Chapter 8 Flashcards
Functions of price
Price signalling (information) Price rationing (best of best) Price allocation (Change market) Price incentive (What to buy)
Advantages and disadvantages of price mechanism
- Promoting consumer sovereignty
- Efficient allocation of resources
- Efficient allocation outcome
- Monopoly producer sovereignty
- Manipulation imperfect information
- Market failure can occur
Why pro free market economists believe that gov intervention works badly
Because can lead to gov failure
Define of market failure
Market mechanism leads to misapplication of resources in the economy, completely not providing the good or wrong amount
Define complete market failure
Market fails to function at all and missing market occurs
Define missing market
No market because functions of price have broken down
Define partial market failure
Does function, but provides the wrong quantity of a good or service resulting in resource miss allocation
Define private good
- Excludable (if you don’t pay you don’t get)
- Rival (one person can eat to stop you from eating for eg)
Define public good
- Non rival (cant stop from having)
- Non excludable (limitless)
Example of public and private good
Public: beam from lighthouse
Private: apple
Define quasi public good
Good that is not fully non rival and not fully non excludable
Significance of technological change with public goods
Roads having to pay now charge, congestion charge
Define positive and negative consumption and production externalities
Positive
Benefit for third party from production or consumption
Negative
Cost for third party from production or consumption
Example of the externalities
PP - Clean water from factory
PC - Pretty view
NP - Pollution
NC - Second hand smoking
Define externalities
Public good or bad of an external cost or benefit dumped onto a third party outside of the market
Explain the free rider problem
Someone benefitting without paying as a result of non excludability such as a pretty view
Why do externalities lead to the wrong quantity produced
Not true cost as dumped onto the third party
Negative : too cheap
Positive : too expensive
How is pollution controlled
Pollution permits
Private benefit maximisation
MPB=MPC
Social benefit maximisation
MSB=MSC
Equation for social benefit
Marginal social benefit= marginal private benefit + marginal external benefit
Equation for social cost
Marginal social cost = marginal private cost + marginal external cost
Draw all the externality graphs
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What does the deadweight welfare loss show
Loss of welfare at free market price
Why can allocative efficiency not occur when there are negative externalities
Because MC is not correctly represented. Market mechanism fails to achieve an allocativyly efficient outcome
Define merit good
Under provided due to incorrect information, social benefits exceed private benefit. Example is NHS
Define social cost
Social cost= private cost + external cost
Deadweight welfare loss in merit goods
Does not portray real benefit
Define demerit good
Social costs exceed private cost. Over consumed. Information failure
What is meant by merit and demerit goods and value judgements
Value judgements are required to understand if a good is merit or demerit
Why existence of monopolies lead to market failure
Due to restricting output and raising price
Why immobility of factors of production lead to market failure
Waste of scarce resources and unemployment
Define competitive policy
Aims to make goods markets more competitive, towards monopolies
monopoly control policies
- Compulsory breaking up of monopolies
- Use of price controls to restrict monopoly abuse
- Taxing monopoly profits
- Rate of return regulation
- State ownership of monopoly
- Removal of barriers to entry
Define public ownership
Ownership of industries firms and other assets by central gov or local gov
Arguements for privatisation (Public to private)
- Revenue raising
- Reduce gov spending
- Promotion of competition
- Promotion of efficiency
Arguments against privatisation (Public to private)
- Monopoly abuse
- Short termism over long termism (under investment)
- Selling family silver
- Free lunch syndrome (believing state owned assets have been sold too cheaply)
Define regulation
Imposition of rules and other constraints which restrict freedoms of economic action
Two types of regulation
External -
Self - self or voluntary
Why is regulation necessary
Protect
- Consumers from harmful products
- Children and old people
- People from self hard
- Exploitation of labourers
Define deregulation
Removing a previously imposed regulation
Two reasons for deregulation
- Promotion of competition
- Removal of unnecessary costs
Define regulatory capture
When regulatory agencies act in the interest of regulated firms rather than consumers
Difference between pro free market economists and interventionists
Free market- no gov intervention
Interventionist- Markets and uncompetitive and gov knows better
Ways a gov can intervene
Remove market Provide nudges (force firms to generate positive externalities and remove negative externalities)
What can the gov do directly to markets
Subsidies
Taxation
Draw price ceiling and what is it
Price above its illegal to trade
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Draw price floor and what is it
Price below which it is illegal to trade
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Define gov failure
Occurs when gov intervention reduces economic welfare leading to an allocation of resources worse than the free market outcome
Reasons for gov failure
- Pursuit of conflicting policy objectives
- Cost to taxpayers
- Law of unintended consequences
What could price ceiling and price floors cause due to excess demand
Black market(rising price)
