Chapter 6: Market Failure & Govt. Intervention Flashcards
What are the assumptions of Price Mechanism.
- Free market: production is only carried out by firms (no govt. intervention)
- Decision making is based on self interest;producers seek to maximise profits, consumer seek to maximise satisfaction
- Perfect Market Conditions:
• perfect info. in the market
• FOP are perfectly mobile - Production and consumption does not generate externalities
Define market failure
Market failure occurs when the workings of the free market result in an inefficient allocation of resources from perspective of society.
Define public goods
Public goods have the characteristics of non rivalry in consumption, non excludablein consumption and non rejectability in consumption.
What does it mean by efficient allocation of resources?
Efficient allocation of resources in a market implied that there is adequate available resources for the production of goods and services to bring about maximum total economic surplus. In doing so, social welfare is maximised.
What is the disadvantage of permits (quota on emission)?
- Firms may not have the incentive to fund less pollutive methods of production is the permit is sufficient for them. This may occur if the government issues out too many permits as they are unable to accurately measure the negative externality.
Disadvantages of tradable permits.
Difficult to know the socially efficient level of pollution—> difficulty in determining how many permits to issue. If too many permits are issued, the price of permit may be too low to incentive firms to cut back pollution so that they can sell their unused permits. The low price may also lead to firms choosing to buy more permits rather than to find less pollutive means of production.
What is a permit and how do they function?
- Permits are instruments aimed at reducing pollution
- Each permit gives the firms a legal right to pollute a certain amount of pollution per year. (for e.g, a permit may allow firms to discharge 100 units of CO2
- The government will determine the total level of pollutants acceptable and issue the permits to producers.
- The number of permits issues is consistent with the total amount of pollution generated by producing the socially optimal output.
What is special about tradable permits?
It provides incentives for firms to reduce pollution so that they can sell unused portion of their permit at a certain price P1 to earn additional revenue.
What is the one sentence that needs to be written for MF due to imperfect information?
In consuming goods, consumers would make decisions based on information that they perceived to be accurate.
Define government failure
Government failure could be defined as the situation where government intertvention causes outcomes to be even more inefficient or inequitable as comapred to no intervention.
Define equity
Equity can be defined as fairness in the distribution of the economy;s resources especially with regards to access to essential goods and services, such as education, healthcare, housing etc.
Define the Price Mechanism
PM is a means by which consumers and firms interact to determine the allocation of scarce resources between competing uses.
Disadvantage of using quota as a CCP
-Firms will not have the incentive to find less pollutive methods of production since they are forced to produce a maximum level of Qs. In fact, they may even resort to finding cheaper methods of production that are more pollutive in order to raise profits.
What does it meant by non-rivalry in consumption?
When ome person consumes a good, it does not diminish the amount available to others
