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Economics - Chapter 8 > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

What are quasi public goods?

A

A good which exhibits some, but not all, of the characteristics of a public good

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2
Q

What is the free rider problem?

A

Individual consumers hope to get a ‘free ride’ without paying for the benefit they enjoy

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3
Q

What makes up MSC?

A

MPC + MEC

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4
Q

What makes up MSB?

A

MPB + MEB

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5
Q

At what point is social welfare optimised?

A

MSB = MSC

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6
Q

What is environmental market failure?

A

Negative externalities arising from the over-exploitation of environmental resources

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7
Q

What can cause environmental market failure to arise?

A

A lack of clearly defined property rights relating to environmental resources. Economic agents don’t suffer any penalty for pollution = leads to over-use + rapid depletion

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8
Q

What is the Tragedy of the Commons?

A

Environmental market failures. Over use of any natural resource etc.

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9
Q

Give 5 examples of merit goods

A

Education
Healthcare
Exercise
Car Insurance
Healthy foods

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10
Q

What is a merit good?

A

A good which would be under-consumed in a free market

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11
Q

What is a demerit good?

A

A good which would be over-consumed in a free market

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12
Q

Why might merit goods be under-consumed in a free market?

A
  • People aren’t aware of the potential private benefits from consumption of merit goods, especially long term
  • Too expensive
  • Bounded rationality - may not take into account the wider benefits of society of their use of merit goods
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13
Q

Why might demerit goods be over-consumed in a free market?

A
  • Ignorance to the damage to their health of consumption
  • Goods are easily affordable or too accessible
  • People may not take into account of the wider external costs associated with their consumption
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14
Q

Perfect markets have 5 what features?

A
  1. Perfect info
  2. No barriers to entry/exit
  3. Homogenous products + f.o.production
  4. Large numbers of buyers/sellers
  5. Perfect mobility of factors of production
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15
Q

Perfect markers are what in reality?

A

Unrealistic and do not exist

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16
Q

How might imperfect and asymmetric information contribute to market failure?

A

Through imperfect info, consumers might not be fully aware of the positive/negative consequences of their use of certain goods, especially in long term = might overconsume/under consume amounts that don’t maximise overall societal welfare. Asymmetric info gives the agent more power in the decision-making process.

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17
Q

What is occupational immobility?

A

Workers + factors of production find it hard to move between occupations for reasons of a lack of desirable skills

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18
Q

What is geographical immobility?

A

When workers find it hard to move to locations where jobs are available i.e. too expensive etc

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19
Q

What is equity?

A

The notion of fairness in the allocation of resources

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20
Q

In a market economy, with no gov intervention, who gets access to greatest share of resources?

A

Those with the highest incomes

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21
Q

Free market capitalists argue what?

A

That inequality creates incentives that positively influence overall national income and can ‘trickle down’ to poorer members of society, raising overall living standards

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22
Q

Critics of free market capitalism say what?

A

That inequality creates social tensions between the relatively rich and poor, leading to reduced living standards

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23
Q

Why might a government intervene?

A
  1. To correct market failure
  2. To achieve a fairer (more equitable) distribution of income and wealth
  3. To achieve the gov’s macroeconomic objectives
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24
Q

What is indirect taxation?

A

A tax on spending, sometimes used to reduce consumption of demerit goods

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25
Q

What 2 types of indirect taxation can gov use?

A
  1. Specific or unit taxes = a fixed amount is added per unit of a good/service i.e. bottles of alcohol
  2. Ad valorem taxes = involve adding a percentage of the price of a good/service
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26
Q

What are the 3 advantages of using indirect taxation?

A
  1. Increases revenue for gov which can be used in other areas to improve the economy
  2. The use of the price mechanism allows consumers/producers to choose how to adjust their behaviour
  3. Helps to internalise external costs
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27
Q

What are the 4 disadvantages of using indirect taxation?

A
  1. Depends on elasticity of goods. If placed on inelastic goods, the quantity demanded may not fall much unless the tax it very large.
  2. Difficult to place an accurate value on external costs - makes it hard to correctly ‘internalise’ a negative externality
  3. Tend to be regressive (they take a larger percentage of a poorer persons’ income)
  4. May decrease international competitiveness of UK firms
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28
Q

What are subsidies?

A

Grants paid by the gov to producers to encourage increased production of certain goods/services i.e. merit goods. Can also promote the use of products which reduce external costs i.e. public transport

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29
Q

What does a grant of a subsidy do to the supply curve?

A

It shifts it rightwards

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30
Q

What are the 2 advantages of using subsidies?

