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Micro Economics > 4.1.8 The Market Mechanism, Market Failure And Government Intervention > Flashcards

4.1.8 The Market Mechanism, Market Failure And Government Intervention Flashcards

1
Q

Rationing functions

A

When there are scarce resources, price increases due to excess demand.

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2
Q

Incentive functions

A

This encourages a change in behaviour of a consumer or producer. E.g a high price would encourage firms to supply more to the market

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3
Q

Signalling function

A

The price acts as a signal to consumers and new firms entering the market. Price changes show where new resources are needed in the market

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4
Q

Price mechanism

A

Determines the market price, ‘the invisible hand of the market’

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5
Q

Advantages of the price mechanism

A
  • impersonal method of allocating resources
  • it acts as a signal to show the cost of purchasing a good to the consumer
  • it signals to producers the revenue they will receive
  • allows consumers to gain sovereignty in the market
  • efficient allocation of resources
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6
Q

Disadvantages of price mechanism

A
  • may be inequality in wealth as it doesn’t consider distribution of wealth
  • ignores equality
  • under provision of public goods and merit goods
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7
Q

Externality

A

The cost or benefit a third party receives from an economic transaction outside of the market mechanism

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8
Q

Public goods

A

Non excludable and non rival, they are underprovided in a feee market because of the free rider problem

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9
Q

Monopolies

A

Consumer has very little choice where to buy goods from so they are often over charged and under consumed

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10
Q

Non excludable

A

By consuming the good, someone else is not prevented from consuming the good as well

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11
Q

Non rival

A

The benefit other people get from the good does not diminish if more people consume the good

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12
Q

Quasi public good

A

Have characteristics of both private and public goods, semi excludable and semi rival

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13
Q

Tragedy of commons

A

Individuals priorities personal gain over the well being of society

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14
Q

Private good

A

Rival and excludable e.g chocolate bar

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15
Q

Social costs

A

Social costs=private costs+external costs

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16
Q

Who is Interested in benefits of a good or service?

A

The consumer so it is on the demand curve

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17
Q

Who is interested in the costs of a good or service?

A

Producers so it’s on the supply curve

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18
Q

Describe the negative production externality graph

A
  • MSC is greater than MPC

* the welfare loss triangle points left to social optimum as it is over produced

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19
Q

Describe the positive production externality graph

A
  • MPC is greater than MSC

* welfare loss triangle points right to SOE as it is underproduced

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20
Q

Describe the negative consumption externality graph

A
  • MPB is greater than MSB

* welfare triangle points to the left to SOE as it’s over consumed

21
Q

Describe the positive consumption externality graph

A
  • MSB is greater than MPB

* welfare triangle points right to SOE as it’s under consumed

22
Q

Symmetric information

A

Consumers and producers have perfect market information

23
Q

Asymmetric information

A

Leads to market failure, where there is unequal knowledge between consumers and producers

24
Q

Agent principal problem

A

When the agent makes decisions for the principal but the agent is inclined to act in their own interests

25
Q

Market failure

A

A free market with a misallocation of resources

26
Q

Merit good

A

Underconsumed in the free market and has a positive affect on the third party

27
Q

Demerit good

A

Over provided in the free market, has negative affects on the third party

28
Q

Free market

A

Where resources are allocated by supply and demand without government intervention

29
Q

Social optimum

A

Where Marginal Social Cost (MSC) meets Marginal Social Benefits (MSB)

30
Q

Consumer surplus

A

The difference between what someone is willing to pay and what they will pay

31
Q

Welfare loss

A

The consumer surplus

32
Q

Types of market failure

A
  • externality
  • under provision of public goods
  • information gaps
  • monopolies
  • Inequality
32
Q

Complete market failure

A

When a good isn’t provided so there is a missing market

32
Q

Partial market failure

A

When the market provides a good but the wrong quantity or price

33
Q

Free rider problem

A

People who don’t pay for the good still receive the benefits of it

34
Q

Why are public goods under provided?

A
  • free rider problem occurs
  • tragedy of commons
  • it is hard to measure the value consumers get from public goods so it is hard to put a price on it
35
Q

Social benefit

A

Social benefit= private benefit + external benefit

36
Q

Indirect taxes

A

Taxes placed in expenditure, they increase production costs and supply shifts inwards, ideally they are the size of the external cost

37
Q

Ad valorem

A

Taxes are a percentage such as VAT which adds 20% of the unit price

38
Q

Specific taxes

A

A set tax per unit, such as the 58p per litre fuel duty on unleaded petrol

39
Q

Subsidies

A

A payment from the government to a producer to lower costs of production and increase supply, ideally it should be the value of the social benefit

40
Q

Who takes most of the burden for a tax on a good which is inelastic

A

The consumer

41
Q

Who takes most of the benefit of an inelastic good which has subsidised?

A

Consumers

42
Q

Maximum price

A

The government set a max price where consumption of a good is to be encouraged (must be set below FM price)

43
Q

Pros and cons of maximum price

A

✅they prevent monopolies from exploiting customers
✅could lead to welfare gains for consumer
✅could increase efficiency in firms since they have an incentive to keep costs low
❌could reduce a firms profit leading to less investment
❌firms might raise the price of other goods

44
Q

Minimum price

A

The government might set a minimum price where consumption of a good is to be discouraged (must be set above FM price)

45
Q

Pros and cons of pollution permits

A

✅should benefit environment in long run
✅the government could raise revenue from permits because they can sell them to firms
✅raises revenue for greener firms
❌could lead to firms relocating to where there are no pollution permits
❌firms might pass higher cost of production onto consumers
❌permits could create barrier to entry and reduce competition
❌expensive for government to monitor emissions

46
Q

Government failure

A

When government intervention leads to a worse allocation of resources and there is a welfare loss to society

47
Q

Causes of government intervention

A
  • distortion of price signals
  • unintended consequences
  • excessive administrative costs
  • information gaps

Micro Economics (6 decks)

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