4.1.8 The market mechanism, market failure and government intervention in markets Flashcards
What are the functions of prices in a market economy
Rationing, incentive and signalling
What are the advantages of the price mechanism
Efficient resource allocation and coordination of buyers and sellers
What are the disadvantages of the price mechanism
Can be impersonal(unethical) and may lead to inequality (e.g market for organs, blood) or undesirable outcomes
What is market failure
When markets lead to a misallocation of resources
What is the difference between complete and partial market failure
Complete mrket failure results in a missing market, partial failure occurs when a market exists but misallocates resources
What causes market failure
Public goods, externalities, merit/demerit goods, monopoly, imperfect information and inequality
What are the characteristics of pure public goods
Non-rival and non-excludable.
What is the free-rider problem
Individuals benefit without paying, leading to under-provision of public goods
What is the tragedy of the commons
Overuse of common resources due to lack of ownership leading to depletion
What are externalities
Divergence between private and social costs/benefits
What is the result of negative externalities
Over-production (e.g pollution)
What is the result of positive externalities
Under-production (e.g education)
What are merit goods
Goods with positive externalities (e.g education)
What are demerit goods
Goods with negatives externalities (e.g cigarettes)
Why are merit goods under-provided and demerit goods over-provided
Due to inperfect information and externalities
How does imperfect information cause market failure
Leads to a misallocation of resources (e.g consumers unaware of risks)
How does monopoly power cause market failure?
Reduces competition, leading to higher prices and lower output.
How does factor immobility cause market failure
Prevents resources from moving to where they are most needed
What is the purpose of competition policy
Tio prevent monopolies and promote competition
What are the costs and benefits of competition policy
Costs: administrative burden; Benefits: lower prices, innovation, and efficiency
4.1.8.8
Yet to be done
Why do governments intervene in markets
To correct market failure (e.g, externalities, public goods)
What methods do governments use to intervene
Taxation, subsidies, regulation, price controls and pollution permits
What are the strengths of government intervention
Can correct market failure and improve welfare
