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Economics > Chapter 8 - The market mechanism, market failure & government intervention in markets > Flashcards

Chapter 8 - The market mechanism, market failure & government intervention in markets Flashcards

1
Q

What is the price mechanism

A

the manner in which the profits of goods or services affects the supply and demand of goods and services (principally by the price elasticity of demand.)

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2
Q

What are the 4 functions of prices

A

Signalling function
Incentive function
Rationing function
Allocative function

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3
Q

What is the signalling function

A
  • Prices signal what is available, conveying information to producers and consumers alike
  • If prices signal wrong or misleading information, then markets may perform inefficiently or break down completely
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4
Q

What is the incentive function

A

Prices create incentives for agents to behave in ways consistent with their self-interest. For example, the rising price of a good may:
• Result in a firm expanding production of that good in its pursuit of profit-maximisation
• Result in a consumer contracting demand as she tries to maximise her overall ‘utility’ with her limited income

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5
Q

What is the rationing function

A

Rising prices ration demand for a product. The higher the price, the fewer people can afford a good.

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6
Q

What is the allocative function

A

Changing relative prices will switch resources from markets of over supply to markets with excess demand. Think of the fishing villages in southern India we looked at.

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7
Q

Advantages of the price mechanism

A

Productively Efficient

Allocatively Efficient

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8
Q

Disadvantage of the price mechanism

A

Imperfectly Competitive Markets & Asymmetric Information

Value Neutral

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9
Q

What’s the 2 ways market fail

A

Inequitable

Inefficient

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10
Q

What is complete market failure

A

When the market does not exist (there is a missing market)

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11
Q

What is Partial market failure

A

The wrong quantity of a good is produced

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12
Q

What is market failure

A

where one or more of the functions of prices breaks down

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13
Q

What else can cause markets to fail

A
  • Knowledge is not perfect - ignorance
  • Goods are differentiated*
  • Resource immobility
  • Market power
  • Services/goods would or could not be provided in sufficient quantity by the market
  • Existence of external costs and benefits
  • Inequality exists
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14
Q

What is social efficiency

A

where external costs and benefits are accounted for

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15
Q

What is allocative efficiency

A

where society produces goods and services at minimum cost that are wanted by consumers

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16
Q

What is technical efficiency

A

production of goods and services using the minimum amount of resources

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17
Q

What is productive efficiency

A

production of goods and services at lowest factor cost

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18
Q

What is imperfect knowledge

A
  • Consumers do not have adequate technical knowledge
  • Advertising can mislead or mis-inform
  • Producers unaware of all opportunities
  • Producers cannot accurately measure productivity
  • Decisions often based on past experience rather than future knowledge
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19
Q

What is a private good

A

Consumption by one person results in the good not being available for consumption by anyone else.

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20
Q

What is a public good

A

A good where consumption by one person does not reduce the amount available for consumption by another person AND once provided all individuals benefit or suffer whether they wish to or not.

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21
Q

Examples of a pure public good

A

Defence
Police
Street light

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22
Q

What is a quasi public good

A

A good which may not perfectly possess the characteristics of being non excludable but which is non rival.

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23
Q

What is a free economy

A

where supply and demand regulate production and labor as opposed to government intervention.

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24
Q

Definition of non-excludable

A

once the goods are provided, it is not possible to exclude people from using them even if they haven’t paid.

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25
Q

Definition of non-rival

A

this means that consumption of the good by one person does not diminish the amount available for the next person.

