AOS 1 U3 #2 Flashcards
What is an externality (MF)
A cost or benefit to an unrelated third party that occurs as a result of a transaction.
Negative externality (types of MF)
economic activity that imposes a negative effect on an unrelated third party (not involved in transaction)
The market tends to over-allocate resources to these areas and therefore external costs are not minimised.
Positive externality (Types of MF)
A benefit that arises from the production or consumption of a g/s that is not directly paid by the producer or consumer.
The market tends to under-allocate resources to these areas and therefore societal benefits and wellbeing are not maximised.
Asymmetric information (types of MF)
Asymmetric information refers to a market transaction where one party has access to more information than the other.
Some markets experience an under-allocation of resources and others experiencing an over-allocation of resources, and hence society may fail to achieve an efficient allocation of resources.
Common access resources (CAR) [types of MF]
Common access goods include environmental natural resources such as air, minerals, oil, forests, river water and fish in oceans.
These goods are:
1. Non-excludable
2. Rivalrous
The overuse and exploitation of common access resources by current generations reduces the amount that is available for future generations, resulting in lower living standards and a decrease in inter-temporal efficiency.
How does government address market failure? [forms of government intervention]
1) Direct government provision
2) Government subsidies
3) Government regulations
4) Indirect taxation
5) advertising
Markets may fail in the production of collective or public goods
Some g/s are so important that everybody should be able to use them, even if they are poor and cannot afford to pay for them.
Examples include education, health, energy, housing, transport and communications.
Usually costly and cannot be sold at a lower price
Characteristics differentiating public goods and private goods
- Excludability
Public goods are generally non-excludable in nature - Rivalry
Public goods are generally non-rivalrous in nature
Public goods
Public goods are those provided by the government and consumed collectively.
Free rider problem
A person or company that gets an advantage from resources
without paying for it or earning it.
Market failure
Market failure is when the free market fails to allocate resources efficiently in a way to maximise society’s needs and wants.
Competitive markets and LS
If competitive markets are able to achieve allocative efficiency, then it could be said that material living standards are being maximised.
Technical efficiency and competition encourage lower prices which further enhance purchasing power and hence material living standards of Australian consumers.
Competitive markets could allocate scarce resources and income inequitably so perhaps the increase in material living standards are for some and not all.
Inequity in income distribution could contribute to a decrease in non-material living standards.
Strong competition and overworking can also lead to a decrease in non-material living standards.
How competitive markets affect inter-temporal efficiency?
The market system is likely to result in inter-temporal inefficiency because the needs and wants of future generations cannot be directly considered.
As the market aims to achieve allocative, technical and dynamic efficiency, this could lead to overproduction in many markets which could be unsustainable.
How competitive markets affect dynamic efficiency?
As firms look to achieve allocative efficiency, there is a need to do so quickly and without interruption.
In achieving this, dynamic efficiency can also be realised where it is the ability to quickly respond to changing market conditions.
How competitive markets affect technical efficiency?
The competitive environment promotes the lowest cost production method as firms look to maximise profits.
In an environment with many sellers and homogenous products, one way to differentiate from competitors is through lower prices.
Technical efficiency is achieved if existing resources can produce higher production volumes.
