Booklet Three Flashcards
What makes a good excludable?
If someone can be excluded from benefiting from it
What makes a good rivalrous?
If the consumption by one person affects someone else’s ability to benefit from it
What is a private good?
A good that is both excludable and rivalrous
What is a public good?
A good that is non excludable and non rivalrous
Non excludability gives rise to which problem?
Free rider problem if no one can be prevented from gaining the benefit without paying nobody has the incentive to buy the good
What good can be produced at zero marginal costs (doesn’t cost much extra to make more of something) ?
Public goods because they are non rivalrous
What is quasi public good?
A good that has some of the characteristics of a public good or has some characteristics of a private good
What is market failure?
When the price mechanisms lead to a misallocation of resources
What are the 3 functions of price?
1)A signalling function
2)Incentive function
3)Rationing or allocative function
What is the signalling function of price?
What customers pay for a good and what revenue producers will receive
What is the incentive function of price?
The role that prices play in motivating and influencing the behaviour of producers and consumers
What is the rationing function of price?
Decide how resources are used and allocated
How do missing markets occur?
When the incentive function of price completely break down and a market fails to come into existence
What is a partial market failure?
When a market exists but the quantity produced / consumed is allocative inefficient
What is the tragedy of the common?
The effect of individuals acting in their own self interest that effects society as a whole
What is merit good?
Good that are more beneficial for consumers than they realise and are underconsuemd in free market
What is demerit good?
Good that are more harmful for consumers than they realise and are over consumed in free markets
What is information failure?
When one party knows more about the true value of a product than another party
What is the difference between search goods and experience goods?
Experience goods are goods that you need to experience them to know more about them opposed to search goods
What is asymmetric information?
When the sellers knows more about the true value than the consumer (can be reversed sometimes)
What is an externality?
A cost or benefit to a third party who is not directly involved in an economic activity or transaction
Difference between positive and negative externality?
Negative externality is a cost to a third party but positive externality is a benefit to third party
What does FMQ stand for?
Private optimum
What does SOQ stand for?
Social optimum
What does MPC stand for?
Marginal private costs
What does MPB stand for?
Marginal private benefit
What does MSB stand for?
Marginal social benefit
What does MSC stand for?
Marginal social costs
What is an indirect tax? (A type of government intervention)
A tax on goods and services
What are the 2 forms of indirect tax
Unit tax and ad valorem tax
What is a unit tax?
Add a fixed amount for a certain quantity
What is a ad Valorem tax?
Add a percentage to the pre tax selling price (VAT)
Indirect tax evaluation points (5)
.It is difficult to put values on externalities (e.g the size of the tax)
.Opportunity cost of monitoring could lead to ‘black markets’
.Regressive - higher proportion of individuals that have a low income
.Potentially inflationary
.Effectiveness of indirect tax depends on PED
What are production subsidies? (A type of government intervention)
A sum of money given by the government to encourage the production of a good or service
Subsidy evaluation points (4)
.It’s difficult to put values on externalities (e.g size of the tax)
.Firms may not use subsidy to increase production so they become productively inefficient
.Opportunity cost
.effectiveness depend on PED
What is a regulation? (A type of government intervention)
The imposition of new rules or laws by the government
Regulation evaluation points (4)
.The government requires accurate information meaning there is a risk of government failure
.Opportunity cost of monitoring and policing
.Can be ignored or could lead to black markets forming
.Punishment needs to be an effective deterrent
What are price controls? (A type of government failure)
The Government can introduce price controls either a maximum or minimum price
Why do the government introduce a minimum price control?
A minimum price to cause a contraction of demand and reduce overconsumption
Why do the government introduce a maximum price control?
A maximum price to cause an extension of demand and reduce underconsumption
In order for a maximum price to be effective
The price must be below the equilibrium price
In order for a minimum price to be effective
The price must be above the equilibrium price
Price controls evaluation points (4)
.Government needs accurate information meaning there is a risk of government failure
.Opportunity cost of monitoring and policing
.Can be ignored could lead to black markets
.Punishment needs to be an effective deterrent
What is state provision?
Something is provided by the government free at the point of consumption
What is information provision? (A type of government intervention)
The government provides information to help customers make an informed choice
Information provision evaluation points (3)
.Opportunity cost (e.g advertising)
.Can be ignored
.Information may be inaccurate leading to a risk of government failure
What are tradable permits? (A type of government intervention)
Tradable permits can be used to deal with pollution.In order to generate one unit of pollution a firm has to have a valid permit
What is a marginal abatement cost?
The cost of reducing firms pollution by one unit
Tradable permit evaluation points (4)
.Tradable permits impose a limit on pollution unlike indirect tax
.Government require accurate information when setting the cap or there’s a risk of government failure
.Opportunity cost of monitoring and administration cost
.Potentially inflationary and regressive as they increase firms costs and price
What are property rights for market failure?
Legal rights individuals have over their property
Benefit of property rights (3)
.Private producers have the incentive not to exploit common access resources
.Negative externalities internalised (only effects the private producers)
.Property rights are well enforced - so they are able to protect their land
Government intervention can lead to …
Unintended consequences
When does market failure occur?
when there is a misallocation of resources
How do inequalities in the distribution of income and wealth contribute to market failure?
Inequalities in income and wealth can lead to market failure by limiting access to essential goods and services for a significant portion of the population this could result in reduced overall economic productivity
Drawback of property rights (3)
.Can property rights be efficiently distributed? (can’t distribute the sea and the air)
.Enforcement is needed which is costly (government can’t afford to police it which could lead to lots of trespassing)
.Equity
4 types of market failure
1)Negative Externalities
2)Positive Externalities
3)Public Goods
4)Information gaps
