Chapter 8 Flashcards
3 types of Economic systems
- market economy
- command economy
- mixed economy
Market economy =
- price is at equilibrium price.
- most profitable products are the ones supplied
- products are distributed by suppliers who can afford it
Command economy
Government decides on:
- price
- products supplied
- distributions of products
Mixed economy =
Is a mixture of a market economy and a command economy. Most economies are of this type.
Market failure =
When supply and demand do not result in an outcome that satisfies both customers and suplliers.
(Eg. Healthcare, or when there is - - a monopoly in an industry,
- demerit goods,
- barriers to entry)
Monopolies:
- Are regulated in a mixed economy
Negatives:
- inflated prices
- cartels
With the result to keep prices or restrict supply
Positives:
- avoids inefficiencies
- technological advancement in case of high research and development costs
Competition policy covers:
- monopolies (government may keep some industries nationalised - this may lead to regional monopolies and industry regulators to ensure prices don’t get inflated)
- abusing market power (collusion leads to restricted supply and inflated prices. Or a monopoly may reduce prices, to create a barrier to entry to the market, imposing switching costs)
- mergers and acquisitions
What can cause barriers to enter the market for competitors:
- a monopoly reducing their prices so low, it’s difficult for a smaller supplier to compete
- distributor agreements
- supplier agreements
Merger =
To combine 2 companies
Acquisition =
One company buys another
M&A can lead to:
- monopoly
- higher prices
- limited choice
Inappropriate market price =
When market conditions create an inappropriate price.
For example when there are too many suppliers of a product, due to its popularity, it can
- lower prices below the costs, which will cause
- suppliers going out of business and unemployment.
- which means a fall in supply
- prices will rise as a result
- inhabitants will fall into poverty, due to lack of work available
CAP = common agricultural policy by the EU:
- Subsidies for farmers:
- because of weather and disease
- dependency on power of large retailers
- new technology
- new entrants to the market
- secure food supply
CAP provided:
- guaranteed prices which led to oversupply
- then quotas were set and set aside schemes
- now they give subsidies
Benefits of CAP:
- Stable income for producers
- investment in R&D maintained
- customers get a stable supply at a stable price
- green issues
Downsides of CAP:
- surplus products
- misallocation of resources
Maximum pricing:
Governments may set a maximum price when:
- customers are being exploited by a monopoly situation
- when shortages threaten an increase in price (eg. Staple product like bread)
- to ensure products stay affordable (eg housing)
- to reduce inflationary pressures
How to set a maximum price (by a government):
- it must be set below the equilibrium price
- this will lead to a shortage in supply and an excess in demand
- a shortage can lead to a black market, which may reduce the official supply even more or they reduce their quality.
Externalities = spill-over effects =
Consumer and seller are first and second party.
Anyone else is a third party. The above is the way in which they are affected.
Example of externality:
Negative:
- External costs: noise pollution, production costs that affect the community, excessive drinking and the effects of it, road congestion, second-hand smoke
How to manage them:
Through tax,
social cost,
regulation
Information
Compensation schemes
Examples of Positive externalities:
- healthcare
- education
- infrastructure
- R&D
How to encourage them:
- increase supply (through grants for example)
- increase demand (give a price subsidy to the consumer, provide information, provide it as a social benefit)
Merit goods =
Goods suitably important and necessary so as to warrant being provided through public finances.
Eg. Education, healthcare
- everyone should have access to them regardless of income
- customers are unaware of the benefits
- they are under-consumed if not provided by the government
Demerit goods =
Potentially harm the consumer and may also produce negative externalities.
Eg. Cigarettes, recreational drugs
- people are unaware of the costs of using the products
- harms the consumer or is socially unacceptable
- government will aim under consumption: through
- taxation
- laws banning consumption
- regulations or advertising on lll on
Public goods =
Goods that are not produced through the market but are necessary and tend to be provided through government intervention.
For example a light house.
Characteristics:
- non-excludability
It leads to free rider problem; you can’t stop anyone from using it.
- non-rivalrous: one persons’ usage doesn’t affect anyone else
Pros of state provision of public goods
- Goods and services that would never be produced are made available
- Economies of scale
- costs are spread over the whole population
Cons of state provision
- No one can opt out
- no allocative efficiency (everyone receives the product, which may sometimes lead to oversupply)
Environmental concerns
Solutions:
- taxing companies
- regulation
