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Microeconomics > 8. The Market Mechanism, Market Failure And Government Intervention In Markets > Flashcards

8. The Market Mechanism, Market Failure And Government Intervention In Markets Flashcards

1
Q

What is a rationing function?

A

Increasing prices rations demand to those most able to afford goods or services

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2
Q

What is the signalling function?

A

Prices provide information to market participants

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3
Q

What is incentive function?

A

Prices create incentives for market participants to change their actions

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4
Q

What is allocative function?

A

The function of prices that acts to divert resources to where returns can be maximised

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5
Q

What happens when any of these functions break down?

A

Market failure occurs

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6
Q

What is market failure

A

When the free market leads to a misallocation of resources in an economy

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7
Q

What is complete market failure?

A

When the free market fails to create a market for a good or service, also referred to as a missing market

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8
Q

What is an example of complete market failure?

A

‘Public goods’ such as lighthouses, since everyone would have an incentive to wait for someone else to provide them

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9
Q

What is partial market failure?

A

When a market for a good or service exists, but it is consumed or produced in quantities that do not maximise economic welfare (either over/under production/consumption of a good or service exists

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10
Q

What is a public good?

A

A good that is non-excludable and non-rivalrous

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11
Q

What does it mean t be non-excludable?

A

Where it is not possible to prevent non-paying customers from consuming a good (lighthouses)

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12
Q

What does it mean to be non-rivalrous?

A

Where one persons enjoyment of a good does not diminish another persons (radios)

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13
Q

What is the free-rider problem?

A

People who require something would be incentivised to wait for others who also require something to fund it,however these people also have the same incentive, and therefore the good/service does not get payed for due to everyone trying to free-ride

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14
Q

What are private goods?

A

A good that is rivalrous and excludable (pizza)

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15
Q

What are quasi-public goods?

A

A good that exhibits some, but not all, of the characteristics of a public good (partially non-excludable or partially non-rivalrous)

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16
Q

What does the ‘margin’ of marginal analysis mean?

A

Analysis based on the last or an additional unit of output of a good or service produced or consumed

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17
Q

What is an externality?

A

A knock-on effect of an economic transition upon third parties (consequences that effect others)

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18
Q

When is social welfare optimised?

A

When MSB = MSC

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19
Q

What is a positive externality?

A

A positive knock on effect of an economic transaction on third parties (external benefits)

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20
Q

What is a private cost?

A

The cost to an individual producer involved in a market transaction

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21
Q

What is social benefit?

A

The total of private benefit plus external benefit of an economic transaction

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22
Q

What is private benefit?

A

The benefit to an individual consumer involved in a market transaction

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23
Q

What is a negative externality?

A

A negative knock-on effect of an economic transaction on third parties (external costs)

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24
Q

What is social cost?

