chapter 14: limits of markets Flashcards
why do gov intervene
A completely free market may fail to meet important community needs, lead to inequality, and contribute to problems like economic instability or even a pandemic. Governments intervene in markets to achieve better resource allocation, equitable income distribution, and economic stability.
Government intervention is necessary to correct market failures, which occur when markets produce inefficient or unfavorable outcomes, such as poor provision of goods and services, unequal income distribution, externalities, abuse of market power, and instability. However, finding the right balance between too much and too little government intervention is crucial to avoid stifling innovation or leaving society exposed to negative effects.
what are public goods
non excludable and non rival eg clean air, street lighting and national defence
non excludable - can attract free riders who benefit without contributing towards their cost
non rival - one person’s enjoyment of a pub good does not diminish the potential for others to enjoy
what are merti goods
a good that benefits the whole society eg syd oepra house and healthcare system
what are demerit goods
items that bring harm to the ocmmunity eg tobacco, alcohol, durgs and gambling
their production and sale may be restricted, heavily taxed or completely prohibited
what is a natural monopoly
a market structure in which goods can be effiecintly provided by only one supplier usually bcos of the enormous investment in infrastructure required to supply that good eg transport and water
what is the consequence of a eco left to operate without any gov intervention
tend to produce substantial inequality in the distribution of incoem
what is absolute and relative poverty
absolute - onyl have just enough incoem to enable them to survive
relative - living standards of the poor in comparison to the rest of the population
how can gov help reduce income inequality
Governments can help mitigate this by providing free education, scholarships, and welfare programs, which aim to reduce inequality and promote equal opportunities.
what are externalities
Externalities are a form of market failure because they occur where the price mechanism fails to represent the true social costs or benefits of production
what are positive externalities
benefitd to third parties eg an eco tourism bus cleans up a polluted river, the public beenfit from clean water
what are negative externalities
adverse spill over effects that production and other economic activities have on the environment eg pollution
how do firms abuse their market power
- monopolisation
- price discrimination: occurs when a firm sells the same type of good or service in different markets at different prices eg tourist locations
- exclusive dealings: sets conditions for supply that excludes retailers from dealing with other competitors
- collusion and market sharing: occur when firms get tgt and agree on a pricing anf makret-sharing arrangement that reduces effective compeitition b/w them (cartels)
