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Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure > 4.1.8 - The Market Mechanism , Market Failure And Government Intervention In Markets > Flashcards

4.1.8 - The Market Mechanism , Market Failure And Government Intervention In Markets Flashcards

1
Q

Define Competition Policy

A

Is a government policy which seeks to promote competition and efficiency in different markets and industries

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2
Q

Explain what the Competition Markets Authority (CMA) is ?

What do they have the power to do

A

Uses market structure , conduct and performance to scan the economy and act as a surrogate in a market to make it more competitive.

Can prevent mergers and takeovers
Investigates cartels
Price fixing
Predatory pricing

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3
Q

What is the UK regulatory framework

A

Occurs where regulatory bodies oversee markets which were formally nationalised industries and are now privatised.

They have the power to investigate competition abuses by companies

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4
Q

What is the EU regulatory framework

A

Occurs where the EU intervenes when it involves cross- border trade . A firm that sells its products in several EU countries can be investigated for anti-competitive behaviour

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5
Q

Define Government regulations

A

Are a set of rules which seek to modify the behaviour of firms

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6
Q

List all the types of government regulations (9)

A 
Price control 
Profit control
Windfall tax
Quality standards 
Performance targets 
Breaking up monopolies
Lowering barriers to entry 
Subsidies 
Merger policy
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7
Q

Explain price control as a method of government regulation

What are examples of it

Advantages and disadvantages

A

Is where a regulatory authority sets price limits to keep price rises below inflation.

Minimum pricing (reduced demand and increased producer surplus) and maximum pricing (reduced supply and increased consumer surplus) are methods of price control

A: Allocative efficiency, reduces price discrimination
D: Loss of Dynamic efficiency, Deters new entrants

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8
Q

Explain profit control as a method of government regulation

What are the problems of this method

A

Involves fixing a maximum level of profit that a firm can earn. The monopolist would make no more profit than if the market was perfectly competitive.

Requires regulators to have a good understanding of costs and profit in the industry, monopolies have little incentive to minimise costs (x-inefficiency)

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9
Q

Explain windfall tax as a method of government regulation

Advantages and disadvantages

A

Occurs where monopolists make large abnormal profits and governments impose a tax on it

A: can help fund social programs
D: can reduce the profit incentive, dynamic inefficiency

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10
Q

Explain Quality standards as a method of government regulation

A

Occur due to firms being profit maximisers rather than focusing on good quality. The government can set a minimum quality standard which a firm has to follow

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11
Q

Explain performance targets as a method of government regulation

A

Occurs where targets like price charged, quality of products or degree of customer choice are set by regulators. If not met regulator fees are charged

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12
Q

Explain breaking up monopolies as a method of government regulation

A

Reduces monopoly power leading to lower prices and profits

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13
Q

Explain Lowering barriers to entry as a method of government regulation

A

Is done in the hope that new firms will enter the market and increase competition

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14
Q

Explain subsides as a method of government regulation

A

Are given to monopolies to increase production and therefore reduce market price

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15
Q

Explain merger policy as a method of government regulation

A

Involves preventing the merger of two large firms which could have a large market share

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16
Q

Define public ownership

A

Is the government ownership of firms , industry or other assets

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17
Q

Define Nationalisation

A

Is the transfer of assets from the private sector to public ownership

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18
Q

What are the arguments for and against nationalisation

A

For:
Economies of scale- monopoly power leads to reduced unit costs and reduced prices for customers
Increased social welfare- allocatively efficient level of output
Industries like rail, energy and water are too important to be owned privately, who’s main goal is to make a profit
Fairer distribution of resources
Against :
Lack of dynamic efficiency
Lack of expertise in the industry
Reduces competition
Lack of knowledge of changing consumer tastes
Can exert monopsonist power

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19
Q

Define Privatisation

A

Is the sale of government owned assets to the private sector

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20
Q

What are the arguments for and against privatisation

A 
For:
Raises extra revenue for the government 
Promotes competition
Promotes efficiency (due to profit incentive) 
Improved choice and quality

Against :
Exploitation of monopoly power (profit maximisation)
Decreased consumer surplus
Decreased equity

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21
Q

Explain Labours plan to Nationalise many different UK industries

A

Labour wanted to renationalise mail delivery, power grid, water and rail.
Nationalising the water and energy industry would cut household costs by £220 a year
Conservatives argued it would add £14 billion to national debt, however the debt would be balanced by acquiring an asset of equivalent value.
Nationalising would mean reduced financing costs but would be run to gain political benefits

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22
Q

Explain Labour’s plan to Nationalise broadband

A

Labour wanted to nationalise broadband and make it free
Would cost £20-40 billion to nationalise
Would provide equitable distribution
Would cause increased public debt and taxes for consumers
Would reduce costs for businesses who rely on broadband, would also allow increased home working and decreased pollution.
No good examples of nationalised broadband and could damage vital foreign investment into british infrastructure.

