3.5 The market mechanism, market failure and government intervention in markets

Question 1

what are the price mechanism (markets) 4 functions:

Answer 1

-Allocates scare resources
-by Rations away any excess demand or supply
-how, Signals will be sent by precise mechanisms to producers stating it’s either too high or too low
-will also provide incentives to. change prices and increase profit

Question 2

free market?

Answer 2

no intervention by government at all

Question 3

what is market failure

Answer 3

when the price mechanism (market) leads to an inefficient allocation of resources and a deadweight loss of economic welfare

Question 4

types of market failure

Answer 4

-negative externalities
-positive externalities
demerit goods
-information gaps
-under provision public goods
-merit goods
-monopoly
-inequalities in income and wealth

Question 5

market failure causes

red heart of the problem which why there is market failure (right)

Answer 5

1) positive and negative externalities (impacts on third parties resulted by production or consumption)- won’t be accounted for in free market mechanism, ignore impacts on third parties (profit and utility maximisers)

2) merit and de-merit goods- imperfect information or information failure which lead to irrational decisions being made

3) public goods- free rider problem and profit motivated firms

4) common access resources - self interest (negative externalities)

5) income inequality - inequity (someone’s opinion of when it is too high)

6) monopoly power- one dominant firm high barriers to entry high chance of exploitation

Question 6

difference between complete and partial market failure

Answer 6

Complete market failure occurs when there is a missing market. The market does not supply the products at all. Partial market failure occurs when the market produces a good, but it is the wrong quantity or the wrong price. Resources are misallocated where there is partial market failure.

Question 7

what is a public good

Answer 7

no one can be prevented from consuming them, and individuals can use them without reducing their availability to other individuals.

Question 8

non excludable meaning

Answer 8

no price can be charged for the good- the benefits of consuming the good cannot be confined to the individual that has paid

Question 9

non rival meaning

Answer 9

The quantity of the good doesn’t diminish upon consumption (street lights)

Question 10

what is the free rider problem

Answer 10

people don’t contribute to the public good as they will wait for others to contribute then benefit of the good due to it being non-excludable.

Question 11

difference between public and private good

Answer 11

Private Goods are products that are excludable and rival. Public goods describe products that are non-excludable and non-rival.

Question 12

missing markets are created by

Answer 12

no private motive to supply (free rider problem) no chance of making profit therefore no supply

Question 13

quasi public good?

Answer 13

sometime shows the characteristics of a pure public good but sometimes shows characteristics of private goods (roads and beaches)

Question 14

technology within public goods making it quasai

Answer 14

Recent technological advances make it possible for governments to charge prices on quasi-public goods. License plate recognition and other new technological measures allow for governments and local transport authorities to charge motor vehicles for using roads.

television broadcasting is now excludable with subscriptions available to those willing and able to pay.

Question 15

what are negative externalities

Answer 15

costs on third parties as a result of the actions of a separate agent

Question 16

what are negative externalities in production / consumption

Answer 16

costs to third parties as a result of the actions of producers (air pollution caused by firms)

costs to third parties as a result of the actions of consumption (smoking)

Question 17

Why negative externalities are likely to result in over-production

Answer 17

In a market with negative externalities, producers do not consider the harmful effects of their actions on others when making production decisions. As a result, they may produce more than is socially optimal, leading to overproduction and inefficient allocation of resources.

Question 18

positive externalities in production and consumption?

Answer 18

benefits to third parties as a result of the action of consumers (vaccinated)

benefits to third parties as a result of the action of the actions of producers (in work training schemes)

Question 19

why positive externalities are likely to result in under-production.

Answer 19

Positive externalities are likely to be underproduced, because the parties involved receive no compensation for producing them.

Question 20

why do externalities exist

Answer 20

peoples own interest is considered (private costs) externalities occur when some of the costs or benefits of a transaction fall on someone other than the producer or the consumer.