A
  1. Can increase consumption of merit goods
  2. Reduce price of a good = makes it more affordable for those on lower incomes = reducing relative poverty
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31
Q

What are the 5 disadvantages of using subsidies?

A
  1. Difficult to place an accurate monetary value on the size of external benefits
  2. Funding carries an opportunity cost
  3. Firms may become reliant on subsidies, encouraging productive inefficiency = decreasing international competitiveness
  4. May be viewed by foreign govs as a form of artificial trade protection, encouraging them to retaliate
  5. Depends on the elasticity of goods
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32
Q

What is the minimum price?

A

A price floor placed above the free market equilibrium

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33
Q

What is the maximum price?

A

A price floor placed below the free market equilibrium

34
Q

What are price floors?

A

An established legal level below which prices are not allowed to fall i.e. NMW

35
Q

What are the 3 advantages of minimum prices?

A
  1. Give producers a guaranteed min price and income, which helps generate a reasonable standard of living
  2. Encourage production of essential products i.e. agriculture
  3. Excess supplies may be bought up and stored, to be released in times of future shortage
36
Q

What are the 5 disadvantages of minimum prices? Via acronym Helping Everyone Out Really Matters

A
  1. Higher prices reduces disposable incomes
  2. Encourage over-production and inefficiency
  3. Opportunity costs if gov or other authorities have to purchase excess supplies
  4. Reduced international competitiveness
  5. May encourage people to seek cheaper, potentially more harmful alternatives
37
Q

Why are maximum prices sometimes imposed?

A

Because the free market equilibrium price would be too high for many consumers, leading to problems of reduced affordability i.e. rent controls to make accommodation for affordable

38
Q

What are the 2 advantages of maximum prices?

A
  1. Some people would otherwise not be able to afford certain goods/services i.e. prescription medications
  2. Can reduce the ability of firms with monopoly power to exploit consumers through charging higher prices
39
Q

What are the 2 disadvantages of maximum prices?

A
  1. Creation of excess demand; queues, shortages and waiting lists
  2. May lead to black markets for goods/services i.e. secondary markets for music event tickets
40
Q

What are the 7 ways for a gov to intervene?

A
  1. Indirect taxation
  2. Subsidies
  3. Min/Max prices
  4. Direct provision
  5. Regulation
  6. Correcting market failure
  7. Extending property rights and the use of pollution permits
41
Q

What are regulations?

A

Rules or laws to control/restrict the actions of economic agents in order to reduce market failure

42
Q

Give 3 examples of regulations

A
  • Banning smoking in public places
  • Imposing max emissions levels on new cars
  • Setting up regulatory bodies (i.e. OFGEM) to restrict the activities of dominant firms
43
Q

Name a few remedies to fix market failure

A
  • Compulsory labelling on food, along with traffic-lighting levels of fat/salt etc
  • Strong health warning on packs of cigs
  • TV advertising campaigns discouraging excessive alcohol consumption
44
Q

What are the drawbacks of government correction of market failure?

A

High costs and a lack of long-term effectiveness

45
Q

What is a pollution permit?

A

The right to use or exploit an economic resource to a specific degree

46
Q

How might introducing pollution permits fix environmental failure?

A

Due to the over-exploitation of natural resources because of a lack of clearly-defined property rights or ownership, it might decrease pollution permit supply over time in order to increase incentives for firms to decrease their emissions.

47
Q

What are the advantages of pollution permits?

A
  1. Use the market mechanism to provide powerful incentives for firms to reduce their carbon emissions
  2. Revenues from selling permits can be used to fund ‘green’ technologies and other environmental schemes
48
Q

What are the disadvantages of pollution permits?

A
  1. Govs will suffer from imperfect info about the full social costs of CO2 emissions, which may lead to gov failure in deciding the quantity of permits to set
  2. If the price of permits are too low, firms will not be sufficiently incentivised to cut their CO2 emissions
49
Q

What is the competition policy?

A

Government policy which aims to make markets more competitive

50
Q

Who oversees the UK competition policy?

A

The CMA (Competition and Markets Authority)

51
Q

What are the 5 main principles of UK competition policy?

A
  1. Ignoring economies of scale, perfect competition is more likely to be productively and allocatively efficiency than monopoly
  2. Monopolists restrict output to raise price and gain supernormal profit, resulting in a net loss of welfare
  3. If economies of scale are present, monopolies may produce output at a lower average cost than firms in perfect competition
  4. Monopoly firms making supernormal profit can be more dynamically efficient than firms in perfect competition
  5. In general, each case is judged on it’s own merits
52
Q

Competition policy in the UK is focused on 4 areas:

A

Monopolies
Mergers
Restrictive Trading practices
Promoting competiton

53
Q

What are the 6 possible approaches the CMA can take against monopolies?