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23
Q

Define Deregulation

A

Is the removal of rules and regulations in order to increase the efficiency of markets

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24
Q

Define market failure

A

Exists when the competitive outcome of markets is not efficient

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25
Q

Define government failure

A

Occurs when government intervention leads to a net welfare loss compared to the free market solution

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26
Q

What are the types of government failure (6)

A 
Distortion of price signals 
Unintended consequences 
Excessive administration costs 
Information gaps 
Conflicting objectives 
Regulatory capture
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27
Q

Explain distortion of price signals as a method of government failure

A

Occurs where minimum/maximum price fixes lead to a net welfare loss in the market

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28
Q

Explain unintended consequences as a form of government failure

Give an example

A

Occurs where some interventions by the government create unintended consequences
For example, the common agricultural policy lead to increased food prices for consumers

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29
Q

Explain excessive administration costs as a form of government failure

A

Occurs where the administrative costs of correcting market failure is so large that it outweighs the welfare benefit.

30
Q

Explain information gaps as a form of government intervention

A

Occurs where governments do not possess complete information to base a decision, may make the wrong policy.

31
Q

Explain conflicting objectives as a form of government intervention

Give an example

A

Occurs where there is an opportunity cost in implementing a policy

For example, the government may want to cut taxes but also increase spending on defence.

32
Q

Explain regulatory capture as a form of government intervention

A

Occurs where the government operates in favour of producers rather than consumers

33
Q

Define public choice theory

A

Is about how and why public spending and taxation decisions are made

34
Q

Define rent seeking

A

Is the use of political power by an economic agent to manipulate the distribution of resources for their own benefit.

35
Q

Define Externalities

A

Are third party costs or benefits from the consumption or production of a product or service

36
Q

What is the formula for marginal social cost

What is the formula for marginal social benefit

A

Private cost + external cost

Private benefit + external benefit

37
Q

Define Private cost/benefit

A

Is the cost/benefit of an activity to an individual economic unit, a consumer or firm

38
Q

What is the Socially optimum level of output

Draw graph

A

Where Marginal social benefit = Marginal social cost

39
Q

Define Social cost

What is the relationship with private costs

A

Is the cost of an activity not just to the individual unit which creates the cost , but the rest of society as well.

If social cost is greater than private cost a negative externality exists

40
Q

Define Demerit goods

A

Goods which are thought to be bad for you, consumption can lead to negative externalities

41
Q

Why do people over consume demerit goods (6)

A 
Temporal myopia (short term thinking)
Information failure 
Information overload 
Lack of alternatives
Addiction 
Marketing and advertising
42
Q

Draw the effect of a a demerit good on a graph

A

X

43
Q

What are government policy solutions for overconsumption of demerit goods (6)

A

Minimum price - (alcohol in Scotland)
Indirect taxes - excise duty, VAT
Providing information - labelling, education, advertising
Ban- making products illegal
Substitute products - providing alternatives
Behavioural economic solutions - cigarettes kept out of sight

44
Q

Define merit goods

A

Are goods that society values and judges that everyone should have, consumption can lead to positive externalities.

45
Q

What are the characteristics of merit goods

A

People under consume them
The government and private sector provide these goods
Social benefit exceeds private benefit
Individuals usually have imperfect information on these goods

46
Q

What are examples of merit goods

A

Pensions
Vaccines
Education
Gym memberships (exercise)

47
Q

Draw a merit good graph

A

X

48
Q

What are the government policy solutions for underconsumption of merit goods

A

Behavioural economic solutions - default choices, Mandated choices and nudges
Simpler information - improve peoples understanding, presentation of options (e.g. five a day campaign advertising)
Providing subsidies - increases supply, cheaper prices for products/services, takes money away from government -> increased tax/debt
Government provision - nationalisation of health and education sector
Taxing negative alternatives - tax on demerit goods