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26
Q

What was the tragedy of the commons

A

Renewable resources are being depleted because of over consumption

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27
Q

What is an externality

A

third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid

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28
Q

Can externalities cause market failure

A

Yes, if the price mechanism does not take into account the full social costs and benefits of production and consumption

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29
Q

What do externalities effect

A

they affect economic agents not directly involved in the production and/or consumption of a good or service

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30
Q

Example of negative externalities

A

Smokers ignore the impact of ‘passive smoking’ on non-smokers
Air pollution from road use

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31
Q

What are private costs

A

Are paid only by the producer or consumer concerned

They are internal costs of production or consumption

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32
Q

Formula for Social cost

A

Social cost = private cost + external cost

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33
Q

What do negative externalities do to social costs and benefits

A

Add social costs

Reduce social benefits

34
Q

What externality does private cost > social cost have

A

Positive externalities

35
Q

What externality does private cost < social cost have

A

Negative externalities

36
Q

Formula for social benefit

A

Social benefit = Private benefit + external benefit

37
Q

What is the PPF

A

a curve which shows the maximum potential level of one good given a level of output for all other goods in the economy.

38
Q

What is the secondary sector

A

production of goods, mainly manufactured.

39
Q

What is an index number

A

an indicator showing the relative value of one number to another from a base of 100. It is often used to present an average of a number of statistics.

40
Q

What is is utility

A

the satisfaction derived from consuming a good

41
Q

What can generate positive externalities

A
  • Social returns from investment in education & training
  • Positive benefits from health care and medical research
  • Benefits from vaccination and immunization programmes
  • Provision of flood protection systems & fire safety equipment
  • Restored historic buildings and monuments
  • External benefits from usage of public libraries and museums
42
Q

What is a social benefit

A

the total benefit to society from a good ie the benefit to individuals and any beneficial unintended spillover effects on third parties.

43
Q

How do you tell something has negative externalities

A

social cost of production > the private cost

44
Q

What is a merit good

A

A good which is underprovided by the market mechanism

A good which some people think should be provided in greater quantities

45
Q

What does governments do to merit goods

A

Subsidy them or provide it for free at the point of use and funded by the government sector

46
Q

Examples of merit goods

A 
Health services
• Education
• Work / business training programmes
• Environmental improvement schemes
• Public libraries and museums and other cultural facilities
47
Q

What can the free-rider problem cause

A

under-investment in training- Firms are concerned that once trained, an employee will leave the firm before the firm has recouped its investment. Unless training pays off very quickly, firms are therefore reluctant to provide training to their workers

48
Q

What can imperfect information cause (For workers)

A

employees (workers) being unable to judge the quality of their training or appreciate the benefits to themselves

49
Q

What are possible government interventions to boost training

A

• Increased funding for education and training programmes within
the public sector (e.g. within the education and health sectors)
• State funded modern apprenticeships and expansion of vocational exams
• Tax credits for businesses that invest in training programmes
• Regulation

50
Q

Do museums provide external costs or benefits (negative or positive externalities)

A

external benefits to society (positive externalities) which leads to an improvement in social welfare

51
Q

What is a demerit good

A

A product, such as alcohol, which consumers may overvalue but which the government believes may be harmful for consumers.

52
Q

Characteristics of demerit good

A
  • A demerit good is ‘socially undesirable’ and ‘worse’ for a consumer than the consumer realises eg alcohol
  • De-merit goods are thought to be ‘bad’ for you
  • Consumption can lead to negative externalities (leading to less social welfare)
53
Q

Examples of demerit good

A

Gambling
Smoking
Obesity
Drug addiction

54
Q

How strategies can control consumption of demerit goods

A

Health awareness programmes
Taxation of demerit goods
Statutory regulation (banning/limiting some products by age)
Subsidising healthier substitutes

55
Q

What is factor immobility

A

places barriers to the movement of factor inputs to their most productive use

56
Q

Why do we need factor mobility

A

Evolving consumer tastes, new products, processes and labour saving technologies mean factors of production currently producing, say, analogue cameras need to switch to alternative uses, say, digital cameras.