A

The total of private cost plus external cost of an economic transaction

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25
What is information failure?
A source of market failure, where participants don’t get enough information to be able to make effective judgements about the ‘correct’ levels of consumption/production of a good
26
What is environmental market failure?
Negative externalities arising from the over exploitation of environmental resources
27
What are property rights?
The legal rights of ownership or use of an economic resource
28
What is the tragedy of the commons?
The overuse or exploitation of resources that are not owned by individuals or organisations
29
What are example of tragedy of the commons?
Oceans, forests or the atmosphere
30
What is a merit good?
A good that would be under consumed if left to the free market
31
What is a demerit good?
A good that would be over consumed if left to the free market
32
What are examples of merit goods?
- Education - Healthcare - Exercise - Car insurance - Healthy food
33
Why would merit goods be under consumed if left to the free market?
- People not aware of the potential private benefits to themselves, especially in the long term (example of information failure) - People may not be able to afford the product - People may not take into account the wider benefits to society
34
What are examples of demerit goods?
- Drugs - Alcohol - Tobacco - Fatty/sugary foods
35
Why would demerit goods be over consumed if left to the free market?
- People may not be aware of the damage to their health - Goods are too cheap so are easily affordable/too accessible - Individuals do not take into account the wider external costs
36
What features do perfect markets have?
- Perfect information - No barriers to entry/exit - Homogenous products and factors of production - Large numbers of buyers and sellers - Perfect mobility of factors of production
37
What do economists make ‘perfect’ markets?
To be able to make comparisons with markets in reality
38
What is imperfect information?
When economic agents do not know everything they need to know to make an informed decision
39
What is asymmetric information?
A source of information failure where one economic agent knows more than another, giving them power in a market transaction
40
41
What is a monopoly?
An extreme market structure where only one firm supplies a market
42
What is occupational immobility?
A source of factor immobility that means workers find it difficult to move between occupations due to the lack of desirable skills
43
What is geographical immobility?
A source of factor of immobility that means workers have difficulty in moving to locations where jobs are available for reasons such as a lack of affordable housing or family commitments
44
What is equity?
The notion of fairness in society
45
What is inequitable distribution of income and wealth?
When the way in which income and wealth are distributed in society is considered unfair
46
What are the main reasons for government intervention?
- To correct any market failure - To achieve fairer (or more equitable) distribution of wealth and income - To achieve the government’s macroeconomic objectives for the economy
47
What is indirect taxation?
A tax on spending, sometimes used to reduce consumption of demerit goods
48
What are specific, or unit taxes?
Involve fixed amounts being added per unit of a good or service
49
What are the two types of indirect taxation?
- Specific, or unit taxes - Ad valorem taxes
50
Examples of specific or unit taxes?
Bottles of alcohol
51
What are ad valorem taxes?
Involve adding a percentage of the price of a good or service
52
Examples of ad valorem taxes?
VAT at 20% would add 20p to a product costing £1, but £20 to a product costing £100
53
What are subsidies?
A payment made to producers to encourage increased production of a good or service
54
What does the government aim to achieve by reducing price of goods and services?
Increased consumption
55
Examples of subsidies being used?
- Promoting products that reduce external costs (public transport)
56
What is a minimum price?
A price floor places above the free market equilibrium price
57
What do subsidies do to the supply curve?
Shifts supply curve right
58
Examples of minimum price being used?
Setting a National Minimum Wage and guaranteed prices paid to farmers for their agricultural products
59
Advantages of a minimum price?
- Give producers a guaranteed minimum price and income - helps generate good standards of living - Encourage production of essential products - Excess supplies may be bought up and stored to be released in times of future shortages
60
Disadvantages of a minimum price?
- Consumers pay higher prices - reducing disposable income - Can encourage overproduction (especially in agriculture) - excess may need to be put in storage - further costs - If governments or other authorities purchase excess supplies, leads to opportunity costs (funds could have been used elsewhere) - Reduces international competitiveness if price is above forgiven competitors - Reduces affordability of demerit goods (tobacco/alcohol) - encourages people to seek cheaper, more harmful alternatives - leading to government failure
61
What is a maximum price?
A price ceiling above which prices are not permitted to rise
62
Whta is a justification for maximum prices?
The free market equilibrium would be too high for many consumers, leading to problems in affordability
63
Examples of maximum price in use?
Rent controls in densely populated cities, and limits on the ability of utility companies to raise their price above the rate of inflation
64
Advantages of maximum prices?
- Without, some can’t afford certain goods and services (prescription medications) - promotes equity and fairness - Reduce firms monopoly power to exploit consumers through charging higher prices
65
Disadvantages of maximum prices?
- People not being able to obtain goods/services (leads to frustration and dissatisfaction) - Creation of excess demand implies queues, shortages and waiting lists - Can lead to establishment of black market goods/services
66
What are regulations?
Rules or laws used to control or restrict the actions of economic agents in order to reduce market failure
67
What are examples of regulations used to tackle market failures?
- Banning smoking in public places - Minimum legal drinking age - Maximum emissions levels on new cars - Noise thresholds on aeroplanes in urban areas - Establishing green-belt lands around major cities - Setting up regulatory bodies to restrict actions of dominant firms
68
What are examples of attempting to correct information failure?
- Compulsory labelling on food - Strong health warnings on cigarettes - TV advertising campaigns discouraging excessive drinking - Publication of national and local league tables for schools and hospitals
69
What is a pollution permit?
The right to use or exploit an economic resource to a specific degree
70
Examples of pollution permits?
- Fishing permits (prevents overfishing and oil spills) - Permits to released carbon dioxide into the atmosphere
71
Advanatges of pollution permits?
- Uses the market mechanism - provides powerful incentives for firms to reduce carbon emissions - Revenues raised from selling permits can be used to fund ‘green’ technology and other environmental schemes
72
Disadvantages of pollution permits?
- Governments are likely to suffer from imperfect information about full social costs of CO2 emissions - may lead to government failure - If permit price is too low, firms will not be incentivise to cut CO2 emissions
73
What is competition policy?
Government policy that aims to make markets more competitive
74
What are the main theoretical principles of UK competition policy?
- Ignoring economies of scale - Monopolists restrict output to praise price and gain supernormal profit
75
What 4 areas is UK competition policy focused on?
- Monopolies - Mergers - Restrictive trading practises - Promoting competition
76
What are the possible approaches for tackling monopolies?
- Compulsory break-ups - Windfall taxes on ‘excess’ supernormal profits - Public ownership (nationalisation) - Privatisation
77
What is a compulsory break-up?
Free market economists who believe that efficiency and consumer sovereignty are maximised when competition is encouraged
78
What are price controls?
E.g. maximum prices may be used to limit excessive profits
79
What is privatisation?
80
What is deregulation?
Removing barriers to entry may make monopolies more contestable and so more likely to operate in societies best interests
81
What is a merger?
When two or more firms willing join
82
What is a takeover?
When two or more firms unwillingly join
83
What do restrictive trading practises include?
- Forming a cartel to fix the price of a good or service - Refusal to supply a specific retailer - ‘Full-line forcing’ - obliging a retailer to stock all products in the firms current range - Charging discriminatory prices e.g. discounts for bulk orders

Microeconomics (8 decks)

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