4.1.8.6 Market imperfections Flashcards
What’s the difference between symmetric and asymmetric information?
Symmetric: Buyers/sellers have equal knowledge → efficient markets.
Asymmetric: Unequal knowledge → market failure (e.g., used car sales).
What is the principal-agent problem? Give an example.
Conflict: Agent acts in self-interest, not principal’s (e.g., managers vs. shareholders).
Result: Misallocation of resources (e.g., excessive executive bonuses).
How can information gaps be reduced?
Government regulation (e.g., cigarette warnings).
Consumer reports (e.g., Which? magazine).
Mandatory disclosure (e.g., financial product risks).
What causes geographical labour immobility?
Family/social ties.
High relocation costs.
Regional house price differences.
Example: UK miners post-1980s collapse.
What causes occupational labour immobility?
Skill mismatches (e.g., coal miners lacking tech skills).
Insufficient training programs.
Result: Structural unemployment.
Why do monopolies cause market failure?
Higher prices → underconsumption.
No incentive to cut costs → productive inefficiency.
Deadweight loss (reduced consumer surplus).
Draw a monopoly diagram showing: Profit-maximizing price (Pₘ) vs. competitive price (P꜀). Deadweight loss triangle.
MR=MC → Pₘ > P꜀.
DWL between Q꜀ and Qₘ.
How does structural unemployment relate to immobility?
Skills mismatch → workers can’t transition to new industries.
Example: UK manufacturing decline vs. tech sector growth.
Give an example of asymmetric information in healthcare.
Doctors (agents) may recommend costly treatments patients (principals) don’t need.
Are all monopolies harmful?
No: Natural monopolies (e.g., utilities) may benefit from economies of scale.
Yes: Most reduce consumer welfare through higher prices.
How do market imperfections link to government intervention?
Solutions:
Antitrust laws (monopolies).
Retraining programs (immobility).
Transparency laws (information gaps).
