5:The market mechanism, market failure and government intervention in markets Flashcards
Signalling function of prices
Prices provide information to buyers and sellers
Incentive function of prices
Prices create incentives for people to alter their economic behaviour e.g. a higher price creates an incentive for firms to supply more of a good/service
Rationing function of prices
Rising prices ration demand for a product
Allocative function of prices
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there’s excess demand
Market failure
When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good/service or providing the wrong quantity
Missing market
A situation in which there’s no market because the functions of prices have broken down.
Private good
A good that is excludable and rival
Public good
A good that is non-excludable and non-rival
Quasi-public good
A good which isn’t fully non-rival and/or where it’s possible to exclude people from consuming the product e.g. roads
Externality
A public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is ‘dumped’ on third parties outside the market.
Positive externality
Same as an external benefit, occurs when the consumption or production of a good causes a benefit to a third party, where the social benefit is greater than the private benefit
Negative externality
Same as an external cost, occurs when the consumption of production of a good causes costs to a third party, where the social cost is greater than the private cost
Production exernality
An externality (which may be positive or negative) generated in the course of producing a good/service
Consumption externality
An externality (which may be positive or negative) generated in the course of consuming a good/service
Social benefit
The total benefit of an activity, including the external benefit as well as the private benefit.
Social benefit=private benefit+external benefit
Merit good
A good for which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good
Subsidy
A payment made by government or other authority, usually to producers for each unit of the subsidised good that they produce. Consumers can also be subsidised
Demerit good
A good for which the social costs of consumption exceed the private costs. Value judgements are involved in deciding that a good is a demerit good
Social cost
The total cost of an activity, including the external cost as well as the private cost.
Social cost= private cost+external cost
Information problem
Occurs when people make wrong decisions as they don’t possess or ignore relevant information. \very often they are myopic (short-sighted) about the future
Immobility of labour
The inability of labour to move from one job to another, either for occupational reasons or for geographical reasons
Geographical immobility of labour
Occurs when workers find it hard or impossible to move to jobs in other parts of the country or in other countries for reasons such as higher housing costs in locations where the jobs exist
Occupational immobility of labour
Occurs when workers find it hard or impossible to move between jobs as they lack or can’t develop the skills needed for the new jobs
Equity
Fairness or justness
