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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
Definition of non-rival
this means that consumption of the good by one person does not diminish the amount available for the next person.
26
What was the tragedy of the commons
Renewable resources are being depleted because of over consumption
27
What is an externality
third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid
28
Can externalities cause market failure
Yes, if the price mechanism does not take into account the full social costs and benefits of production and consumption
29
What do externalities effect
they affect economic agents not directly involved in the production and/or consumption of a good or service
30
Example of negative externalities
Smokers ignore the impact of ‘passive smoking’ on non-smokers Air pollution from road use
31
What are private costs
Are paid only by the producer or consumer concerned | They are internal costs of production or consumption
32
Formula for Social cost
Social cost = private cost + external cost
33
What do negative externalities do to social costs and benefits
Add social costs | Reduce social benefits
34
What externality does private cost > social cost have
Positive externalities
35
What externality does private cost < social cost have
Negative externalities
36
Formula for social benefit
Social benefit = Private benefit + external benefit
37
What is the PPF
a curve which shows the maximum potential level of one good given a level of output for all other goods in the economy.
38
What is the secondary sector
production of goods, mainly manufactured.
39
What is an index number
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
What is is utility
the satisfaction derived from consuming a good
41
What can generate positive externalities
* 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
What is a social benefit
the total benefit to society from a good ie the benefit to individuals and any beneficial unintended spillover effects on third parties.
43
How do you tell something has negative externalities
social cost of production > the private cost
44
What is a merit good
A good which is underprovided by the market mechanism | A good which some people think should be provided in greater quantities
45
What does governments do to merit goods
Subsidy them or provide it for free at the point of use and funded by the government sector
46
Examples of merit goods
``` Health services • Education • Work / business training programmes • Environmental improvement schemes • Public libraries and museums and other cultural facilities ```
47
What can the free-rider problem cause
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
What can imperfect information cause (For workers)
employees (workers) being unable to judge the quality of their training or appreciate the benefits to themselves
49
What are possible government interventions to boost training
• 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
Do museums provide external costs or benefits (negative or positive externalities)
external benefits to society (positive externalities) which leads to an improvement in social welfare
51
What is a demerit good
A product, such as alcohol, which consumers may overvalue but which the government believes may be harmful for consumers.
52
Characteristics of demerit good
* 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
Examples of demerit good
Gambling Smoking Obesity Drug addiction
54
How strategies can control consumption of demerit goods
Health awareness programmes Taxation of demerit goods Statutory regulation (banning/limiting some products by age) Subsidising healthier substitutes
55
What is factor immobility
places barriers to the movement of factor inputs to their most productive use
56
Why do we need factor mobility
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
Why is factor immobility bad
Immobile resources means the economic system cannot meet changing needs or adapt to changing process of production
58
The geographical immobility of labour
* 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
What are 3 government policies to improve geographical mobility
* 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
What is occupational immobility
Workers having barriers to change job/occupation
61
What can occupational immobility of labour cause
* structural unemployment | * a waste of scarce resources and a loss of efficiency
62
How can you improve occupational mobility
* (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
What is the competition policy
a mechanism of disciplined pluralism, which rewards success and penalizes failure. The purpose of competition policy is to protect that mechanism.
64
What is government regulation
rules set by government or their agencies that control the operations of firms. (Regulation is designed to correct for market failure)
65
What are the 3 areas of competition policy
1. Monopolies 2. Mergers 3. Restrictive Practices
66
What is a monopoly
where one firm has at least 25% of a market
67
What are the 6 pillars of the UK competition policy
``` Prevention Regulation of monopolies Anti-cartel Deregulation Market contest-ability remove restrictive practices ```
68
What is privatisation
the transfer of assets from state ownership to the private sector
69
What’s deregulation
the removal of restrictions on the provision of a good/service
70
What’s are some arguments for privatisation
Promotes efficiency Promotes competition Raises revenue for government Promotes popular capitalism
71
What are some arguments against privatisation
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
What is Public-private partnerships (PPP)
partnerships between the private and public sectors to provide public services such as healthcare, prisons, residential care homes and schools.
73
What is direct provision
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
What is subsidised provisions
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
What is regulation (In terms of government regulation)
The government may leave provision to the private sector but make consumers purchase a merit good eg. Motor insurance
76
Ways of correcting market failures
* One extreme - Abolish the market * Impose Regulations * Taxes & Subsidies * ‘Nudging’ e.g. Opt-out, usage data & painted urinals
77
What are 3 types of taxation
* Specific or flat rate – amount per unit * Ad Valorem – percentage of the price * Levied on the producer – indirect tax
78
Examples of taxation
VAT, excise duties, tariffs, levies, duties (e.g. stamp duty) National Insurance Contributions (NICs)
79
Effects of tax (not taxation)
* Increases price | * Reduces consumption/output
80
Effects of taxation
* 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
Characteristics of subsidises
* Aim to change relative prices * Given to the producer * Used to help re-distribute income * Used to help firms compete
82
Examples of subsidy
state benefits, free school meals, working tax credits, agriculture, transport, regional development, housing, employment, education

Economics (11 decks)

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