Question 21

what are merit goods

Answer 21

goods that are deemed to be more beneficial to consumers then a they realise

Question 22

how does under provision of merit goods may result from imperfect info

Answer 22

may be info gaps therefore imperfect information (info failure/ asymmetric info) so ppl don’t know all the benefits of merit goods

Question 23

how do merit goods generate positive externalities

Answer 23

(imperfect information) consuming education leads to positive externalities in consumption therefore under consumed and under produced in a free market

Question 24

what are demerit goods

Answer 24

goods deemed more harmful to consumers than they realise

Question 25

how does over provision of de merit goods result from imperfect info

Answer 25

asymmetric info producers could have and not charge , info failure

Question 26

how do de merit goods lead to negative externalities of consumption

Answer 26

over produced and consumed, may not know just how bad, will effect ppl who don’t smoke

Question 27

Why imperfect and asymmetric information can lead to market failure.

Answer 27

due to imperfect information, decisions are made irrationally which means goods will be sold or bought at an either too high price or a low price

Question 28

what is symmetric information

Answer 28

Symmetric information means that the consumers and producers have perfect information to make their decision

Question 29

what is asymmetric information

Answer 29

This is when there is unequal knowledge between consumers and producers.

Question 30

Imperfect information

Answer 30

where info is missing so an informed decision cannot be made.

Question 31

Why the existence of monopoly and monopoly power can lead to market failure

Answer 31

monopoly prices higher than a competitive market and restricts output also a higher chance of exploitation due to higher prices. charged (allocative efficiency)

Question 32

Why the immobility of factors of failure. production can lead to market

Answer 32

If factors are immobile it means that they’re not being put to good use. They’re either unused completely or underused. Therefore, resources are not being used in the best way possible. Inefficient use of our resources is what leads to the market failure.

Question 33

why In the absence of government intervention, will the market mechanism result in a very unequal and inequitable distribution of income and wealth.

Answer 33

In a free market, firms can gain monopoly power to charge high prices to consumers and monopsony power to pay lower wages to workers. This increases inequalit

Question 34

In a market economy, an individual’s ability to consume goods and services depends upon their income and wealth and an
inequitable distribution of income and wealth is Iikely to lead to a misallocation of resources and hence market failure.

Question 35

what is a market economy

Answer 35

A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand.

Question 36

why do governments interfere in markets

Answer 36

-in order to correct market failure, and correct allocation of resources
- achieve macroeconomic objectives
-economic growth
-low unemployment
-equality
-bop

Question 37

ways in which governments interfere to correct market failures

Answer 37

+indirect tax
-subsidies to producers include job retention schemes
-price controls
-direct provision (gov gains control of a firm so it isn’t in the hands of private firms)
-regulations (laws)
-provision of information

Question 38

when does government failure occur

Answer 38

when government intervention in the economy leads to a misallocation of resources.

Question 39

what are sources of government failure

Answer 39

Inadequate information- imperfect or asymmetrical information mean it’s difficult to assess the extent of market failure, which makes it harder to put a value on the government intervention needed.

conflicting objectives- a governments effort to achieve a certain policy objective may have a negative impact on another. short term fixes are preferred

administrative costs- The social benefits of a policy might not be worth the financial cost of administering the policy

Question 40

what are market distortions

Answer 40

any situation in which the prices of goods and services on the market are influenced by anything other than the natural forces of supply and demand.

Question 41

examples of government failure which cause market distortions

Answer 41

income taxes can be a disincentive to working hard as more money you earn more tex you pay.

gov price fixing (max and min price levels) can lead to distortions of price signals. producers will over produce if they will receive a guaranteed minimum price for it. = surplus good

subsidies may encourage firms to be inefficient and use them in bad ways

Question 42

what are unintended consequences and how does it happen

Answer 42

This is when the actions of producers and consumers have unexpected, or unintended, consequences.

happens: In government intervention in markets there is usually at least one and often many unintended consequence. as they don’t know how consumers will react