49
Q

Define Negative Externalities in Production

A

Are the third party costs of producing a good

50
Q

State examples of negative externalities in production (3)

A

Pesticides used in farming which pollute rivers
Damage to ocean beds from intensive fishing
Air pollution caused by manufacturing

51
Q

Draw and explain a negative externalities in production graph

A

Assumed that the MPB = MSC
The market equilibrium level of output is where MPB= MPC
Where MSC = MSB is the socially optimum level of output
Net welfare loss from producing the market equilibrium output instead of socially optimum level of output

52
Q

What are the policy solutions to reduce negative externalities in production

What are the advantages and disadvantages

A

Tax on production- e.g. pollution tax, congestion charge
A: Ring fencing opportunities (congestion charge spent on improving transport)
D: Hard to asign right level of tax, producers may move to countries with lower tax -> increased unemployment

Subsidising positive externalities in production - Increases their supply and reduces prices, consumers may choose subsidised product over negative production externalities product

53
Q

Define Positive externalities in production

A

Are the third party benefits of producing a good

54
Q

State examples of positive externalities in production

A

Building a train station which provides shelter for the homeless
A company develops new technology which can be implemented by other firms

55
Q

Draw and explain the positive externalities in production graph

A

Shows the potential welfare gain by producing the socially optimum level of output instead of the market forces output

56
Q

Define public goods

Explain their characteristics

A

Are goods which when supplied to one individual is immediately available to others at no charge , are non rival and non excludable

Non rival - means that one persons enjoyment of the good does not diminish another persons enjoyment

Non excludable - means that non paying customers cannot be excluded from using a good once its been produced

57
Q

State examples of public goods

A

Street lighting - once produced everyone can use it without charge
Flood defences - protecting the coastline from flooding benefits the whole community

58
Q

Why is a public good under provided in the market

A

Under provided in a free market due to there not being an incentive to pay. Firms may not provide the good as they have trouble charging for it

59
Q

Explain the free rider problem

A

Is the reason for market failure in terms of public goods . Not possible to prevent anyone from consuming a good, people do not pay for it so producers stop producing it.

60
Q

What are cases for government intervention with public goods

A

Overcomes the free rider problem
Prevents underconsumption , social welfare is improved
Government provision allows economies of scale

61
Q

Define property rights

A

Describes the legal ownership of resources and how they can be used , can be owned by individuals, businesses or governments

62
Q

Define private goods

Explain their characteristics

A

Are goods and services sold by private sector businesses which are excludable and rival in consumption

Excludable - where consumers can be excluded from enjoying a product if they are not willing to pay for it , allowing the seller to make a profit and exercise property rights. E.g. Pay per view events

Rival in consumption - where one persons consumption of a good reduces the amount for others to benefit from , scarce resources are used in production

63
Q

State examples of private goods

A

Private gyms
Exclusive clubs
Tickets to an event

64
Q

What is the difference between public and private goods

A

Consumption of a private good reduces the benefit for someone else, a public good has the same amount of benefit for everyone

Public goods are available for everyone, private goods are only available for those willing to pay for it.

65
Q

Define Quasi public goods

Explain their characteristics

A

Is a near public good but does not have all the characteristics.

Semi non rival - Beaches are public goods until they become overcrowded and reduce benefit

Semi non excludable - toll booths charge for road usage on congested roads

66
Q

What effect do advances in technology have on public and private goods

A

Causing a blurring of the distinction between public and private goods

E.g. Technology allows sporting events which were private goods and excludable to become non-excludable and public goods through live streaming

67
Q

Define environmental market failure

A

Are negative externalities arising from the over- exploitation of environmental resources

68
Q

Explain the tragedy of the commons

A

Is the over-exploitation of resources such as oceans, forests or atmosphere that are not owned by individuals or organisations

69
Q

What are the functions of the price mechanism (4)

What are their relation to market failure

A

The Rationing function- increasing prices ration demand to those most able to afford a good or service
The Signalling function- prices provide important information to market participants
The Incentive Function - increased prices strengthen incentives for firms to produce more to make a profit.
The Allocative function- diverts resources to where they can maximise their returns and away from users where they don’t

When any of these price functions break down, market failure occurs

70
Q

Define Complete market failure

A

Occurs when the free market fails to create a market for a good or service, public good

71
Q

Define partial market failure

A

Occurs when a market exists, but does not provide resources in their optimum quantities , over production/consumption and under production/consumption

Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure (8 decks)

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