4.1.8.4 + 4.1.8.6 Flashcards
To be the best
Why does the immobility of factors of production cause market failure?
It prevents resources like labour or capital from moving to where they are most efficiently used, leading to inefficiencies and resource misallocation.
What is geographical immobility of labour?
When workers cannot move to areas with better job opportunities due to factors like high housing costs, family ties, or lack of transport.
What is occupational immobility of labour?
When workers lack the skills to move into jobs in different industries, causing structural unemployment.
How does imperfect information lead to market failure?
It results in poor decision-making by consumers or producers, causing resource misallocation and inefficiencies.
What is asymmetrical information, and how does it lead to market failure?
When one party in a transaction has more knowledge than the other, leading to issues like adverse selection and moral hazard.
Private Costs / Benefits
Incurred directly by individuals or firms.
Social Costs / Benefits
Include the wider effects on society, creating a divergence.
Why do negative externalities result in overproduciton?
They impose social costs not reflected in market prices, causing firms to produce more than is socially optimal (e.g. pollution).
What is an example of a negative externality in production?
Factories releasing harmful emissions into the environment create additional social costs such as health problems and environmental degradation.
Why do positive externalities result in overproduction?
They aren’t fully captured by private markets, leading to less production than is socially optimal. (E.g. education or vaccinations)
What is an example of a positive externality in production?
Education provides private benefits to individuals and wider social benefits such as a more productive workforce, but it’s often under-consumed without government intervention.