A

Compulsory break-up
Windfall taxes on ‘excess’ or supernormal profits
Price controls i.e. max prices
Public ownership (nationalisation)
Privatisation
Deregulation

54
Q

What are mergers?

A

When two or more firms willingly join together

55
Q

What does the competition policy consider about mergers and takeovers?

A

Whether they might create a new monopoly

56
Q

What is a takeover?

A

When two or more firms unwillingly join together

57
Q

Why might mergers and takeovers be prohibited?

A

If they are predicted to substantially reduce competition.

58
Q

When are the CMA alerted to monopolies?

A

If their collective market share is over 25%
If their collective new revenue a year is over £75,000

59
Q

What are the restrictive trade practices that monopolies can undertake?

A

Forming a cartel to fix the price of a good/service
Refusal to supply a specific retailer
‘Full-line forcing’ - obliging a retailer to stock all products in the firm’s current range
Charging discriminatory prices i.e. discounts for bulk orders

60
Q

What will the CMA usually do if restrictive trade practices are investigated?

A

To require the firm(s) involved to stop the practise under threat of prosecution

61
Q

What is public ownership?

A

Gov ownership of firms, industries or other assets

62
Q

What are the 3 advantages of public ownership?

A
  1. Nationalised monopolies are more likely to take account of externalities
  2. State-run monopolies are more likely to produce an allocatively efficient output
  3. Key industries i.e. rail, energy, steel and water may be regarded as too important to be run by private organisations
63
Q

What are the 2 disadvantages of public ownership?

A
  1. Lack of dynamic efficiency
  2. The best managers and leaders are to be found in the private sector where financial rewards may be significantly higher
64
Q

What is nationalisation?

A

The transfer of assets from the private sector to public ownership

65
Q

What is privatisation?

A

The sale of government-owned assets to the private sector

66
Q

What are the 4 advantages of privatisation?

A
  1. Raising extra revenue for the government
  2. Promoting competition
  3. Promoting efficiency
  4. Encouraging greater share ownership by the general public may lead to greater pressure on firms to act in the public interest
67
Q

What are the 3 disadvantages of privatisation?

A
  1. Exploitation of monopoly power
  2. Short-termism = a focus on cost-cutting to maximise short-term profits rather than on longer-term investment projects
  3. Private firms may ignore externalities of their activities
68
Q

What is external regulation?

A

Involves agencies i.e. CMA imposing rules and restrictions

69
Q

What is self-regulation?

A

Involves organisations in particular industries voluntarily regulating themselves i.e. the Law Society

70
Q

Whilst regulation may impose additional costs to businesses, it’s felt what?

A

To be justified in protecting consumers from abuse of monopoly power and external costs

71
Q

What might regulation through the CMA lead to?

A

Regulatory capture

72
Q

What is regulatory capture?

A

When regulatory agencies act in the interest of regulated firms rather than on behalf of the consumers they are supposed to protect

73
Q

What is deregulation?

A

The removal of rules and regs in order to increase efficiency of markets

74
Q

What are the 3 advantages for deregulation?

A
  1. May reduce firms’ costs of production - consumers can benefit from lower prices
  2. The promotion of competition may lead to a more contestable market
  3. May avoid the problem of regulatory capture
75
Q

What is government failure?

A

When gov intervention in a market reduces overall economic welfare

76
Q

What are the reasons for gov failure?

A

Inadequate info
Unintended consequences
Market distortions
Administrative costs
Regulatory capture

77
Q

What does the contestable market theory argue?

A

That the most effective way to promote competition is through deregulation

78
Q

What is the problem with regulatory capture?

A

Supporters of deregulation argue that much regulatory activity is unnecessary, and that once implemented, the regulators have incentives to keep adding more rules and regs in order to justify their pay and jobs. Regulation acts are an informal ‘tax’ on the regulated, increasing production costs and consumer prices, and as an extra barrier to market entry, restricting competition.

79
Q

Before the UK left the EU at the end of Jan 2020, the UK competition policy was overarched by what?

A

The EU competition policy.

80
Q

What is the EU competition policy?

A

The EU merger policy (part of the competition policy) is based on the principle of subsidiarity, which delegates policy as much as possible to national govs. Member countries continue to use national policy to deal with smaller mergers, but the European Commission adjudicates on larger merges with a community dimension.

Economics - Chapter 8 (10 decks)

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