Business and government - market failure and externalities

Question 1

What is market failure ?

Answer 1

This arises when the market either fails to provide certain goods or fails to provide them at their optimum or most desirable level

Question 2

Three main types of market failure ?

Answer 2

monopoly
public goods
externalities

Question 3

What is individual failure ?

Answer 3

Irrational, lack of self control, behavioural economics

Question 4

What does privatisation mean ?

Answer 4

The surrender of some aspects of state inf;uence over economic activity and the consequent reassertion of market priorities

Question 5

When does market failure happen ?

Answer 5

1. too little produced
2. too much produced
3. none produced

Question 6

What is the competition policy concept ?

Answer 6

This is a concept that involves attempts by the government to promote competitive practices between firms in markets

Question 7

What is the industrial policy concept ?

Answer 7

This involves attempts by the government to enhance the performance of firms in markets

Question 8

Types of goods ?

Answer 8

public

private

Question 9

What is a public good ?

Answer 9

One that, once produced, can be freely consumed by everyone

Question 10

What are externalities / third party effecrts ?

Answer 10

These are costs incurred or benefits received by other members of society not taken into account by producers and consumers

Question 11

What is a private good ?

Answer 11

One that is wholly consumed by an individual

Question 12

What is the free rider problem concept ?

Answer 12

This refers to the possibility that public goods will be underprovided by the market because individuals rely on others to pay for them

Question 13

What are the characteristics of public goods ?

Answer 13

They are hard for the market to deliver 
non rival
non excludable 
free rider problem 
e.g. street lighting

Question 14

How are public goods provided ?

Answer 14

Tax revenue goes to private contractors and then to pure public goods
OR
tax revenue goes straight to pure public goods

Question 15

When do externalities occur ?

Answer 15

When private transactions (market based) affect other third parties and the market cant understand what is happening

Question 16

Types of externalities ?

Answer 16

Negative

Positive

Question 17

What is the states role with regards to externalities ?

Answer 17

reduce negative externalities and promote positive ones

Question 18

What are positive externalities ?

Answer 18

When a private transaction produces unintended benefits

Question 19

What does the concept crowding out mean ?

Answer 19

it refers to the reduction in private expenditure that results folowwing an increase in government expenditure.

Question 20

why might governments not be able to correct market failure ?

Answer 20

Asymmetric information

resources

Question 21

Why might governments not be willing to correct a market failure ?

Answer 21

Behavioural symmetry
corruption / predatory states - developing countries
Vote chasing politicians - e.g. us giving 250 million to NFL stadiums
buraeaucracies have their own agenda - budgets
lobbying and regulatory capture - inside job
rent seeking - resources spent on trying to secure a favour without comp. effort.

Question 22

What 3 principles is the liberal view on market failure based on ?

Answer 22

1. The state may fail too
2. state failures may be worse than free market failure
3. the failures of the free market are overstated

Question 23

What do liberals think about state failure ?

Answer 23

Voluntarism from customers is vital for market
vital individualist relationship between consumer and producer
1. The market is the only thing that can respond to desires of the society not the state
2. coercion - e.g. everyone having to pay tax and being fined if choosing not to
3. crowding out - e.g. the housing system in the UK - three types of housing = owner occupied, privately rented and state rented. The government built more state housing so that the government could receive more money
Liberals believe that unless it is absolutely necessary, the state should not intervene because a truely free market is the best

Question 24

why is privatisation good ?

Answer 24

1. the market empowers the consumer
2. promotes the division of labour
3. sparks the entrepreneurial zeal of the profit motivated producer

Question 25

Why is privatisation bad ?

Answer 25

1. a change of ownership in itself confers no obvious benefits
2. the success for privatisation is the extent to which it promotes competition

Question 26

What is the coase theorem ?

Answer 26

he suggests that there may be other ways than simply the government suppressing negative externalities and promoting positive ones.
parties may be able to negotiate instead of the government intervening