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A Level Economics > 2: Market Failure > Flashcards

2: Market Failure Flashcards

1
Q

Market failure

A

When the price mechanism leads to a misallocation of resources

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2
Q

Complete market failure

A

Happens where unless the good or service is provided outside the price mechansim there wouldn’t be a market for it i.e. the military

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3
Q

Partial market failure

A

Happens when the private sector may partially provide it but at the wrong price or quantity i.e. private health care vs NHS

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4
Q

What are the benefits of a good seperated into?

A

Private and external benefits

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5
Q

What are the costs of a good seperated into?

A

Private and external costs

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6
Q

What is a source of market failure due to costs and benefits of goods?

A

Some are over/under consumed

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7
Q

Social benefit =

A

External + private benefits. Socially optimal level is where it is allocatively efficient to produce and consume -> a different quantity to what is observed in the free market

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8
Q

What is the difference between the social benefit and the private benefit?

A

The external benefit

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9
Q

When is the external benefit constant?

A

When social + private curves are parallel

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10
Q

When is the external benefit greater as output increases?

A

When social + private curves diverge

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11
Q

Causes of market failure

A

Externalities
Lack of public goods
Infomation gaps

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12
Q

Externalities

A

Effects of producing/consuming a good on a 3rd party

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13
Q

Positive consumption externalities

A

‘Good’ externalitie created in consumption of a good
MSB is more than MPB
Consumers won’t account for the benefit of the externality and this good will be underconsumed i.e. education

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14
Q

Negative consumption externalities

A

‘Bad’ externality created in consumption of goods/services
MSB is less than the MPB and the good will be overconsumed i.e. cigarettes

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15
Q

Positive production externalities

A

‘Good’ externality incurred when producing good/service
MSC is less than the MPC and the good will be underproduced

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16
Q

Negative production externailities

A

‘Bad’ externality incurred when producing good/service
MSC is greater than the MPC and the good will be overproduced (Vs socially optimal level) i.e. factory noise + air pollution

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17
Q

Private cost/benefit

A

Benefit/cost to an individual in the market

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18
Q

External cost/benefit

A

Cost/benefit a 3rd party receives due to a positive/negative externality

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19
Q

Social cost/benefit

A

Cost/benefit to society due to a positive/negative externality

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20
Q

What do firms only account for when producing goods?

A

MPC

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21
Q

What do consumers only account for when consuming goods?

A

MPB

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22
Q

Deadweight welfare loss

A

Loss to society when overproducing something that has a negative externality

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23
Q

Characteristics of a public good

A

Non-rivalrous (more than one person can consume)
Non-excludable (not paying can still consume)

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24
Q

Characteristics of a private good

A

Rivalrous
Excludable

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25
Q

Why do the private sector rarely produce public goods?

A

No incentive

26
Q

What does the government do to produce public goods?

A

Intervenes and decides suitable amount of public goods for society. Has to guess the MSB which can be inaccurate

27
Q

Free-rider problem

A

Can’t exclude someone from public goods who can’t pay for it, so everyone gets the same benefit -> disincentives people from producing a good in the free market which is a form of market failure

28
Q

What else disincentives production of a public good in the free market?

A

It is hard to price. Producers may overvalue, consumers may undervalue

29
Q

Asymmetric infomation

A

Both parties in a transaction have unequal amounts of infomation. Can cause a decline in price or quantity of products solds. i.e. producer may know a product is faulty and consumer doesn’t -> misallocation of resources + limits ability to make rational choices and pay appropriate price for a product

30
Q

Thin market

A

Buyers + sellers discouraged from participating in a market, fewer active in said market

31
Q

Thick market

A

Lots of buyers and sellers

32
Q

What do buyers with imperfect infomation believe?

A

Price = Quality i.e. Michelin Star > Mcdonalds. Leads to markets struggling to reach an equilibrium price and quantity

33
Q

Demerit goods

A

Negative effects of a good i.e. smoking

34
Q

Merit goods

A

Positive effects of a good i.e. education

35
Q

What can solve overconsumption of a demerit good?

A

Taxes/bans -> correct market failure

36
Q

What can encourage consumption of merit goods?

