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Microeconomics Y12 > Booklet Three > Flashcards

Booklet Three Flashcards

1
Q

What makes a good excludable?

A

If someone can be excluded from benefiting from it

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2
Q

What makes a good rivalrous?

A

If the consumption by one person affects someone else’s ability to benefit from it

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3
Q

What is a private good?

A

A good that is both excludable and rivalrous

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4
Q

What is a public good?

A

A good that is non excludable and non rivalrous

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5
Q

Non excludability gives rise to which problem?

A

Free rider problem if no one can be prevented from gaining the benefit without paying nobody has the incentive to buy the good

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6
Q

What good can be produced at zero marginal costs (doesn’t cost much extra to make more of something) ?

A

Public goods because they are non rivalrous

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7
Q

What is quasi public good?

A

A good that has some of the characteristics of a public good or has some characteristics of a private good

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8
Q

What is market failure?

A

When the price mechanisms lead to a misallocation of resources

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9
Q

What are the 3 functions of price?

A

1)A signalling function
2)Incentive function
3)Rationing or allocative function

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10
Q

What is the signalling function of price?

A

What customers pay for a good and what revenue producers will receive

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11
Q

What is the incentive function of price?

A

The role that prices play in motivating and influencing the behaviour of producers and consumers

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12
Q

What is the rationing function of price?

A

Decide how resources are used and allocated

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13
Q

How do missing markets occur?

A

When the incentive function of price completely break down and a market fails to come into existence

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14
Q

What is a partial market failure?

A

When a market exists but the quantity produced / consumed is allocative inefficient

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15
Q

What is the tragedy of the common?

A

The effect of individuals acting in their own self interest that effects society as a whole

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16
Q

What is merit good?

A

Good that are more beneficial for consumers than they realise and are underconsuemd in free market

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17
Q

What is demerit good?

A

Good that are more harmful for consumers than they realise and are over consumed in free markets

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18
Q

What is information failure?

A

When one party knows more about the true value of a product than another party

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19
Q

What is the difference between search goods and experience goods?

A

Experience goods are goods that you need to experience them to know more about them opposed to search goods

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20
Q

What is asymmetric information?

A

When the sellers knows more about the true value than the consumer (can be reversed sometimes)

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21
Q

What is an externality?

A

A cost or benefit to a third party who is not directly involved in an economic activity or transaction

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22
Q

Difference between positive and negative externality?

A

Negative externality is a cost to a third party but positive externality is a benefit to third party

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23
Q

What does FMQ stand for?

A

Private optimum

24
Q

What does SOQ stand for?

A

Social optimum

25
Q

What does MPC stand for?

A

Marginal private costs

26
Q

What does MPB stand for?

A

Marginal private benefit

27
Q

What does MSB stand for?

A

Marginal social benefit

28
Q

What does MSC stand for?

A

Marginal social costs

29
Q

What is an indirect tax? (A type of government intervention)

A

A tax on goods and services

30
Q

What are the 2 forms of indirect tax

A

Unit tax and ad valorem tax

31
Q

What is a unit tax?

A

Add a fixed amount for a certain quantity

32
Q

What is a ad Valorem tax?

A

Add a percentage to the pre tax selling price (VAT)

33
Q

Indirect tax evaluation points (5)

A

.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

34
Q

What are production subsidies? (A type of government intervention)

A

A sum of money given by the government to encourage the production of a good or service

35
Q

Subsidy evaluation points (4)

A

.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

36
Q

What is a regulation? (A type of government intervention)

A

The imposition of new rules or laws by the government

37
Q

Regulation evaluation points (4)

A

.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

38
Q

What are price controls? (A type of government failure)

A

The Government can introduce price controls either a maximum or minimum price

39
Q

Why do the government introduce a minimum price control?

A

A minimum price to cause a contraction of demand and reduce overconsumption

40
Q

Why do the government introduce a maximum price control?

A

A maximum price to cause an extension of demand and reduce underconsumption

41
Q

In order for a maximum price to be effective

A

The price must be below the equilibrium price

42
Q

In order for a minimum price to be effective

A

The price must be above the equilibrium price

43
Q

Price controls evaluation points (4)

A

.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

44
Q

What is state provision?

A

Something is provided by the government free at the point of consumption

45
Q

What is information provision? (A type of government intervention)

A

The government provides information to help customers make an informed choice

46
Q

Information provision evaluation points (3)

A

.Opportunity cost (e.g advertising)
.Can be ignored
.Information may be inaccurate leading to a risk of government failure

47
Q

What are tradable permits? (A type of government intervention)

A

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

48
Q

What is a marginal abatement cost?

A

The cost of reducing firms pollution by one unit

49
Q

Tradable permit evaluation points (4)

A

.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

50
Q

What are property rights for market failure?

A

Legal rights individuals have over their property

51
Q

Benefit of property rights (3)

A

.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

52
Q

Government intervention can lead to …

A

Unintended consequences

53
Q

When does market failure occur?

A

when there is a misallocation of resources

54
Q

How do inequalities in the distribution of income and wealth contribute to market failure?

A

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

55
Q

Drawback of property rights (3)

A

.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

56
Q

4 types of market failure

A

1)Negative Externalities
2)Positive Externalities
3)Public Goods
4)Information gaps

Microeconomics Y12 (3 decks)

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