Ch 5: Market Failure Flashcards
What is market failure?
When resources are not allocated efficiently- total economic surplus is not being maximised
What are the main types of market failure?
- externalities
- public goods
- common property resources
- inequity
What are the features of a competitive market and when does it become ‘imperfect’?
- large number of small firms
- free entry and exit
- very little product differentiation
the market is said to be imperfect when one or more of these conditions are not met
What is the difference between a monopoly market and an oligopoly market? What occurs when a firm has market power?
a monopoly is a market with just one firm while an oligopoly is a market with a few large dominant firms
- in these markets firms are said to have market or monopoly power because there is restricted competition
- because there is less competition, imperfect markets have higher prices as firms with market power can affect the market price by varying its output
List what blue, pink and green shaded areas represent and describe why Pe has increased to Pm?
How should you draw this in a test?
blue- consumer surplus
pink- producer surplus
green- dead weight loss (DWL)
Market power allows a firm to increase its price o Pm, by restricting output to Qm- firms do this to maximise producer surplus/profiy (which reduces total surplus). Consumers are worse off as they receive a lower quantity and higher price
Draw first a competitive market then the non-competitive market to compare
What are some of the ways firms can become monopolies or oligopolies?
- a firm that controls a scarce resource- water, electricity, rare stones
- a firm that develops a technological advantage over others- Microsoft and Office suite
- a firm that gains a patent on an invention that gives it protection from competition for a period of time (up to 17 years in Australia)
- a firm that can restrict the entry of new firms through extensive product differentitation, brand proliferation, large advertising budget, controlling retail outlets
- a firm that achieves economies of scale (cost advantage that arises with increased production- decreasing cost of production with increasing output) or considerable cost advantages over other firms that allow it to gain most of the market- BHP, Rio
- collusive behaviour: when firms agree to share markets, to fix prices or quantities or otherwise seek greater market power than if they could if they acted competitively
What is anti-competitive behaviour?
any agreements/arrangements between firms that seek to restrain comeptition and thereby remove the automatic regulation that competitive market achieve
What are the benefits of a competitive market?
- encourgae businesses to omprove performance, develop new products and respond to changing circumstances
- lower prices
- improved choice for consumers
- greater efficiency
- higher economic growth
- increased employment opportunities
Who protects consumers and businesses from practices that limit competition in Australia?
The Australian Competiton and Consumer Commission (ACCC).
What is a cartel?
when firms agree to act/collude together instead of competing with each other
What is collusion, collusive bidding and collusive tendering?
- collusion: agreements betweem firms- either price or market sharing
- collusive bidding: bidders at an auction bid in a predetermined manner in order to keep prices low
- collusive tendering: firms agree to submit exorbitant tenders which ensure high profits and the sharing of work between the collusive members
What is market sharing?
a market is divided into a series of smaller markets, each supplied by one of the firms, thus reducing competition
What is predatory pricing?
predatory pricing- when a company with substantial market power sets prices at a sufficiently low level with the purpose of seliminating/substantially damaging a competitor
What is resale price maintenance?
supplier sets the price at which a retailer must sell its products. The manufacturer may refuse to sell to any retailer which may resell their products at a discount
What is exclusive dealing?
when one person trading with another imposes some restrictions on the other’s freedom to choose with whom, in what, or where they deal
What is a collective boycott?
when a group of competitors agree not to aquire goods/services from/or not to supply goods/services to, a business whom the group is negotiating
What is a merger?
two or more firms join together to form one larger firm- prohibited if it substantially reduces competition in the market
What are externalities?
external/side effects of economic activity. Can be positive or negative
- also known as spillovers
- when they exist, the market outcome will not be efficient as it will fail to produce the optimal quantity
What is negative production externalitity and what are some examples?
the negative effects of producing a good that is a cost to society. There is overproduction- the market quantity exceeds the efficient/optimal quantity. If you factor in the external (true) cost you would see an increase in price, decrease in quantity generally by a tax
- driving cars- imcreases smog and air pollution, increases travel time
- cigarettes: health care system cost and effect on non-smokers
- fossil fuels- contributes to global warming and climate change
What is positive production externalitity and what are some examples?
the positive effects of producing a good
- paid education (university)- not only do students benefit from an increased income but society also gains as it has more skilled and productive workforce
- government subsidises this as knows students can’t pay
What is a negative consumption externality?
the negative effects of overconsuming a good. If we factored in the external cost, price would increase and quantity would decrease
- fast food- overconsuming has negative effects
What is positive consumption externalities?
if factored in, quantity and price will increase
- gyms- less health problems, less medicare costs, feel better
- education
How do governments use market based policies to correct for negative externalities?
to internalise a negative externality, the govt. can impose a tax on producers = external cost. The tax=P1P0. The tax forces the producer to pay, it shifts the firm’s private supply curve (Sp) to the left.
How do governments use market based policies to correct for positive externalities?
To internalise a positive externality, govt. can pay a subsidy to consumers=external cost. The subsidy=P2P0. The subsidy shifts the consumer’s private demand curve (Dp) to the social demand curve (Ds). The price paid by consumers is decreased to P2 nad quantity is increased