A

Subsidies -> correct market failure

37
Q

Advantages of a subsidy

A

Reduce cost of product and allow firms to exploit economies of scale -> will improve long run efficiency + competitveness abroad
Consumer preference may change

38
Q

Disadvantages of a subsidy

A

Encourages laziness from producers as don’t need to be efficient
Elasticity of demand determines how effective a subsidy is
May be of a lower standard than the good they are replacing

39
Q

Max price

A

Used to increase consumption of a good
If max price above equilibrium not effective, if below it there will be more demand. Shortage of supply leads to excess demand however -> lead to a good being sold in the black market as less people have it

40
Q

Pros of max price

A

Protects consumers from exploitation
Makes firms more efficient as pay attention to costs

41
Q

Cons of max price

A

Deters firms from entering a market
Limited investment into a market due to limited profit
Firms could cut costs too aggressively to boost profit leading to a poor quality good

42
Q

Min price

A

Corrects market failures in monoplies
If below equilibrium no change, if above there will be less demand but increased supply leading to excess supply

43
Q

Min price pros

A

Suppliers get reasonable price for goods

44
Q

Min price cons

A

Consumers pay more for goods
Resources wasted when excess goods are destroyed
Resources allocated inefficently (excess supply)
Opportunity cost

45
Q

Tradeable pollution permits

A

Allocated to businesses to control pollution levels

46
Q

Tradeable pollution permits pros

A

Put cap on pollution
Lower pollution for a firm, more they can benefit -> incentive to lower pollution levels
Government makes revenue

47
Q

Tradeable pollution permits cons

A

Costs
Deciding on pollution level is difficult
Market for permits is subject to failure

48
Q

What does the European Union emissions trading system (ETS) do to incentives less pollution?

A

Cut members of permits, forcing firms who don’t comply to buy more permits

49
Q

Regulation pros

A

Correct market failures that arise from externalities i.e. limit pollution a firm makes
Can control monoplies and stop them taking advantage of customers and reducing welfare
Legislation provides a means of punishing firms for their anti-competitive behaviour
Protects environment

50
Q

Regulation cons

A

Hard to know what industries to regulate and how to regulate them -> needs value judgement i.e. what level to set for pollution
Expensive to monitor firms and opportunity cost
Expensive to follow regulations -> firms may close down or relocate due to high costs

51
Q

Deregulation pros

A

Allocation of resources will improve due to less governmet intervention
By reducing the bureaucracy associated with legislation, efficiency will improve

52
Q

Deregulation cons

A

Customers no longer protected from the anti-competitive behaviour from firms and may lose out
Some market failures can’t fix themselves i.e. externalities -> deregulation of industries may lead to an increase in pollution due to tragedy of the commons
Some natural monoplies need regulation i.e. sewage services

53
Q

Renewable obligation certificates (ROCS)

A

Set regulations to try to promote the use of renewable energy sources. Suppliers that don’t comply with purchasing energy from accredited electricity generators will be fined -> money is shared between suppliers that do

54
Q

State-provision

A

When states provide good/services to consumers. Either provided by government themselves (education) or purchased via private sector so public use for free (NHS) -> paid for by tax revenue

55
Q

State provision pros

A

Reduce inequality by distributing money from wealthy to poor
Provides services that my not be profitable (some train routes)
Value judgements decide what state can and can’t provide well

56
Q

State provision cons

A

Less incentive to make a service as efficient as possible if it isn’t profitable -> economics incentives for efficiency may be eroded
Opportunity cost
Asymmertic infomation may lead to government failure

57
Q

When have the government spread infomation to overcome market failures?

A

Diptheria vacccine - 1942 advertised by govt as people though it was more common during war
Polio vaccine - 1956 campaign to vaccinate everyone under 40. Eradicated by 1980
Lifestyle campaigns - 2004, DrinkAware, Change4Life

58
Q

Government failure

A

The unintended worsening allocation of resources as a consequence of a policy the government has implemented to correct market failure. Produces net welfare loss i.e. Council charging for forms of waste disposal may increase fly-tipping

59
Q

Administrative costs

A

Resources needed to implement government intervention. If costs too high, intervention not worthwhile. Governments may underestimate costs of their projects

60
Q

Bureaccuracy

A

Individuals working for the government don’t see benefits directly
Governments also very large and may suffer from material diseconomies of scale

61
Q

Imperfect infomation

A

Limits governments ability to critically assess market failures and possible solutions -> right decision may not be made and government failure may arise

62
Q

What can government failure lead to?

A

Conflicting polivy objectives - trying to satisfy one objective may be compromised or politicians may be influenced by what’s politcally acceptable or not i.e. can’t ban cars as people rely on them or macro economic policies clash with environmental ones
Market distortions - can affect the way price mechanism works i.e. income taxes give less incentive to work -> reduces efficiency, subsidies allow firms to make profits without being efficient, min and max price can distort price signals (overproduction as firms can gurantee a min price)

A Level Economics (15 decks)

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