8 The market mechanism, market failure and government intervention in markets (MICRO) Flashcards
What is a public good?
a good that is both non-rivalrous and non-excludable
What is meant by a public good (explained)?
- non-excludable - no one can be excluded from consuming it
- non-rivalrous - one person’s consumption does not diminish the quality or quantity of another’s consumption
What is meant by non-rejectability?
the collective supply of a public good for all means that it cannot be rejected by people
What is a common resource?
a resource that no individual or organisation can lay claim to
What is the ‘Tragedy of the Commons’?
the idea that individuals acting in their own best interest will overuse a common resource, leading to the depletion or degradation of this resource
Why does the tragedy of the commons occur?
as the common resource is non-excludable but it is rivalrous
What are three possible solutions to the tragedy of the commons?
- rules and regulations
- cultural norms
- creating property rights
Give an example of a rule or regulation that would offer a solution to the tragedy of the commons
limiting the number of days that people can fish for
What is a problem with using rules and regulations as a solution to the tragedy of the commons?
- often inefficient and ineffective
- limits the tragedy but rarely prevents it
Give an example of how cultural norms could be a solution to the tragedy of the commons
(example)
- overfishing results in cultural disapproval
- one who honours the norms is repcted
- can be effective in relatively small, self-governing communities
What is a problem with using cultural norms as a solution to the tragedy of the commons?
take a long time for cultural norms to develop
Explain how the process of creating property rights offers a solution to the tragedy of the commons
- it makes the common resource excludable - therefore it makes the common resource behave like a private good
- e.g. tradable fishing allowances
What is a problem with using property rights as a solution to the tragedy of the commons?
- the common resource may not stay in one place (e.g. fish)
- would need a multi-country system to be truly effective
Market failure definiton
When the free market fails to allocate scarce resources at the socially optimum level of output.
What are the causes of market failure?
- Negative Externalities (Self-Intrest)
- Positive Externalities (Self-Intrest)
- De-merit Goods (Information Failure)
- Merit Goods (Information Failure)
- Public Goods (Free Rider Problem + Profit Motivated Firms)
- Tragedy of the commons (Self-Intrest)
- Income Inequality (Inequality)
- Monopoly Power (One dominant seller & High barriers to entry)
What is meant by negative externalities of production?
Costs to 3rd parties as a result of the actions of producers
What are examples of negative externalities of production?
Air Pollution, Resource Depletion, Resource degradation, Deforestation.
negative externalities of production graph
https://gyazo.com/e7598bc183473364f1ef61964252ae0e
MSC > MPC (SC = PC + EC)
In a free market, it is assumed that people ignore the external costs. (e.g. when driving you consider the cost of petrol, but, not the fact that congestion and pollution increases causing problems for others.)
Because of externalities such as pollution, the social cost of driving is higher than the private cost. Therefore, in a free market we get overconsumption. This makes common sense, just think of rush hour traffic – there tends to be overconsumption of driving because people ignore the costs to others.
Name 2 Negative Externalities of Production Analysis Points.
Self-Intrest
Firms are ignoring the full social cost because of interest, they’re only considering the private cost as a result the market allocates resources at the private optimum rather than the social optimum the end result is an “Over-Production” and a “Over-Consumption” as a result.
The price is too low
P1 only accounts for Private Cost and not the full social costs which includes the external cost which incourages more over-production and over-consumption of these goods and the end result is misallocation of resources and allocatively efficiency accommodating the welfare lost
What is meant by negative externalities of consumption?
Costs to 3rd parties as a result of the actions of consumers
What are examples of negative externalities of consumption?
Smoking, Excessive Alcohol, Excessive Sugary Drinks, Fast Food
negative externalities of consumption graph
https://gyazo.com/737b29c1778850108812f9e8693d8a8b
Name 2 Negative Externalities of consumption Analysis Points.
Self-Intrest
Consumers are ignoring the full social benefit of their action and only considering their private benefit due to self-intrest, the end result is the market is allocating resources, that leads to over consumption and over production of the goods and resources as a result of all of this there is a misallocation of resources resulting in allocative inefficiency and welfare loss to society.
what is privatisation
Privatisation is when the assets from the public sector are transferred to the private sector
what are the intentions of privatisation
To make markets more competitive and efficient.
privatisation advantages
+ Increase in allocative efficiency:
With more competition firms will drive for more efficiency, higher quality products which would increase consumer satisfaction.
+ reduction in x inefficiency:
reduction off costs as firms will drive down costs to remain competitive to maximise profits.
+ Efficiency incentive which drives dynamic efficiency:
privatisation disadvantages
- Loss making services cut even if socially desirable
If firms dont make a profit, firms wont provide them which could be a problem - Loss of natural monopoly and loss of economies of scale
Which would lead to product inefficiency as average costs cant be minimised as a result of lower barriers to entry allowing more firms to enter the market.