57
Q

Why is factor immobility bad

A

Immobile resources means the economic system cannot meet changing needs or adapt to changing process of production

58
Q

The geographical immobility of labour

A
  • Family and other social ties
  • The costs involved in moving home
  • Regional variations in house prices and shortages of rented property
  • Differences in living costs between regions
  • Language barriers
  • Differences in tax, social security and pension systems between countries
  • Legal limits on the scale of labour migration allowed into a particular country
59
Q

What are 3 government policies to improve geographical mobility

A
  • Improve the supply of housing and reduce the cost of rented properties
  • Offer subsidies for people moving into areas where there are shortages of labour
  • Harmonisation of welfare and tax systems to encourage inward migration of labour within the European economy
60
Q

What is occupational immobility

A

Workers having barriers to change job/occupation

61
Q

What can occupational immobility of labour cause

A
  • structural unemployment

* a waste of scarce resources and a loss of efficiency

62
Q

How can you improve occupational mobility

A
  • (1) Training schemes for those workers experiencing structural unemployment
  • (2) Increased investment in vocational education and lifetime learning opportunities
  • (3) Encourage businesses to introduce more flexible working patterns
63
Q

What is the competition policy

A

a mechanism of disciplined pluralism, which rewards success and penalizes failure. The purpose of competition policy is to protect that mechanism.

64
Q

What is government regulation

A

rules set by government or their agencies that control the operations of firms. (Regulation is designed to correct for market failure)

65
Q

What are the 3 areas of competition policy

A
  1. Monopolies
  2. Mergers
  3. Restrictive Practices
66
Q

What is a monopoly

A

where one firm has at least 25% of a market

67
Q

What are the 6 pillars of the UK competition policy

A 
Prevention
Regulation of monopolies
Anti-cartel
Deregulation
Market contest-ability
remove restrictive practices
68
Q

What is privatisation

A

the transfer of assets from state ownership to the private sector

69
Q

What’s deregulation

A

the removal of restrictions on the provision of a good/service

70
Q

What’s are some arguments for privatisation

A

Promotes efficiency
Promotes competition
Raises revenue for government
Promotes popular capitalism

71
Q

What are some arguments against privatisation

A

Decrease in efficiency
Short-term
Closure of loss making services (railway branches, village post offices)
Selling the family silver (better to retain these assets to generate revenue for government in the long run)

72
Q

What is Public-private partnerships (PPP)

A

partnerships between the private and public sectors to provide public services such as healthcare, prisons, residential care homes and schools.

73
Q

What is direct provision

A

Governments can supply public and merit goods directly to consumer free of charge as in the example of primary school education or visits to the GP

74
Q

What is subsidised provisions

A

The government may pay for part of the good or service but expect consumers to pay the rest. Dental care and prescriptions are subsidised in this way in the U.K.

75
Q

What is regulation (In terms of government regulation)

A

The government may leave provision to the private sector but make consumers purchase a merit good eg. Motor insurance

76
Q

Ways of correcting market failures

A
  • One extreme - Abolish the market
  • Impose Regulations
  • Taxes & Subsidies
  • ‘Nudging’ e.g. Opt-out, usage data & painted urinals
77
Q

What are 3 types of taxation

A
  • Specific or flat rate – amount per unit
  • Ad Valorem – percentage of the price
  • Levied on the producer – indirect tax
78
Q

Examples of taxation

A

VAT, excise duties, tariffs, levies, duties (e.g. stamp duty) National Insurance Contributions (NICs)

79
Q

Effects of tax (not taxation)

A
  • Increases price

* Reduces consumption/output

80
Q

Effects of taxation

A
  • Distortion of the market
  • Influence on behaviour
  • Extent of the effect dependent on the degree of elasticity (number of substitutes, addictiveness of the product, proportion of income devoted, time scale)
  • Creation of underground markets – smuggling, booze cruises, etc.
  • Increases business costs (competitiveness increase)
  • Raises revenue to help pay for government services
81
Q

Characteristics of subsidises

A
  • Aim to change relative prices
  • Given to the producer
  • Used to help re-distribute income
  • Used to help firms compete
82
Q

Examples of subsidy

A

state benefits, free school meals, working tax credits, agriculture, transport, regional development, housing, employment, education

Economics (11 decks)

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