8 Market failure and govt intervention in markets Flashcards
Functions of prices
- Rationing function
- Signalling function
- Incentive function
- Allocative function
Rationing function
increasing prices rations demand to those most able to afford a good/service
Signalling function
prices provide important info to market participants
Incentive function
prices create incentives for market participants to change their actions
Allocative function
the function of prices that acts to divert resources to where returns can be maximised
Market failure
when the free market leads to a misallocation of resources in an economy
Complete market failure
when the market fails - missing market
Two characteristics for public good
- non-excludable
- non-rival
The free-rider problem
when the consumers hope to get ‘free ride’ without paying for a good
Quasi-public good
a good that is either non-excludable or non-rival
Externalities
a knock-on effect of an economic transaction upon third parties
Positive externalities in production
MSC is bigger than MPC/ underproduction
Positive externalities in consumption
MSB is bigger than MPB/ underconsumption ; MERIT GOOD
Negative externalities in production
MPC is bigger than MSC/ overproduction
Negative externalities in consumption
MPB is bigger than MSB/ overconsumption ; DEMERIT GOOD
Environmental market failure
negative externalities arising from the over exploitation of environmental resources
The tragedy of commons
the overuse of exploitation of resources such as oceans, forests or atmosphere that are not owned by individuals or organisations
Equity
the notion of fairness in society
Reasons for government to intervene into the market
- correct market failure
- achieve a fairer distribution of wealth and income
- achieve the government’s macroeconomic objectives for the economy
Two types of indirect taxes
- unit tax
- ad valorem tax
Subsidy
a payment made to producers to encourage increased production of a good/service
Minimum price
a price floor placed above the free market equilibrium price
Maximum price
a price ceiling above which prices are not permitted to rise
Regulation
rules or laws used to control or restrict the actions of economic agents in order to reduce market failure
example: banning smoking in public places
Pollution permits
the right use or exploit an economic resource to a specific degree
Competition policy
it involves measures to enhance competition between firms in order to improve economic outcomes for society
Merger
when two or more companies willingly Jon together
Public ownership
government ownership of firms industries or other assets
Privatisation
the sale of government-owned assets to the private sector
Government failure
when government intervention in a market reduces overall economic welfare
Reasons for government failure
- inadequate info
- unintended consequences
- market distortions
- administrative costs
- regulatory capture
