4.2 Market Power and Market Failure Flashcards
Draw the graph for a Positive Externality
Draw the graph for a Negative Externality
Define Market Failre
Where there is an inefficient allocation of resources, resulting in them being wasted
Define Market Power
The ability of a producer to exert control over a market
Why is there commonly market failure in Monopolies?
lack of competition leads to lack of efficiency
Define ‘Restrictive Practises’ and give an example
Any action a firm may take to limit competition (e.g. Collusion)
How are ‘Restrictive Practises’ a form of market failure?
It reduces competition which reduces the need to be efficient
Explain how Cartels can be a form of Market Failure
They reduce the initiative to operate efficiently and innovate
Define Monopsony Power
Where the buyer has power over the seller
How is Monopsony Power a form of Market Failure?
Gives more room for the firm to become inefficient
Define what is meant by ‘Power in the Labour Market’
A firm being able to offer pay below the free market equilibrium
How is ‘Power in the Labour Market’ a form of market failure?
It forces costs down which gives more room to be inefficient and reduces the workers incentive to provide a good service
How does Market Failure affect consumers?
Restricts competition and increases prices
How does Market Failure affect the Government?
Economic Growth is slowed as spending decreases and goods become more expensive, reducing their international competitiveness
What do the CMA ‘Competition and Markets Authority’ do?
Investigate restrictive practises and mergers to avoid market domination
Define Privtisation
Government owned industries changing to be controlled by firms in the free market
Why is Privatisation good for consumers?
Increases competition and thus productivity, driving down the price of the good and increasing its quality
What is meant by the Consumer Protection Law?
Information has to be provided on some goods’ contents
What is the role of the EU Competition Policy?
They collaborate with national competition authorities such as the CMA to retain European competition
What is the Working Time Directive?
A maximum weekly hours limit
How does employee protection impact a business?
Helps society which can help the business with sales later on
Extended Question: Evaluate Arguments for regulation (including its impact on consumers, employers, the government and businesses)
- Increases consumer surplus, since goods and services are provided at lower prices
- Encourages firms to meet minimum quality targets, and results in products which are generally safe
- Helps to improve the quality of life for consumers and employees
- If regulation is harmonised, there can be fair rules for all businesses
- The flexibility of labour markets in the UK has resulted in lower levels of unemployment and more job creation
Extended Question: Evaluate Arguments against regulation (including its impact on consumers, employers, the government and businesses)
- Regulation could increase the costs of firms and mean that it is more difficult to do business. For example, firms are likely to face higher costs if they have to comply with laws ensuring safer working environments for employees. It is also more expensive for firms to employ workers if they have to pay a minimum wage.
- If firms cannot collude, then their ability to increase their market power is limited. This could mean firms have to compete on price, which lowers their potential profits.
