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economics > chapter 4 > Flashcards

chapter 4 Flashcards

1
Q

Market Failure definition

A

exists when free market fails to allocate resources in an efficient manner

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2
Q

Sources of Market Failure

A
  1. public goods
  2. externalities
  3. information failure
    - imperfect information
    - asymmetric information
  4. market dominance
  5. factor immobility
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3
Q

Public Goods definition

A

goods that are not provided by the free market & have the features of :
1. non-rivalry
- the consumption of the g&S by an individual does not depleye the benefits available to others to enjoy

2. non-excludability
- impossible to provide the good to only one person only without it being available for others too

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4
Q

Externalitites definition

A

occurs when the costs / benefits associated with the production / consumption of a good spillsover onto a 3rd party (anyone besides the seller / consumer), for which no compensation is paid

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5
Q

Types of Externalities

A
  1. negative externalities
    - from production
    - from consumption
  2. positive externalities
    - from production
    - from consumption
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6
Q

Policies for Negative Externalities

A

market based solutions
- taxation
- tradable permits
- quotas

non-market based solutions
- legislations / government regulation
- education / campaigns / advertisements

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7
Q

Policies for Positive Externalities

A

market based solutions
- subsidies

non-market based solutions
- legislations / government regulation
- direct provision

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8
Q

Externalities analysis

A

before
- free market, MPC = MPB
- externality (MEC/MEB) in context

during
- divergence between MPC & MSC due to presence of MEC/MEB
- free market not at social optimal level

after
- agents are unable to internalise these externalities
- there is overproduction/consumption
- allocative inefficient market = market failure

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9
Q

Imperfect Information definition

A

consumers are unaware of the actual costs & benefits of consuming the g&s

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10
Q

Policies for Imperfect Information

A
  • public education
  • regulation
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11
Q

Asymmetric Information definition

A

occers when one party in the market has more information about the g&s than the other resulting in a distortion of incentives & inefficient market outcomes

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12
Q

Effects of Assymetric Information

A
  • adverse selection
  • moral hazards
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13
Q

Adverse Selection definition

A

occurs when the asymmetric information between buyers & sellers causes one of the parties to make suboptimal choices that result in lower welfare & thus an inefficient market outcome

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14
Q

Solutions for Adverse Selection

A
  • investing in information
  • signals
  • screening
  • laws
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15
Q

Moral Hazard definition

A

the situation in which the economic agents take greater risks than they normally would because the resulting costs will not be borne by them, but instead the cost is shifted to the other party

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16
Q

Solutions for Moral hazards

A
  • incentives
  • deductibles & co-payment
17
Q

Policies for Market Dominance

A
  • anti-trust policies
  • regulation through taxes
    1. lump-sum tax
  • regulation using pricing policies
    1. MC pricing
    2. AC pricing
  • natioanlisation
  • liberalisation / deregulation
18
Q

Factor Immobility definition

A

the inability of a factor of production to shift from one use / area to another, even in response to a large changes in demand & remuneration

19
Q

Types of Factor Immobility

A
  • occupational immobility
  • geographical immobility
20
Q

Occupational Immobility definition

A

occurs when there are barriers to the mobility of the factors of production between different industries & occupations

21
Q

Solutions for Factor Immobility

A
  • improving information flow
  • training / upskilling workers
  • improving infrastructure / transport system
  • providing incentives
22
Q

Government Failure definition

A

occurs when the government intervention leads to greater market inefficiencies

23
Q

Factors leading to government failure

A
  • imperfect information
  • bereaucracy / time lags
  • lack of market incentives
  • shifts in government policies creating uncertainties in the market
  • myopic decision-making
  • pursuit of self-interest

economics (18 decks)

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