Chapter 8 Flashcards
What is the signalling function of prices
Prices provide information to buyers and sellers
What is the incentive function of prices
Prices create incentives for people to alter their economic behaviour e.g a higher price creates an incentive for firms to supply more of a good or service
What is the rationing function of prices
Rising prices ration demand for a product
What is the allocative function of prices
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into market in which their is excess demand
What is market failure
When the market mechanism leads to a misallocation of resources in the economy either completely failing to provide a good or service or providing the wrong quantity
What is complete market failure
A market fails to function at all and a missing market results
What is partial market failure
A market does function but it delivers the wrong quantity of a good or service which results in resource misapplication
What is a missing market
A situation in which there is no market because the function of prices have broken down
What is a private good
A good such as an orange that is excludable and rival
What is an excludable good
People who are unprepared to pay can be excluded from benefiting from the good
What is a rival good
When one person consumes a private food the quantity available to others diminishes
What is a public good
A good such as a radio programme which is non excludable and non rival
What is a quasi public good
A good which is not full non rival and or where it is possible to exclude people from consuming the product
What is an externality
A public good in the case of an external benefit or a public bad in the case of an external cost that is dumped on third parties outside the market
What is a positive externality
An external benefit that occurs when the consumption or production of a good cause a benefit to a third party where the social benefit is greater than the private benefit
What is a negative externality
An external cost that occurs when the consumption or production of a good causes costs to a third party where the social costs is greater than the private cost
What is a property right
The exclusive authority to determine how a resource is used
What is the free rider problem
A free rider is someone who benefits without paying as a result of non excludability. Customers may choose not to pay or a good with the result that the incentive to provide the food through the market disappears
What is a production externality
An externality generated in the course of producing a good or service
What is a consumption externality
An externality generated in the course of consuming a good or service
What is a merit good
A good such as health care for which the social benefits of consumption exceeds the private benefits. Value judgments are often unloved in deciding that a good is a merit good
What is information failure
Occurs when people make wrong decisions because they do not possess or ignore relevant information. Very often they are myopic about the future
What is social benefit
The total benefit of an activity including the external benefit as well as the private benefit
What is a subsidy
A payment made by government or other authority usually to producers for each unit of the subsidised good that they produced. Consumers can also be subsidised e.g bus passes
What are demerit goods
Good such as tobacco for which the social costs of consumption exceeds the private costs. Value judgement are involved in deciding that a good is a demerit good
What is social cost
The total cost of an activity including the external cost as well as the private cost
What is a moral hazard
The tendency of individuals and firms once insured against some contingency to behave so as to make that contingency more likely
What is immobility of labour
The inability of labour to move from one job to another either for occupational reasons or for geographical reasons
What is competition policy
The part of government’s microeconomic policy and industrial policy which aims to make goods markets more competitive. It comprises policy toward monopoly, mergers and restrictive trading practices
What is competition and markets authority
Government agency responsible for advising on and implementing uk competition policy
What is public ownership
Ownership of industries, firms and other assets such as social housing by central government or local government. The states acquisition of such assets is called nationalisation.
What is privatisation
The transfer of assets from the public sector to the private sector
What is regulation
The imposition of rules and other constraints which restrict freedom of economic action
What is deregulation
The removal of previously imposed regulations
What is regulatory capture
Occurs when regulatory agencies act in the interest of regulated firms rather on behalf of the consumers they are supposed to protect
What is a tax
A compulsory levy imposed by the government to pay for its activities. Taxes can also be used to achieve other objectives such as reduced consumption of demerit goods
What is a price ceiling
A price above which it is illegal to trade. Price ceilings or maximum legal prices can distort markets by creating excess demand
What is a price floor
A price below which it is illegal to trade. Price floors or minimum legal prices can distort markets by creating excess supply
What is government failure
Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free market outcome
What are the functions of prices?
Signalling
incentive
rationing
allocative
What are the advantages of the price mechanism?
promoting consumer sovereignty
providing it operates in the way through cost reduction the price mechanism leads to a productively efficient allocation of resources
By redistributing resources into the production of goods and services that people wish to buy the price mechanism achieves an allocative efficient outcome
What are the disadvantages of the price mechanism?
- imperfectly competitive markets favour producers
- monopoly the operation of the price mechanism leads to an outcome in which firms exploit their producer sovereignty
- price mechanism is value neutral has no regard for equality and the fairness or otherwise of allocation of buying power between different income groups
allocative efficiency could only occur if:
- there were competitive markets for all goods and services
- there were no economies of scale
- markets were simultaneously in equilbrium
What are two important points are there to remember about perfect competition?
- in the absence of economies of scale perfect competition would be more allocatively and productively efficient than monopoly
- in perfect competition the “consumer is king”
When might monopoly be preferable?
- When the size of the market is limited but economies of scale are possible
- under certain circumstances firms with monopoly power may be more innovative than firms that are not protected by entry barriers
What are the three different parts of competition policy?
Monopoly policy
merger policy
restrictive trading practices policy
What strategic approaches could be used to deal with the problem of monopoly?
- compulsory breaking up of monopolies
- use of price controls to restrict monopoly abuse
- taxing monopoly profits
- the rate of return regulation
- state ownership of monopoly
- privatising monopolies
- deregulation and the removal of barriers to entry
What independently undertaken restrictive prices are there?
- decisions to charge discriminatory prices
- refusal to supply a particular resale outlet
- full line forcing whereby a supplier forces a distributor that wishes to sell one of its products to stock its full range of products
What are the arguments to justify privatisation?
- Revenue raising
- reducing public spending and the government borrowing debt
- promotion of competition
- promotion of efficiency
- popular capitalism
What are the arguments against privatisation?
- monopoly abuse
- short-termism wins over long termism
- selling the family silver
- the free lunch syndrome
What are the advantages of regulation?
necessary to protect
- consumers from harmful products and to maintain quality standards
- workers from labour market exploitation
- the environment
- child and old people from exploitation and abuse
- people from self-harm
What the two main justifications of dereuglation?
- promotion of competition and market contestability through the removal of artificial barriers to entry
- the removal of red tape and bureaucracy which imposes unnecessary costs on economic agents
What reasons are there for government failure?
Pursuit of conflicting policy objectives
administrative costs
the law of unintended consequences
