E2B Market Failture

Question 1

define MARKET ECONOMIC SYSTEM

Answer 1

PM allocates resource
private sector only
minimal govt intervention

Question 2

what are the PROS of a MARKET ECONOMY?

Answer 2

PM → S responsive to D → efficient resource allocation

PROFIT INCENTIVE motivates firms to be more efficient to maximize profit + motivates individuals to work hard to earn wealth → boosts EG + LS

COMPETITION→ efficiency, quality, low price, innovation…

Question 3

what are the CONS of a MARKET ECONOMY?

Answer 3

MARKET FAILURE

• under p+c of MERIT
• over p+c of DEMERIT
• under-provision of PUBLIC g/s by private firms
• lack of govt regulation → ENVIRONMENT issue, MONOPOLY…

Question 4

define MARKET FAILURE

Answer 4

when PM fails to allocate resources efficiently as decision-makers don’t consider all costs and benefits

Question 5

define PRIVATE costs/benefits

Answer 5

affect those who are involved in p/c

Question 6

define EXTERNAL costs/benefits

Answer 6

affect third parties who aren’t involved in p/c

Question 7

define SOCIAL costs/benefits

Answer 7

affecte the whole society (private + external)

Question 8

define POSITIVE EXTERNALITY

Answer 8

PB < SB
PC > SC
(negative externality is vice-versa)

Question 9

define MERIT goods

define DEMERIT goods

Answer 9

M: create positive externalities, under-produced+consumed as ppl only consider PB and ignore EB
D: create negative externalities, over-produced+consumed as ppl only consider PC and ignore SC

Question 10

how can govt encourage the p+c of MERIT goods?

Answer 10

advertise the benefits
compulsory consumption
subsidy, cut tax, free provision

Question 11

how can govt discourage the p+c of DEMERIT goods?

Answer 11

advertise the harm
regulation
tax

Question 12

identify some MERIT goods + explain

Answer 12

HEALTHCARE - besides PB, EB are better productivity and less spread of disease
EDUCATION - besides PB, EB are better productivity and lower crime rate

Question 13

identify some DEMERIT goods + explain

Answer 13

CIGARETTE - besides PC, EC are air pollution and passive smoking
CARS - besides PC, EC are air pollution, noise pollution, congestion, accidents

Question 14

define PUBLIC GOOD

Answer 14

extreme example of merit goods, funded by tax revenue
non-rivalrous: one’s consumption doesn’t stop others
non-excludable: producers can’t prevent free riders

Question 15

analyze the impacts of INDIRECT TAX on different stakeholders

Answer 15

• producer: more COP → less profit → S decrease
•consumer: more expensive → D contract, LS decrease, less, poor quality
• worker: S fall → UE
•govt: tax revenue (but fall in QS+QD may lead to less tax revenue)

Question 16

illustrate the effects of INDIRECT TAX on a D&S graph

Answer 16

COP increase → QS decrease → P rise → QD contract

Question 17

evaluate: what does the EFFECT OF INDIRECT TAX in addressing market failure DEPEND UPON?

Answer 17

SIZE, PED

elastic:
- higher COP reduces demerit p + higher P reduces demerit c → CORRECTS NE → LS
- tax revenue to FUND MERIT → PE → LS

inelastic:
- no effect on reducing demerit, but can use tax revenue to FUND MERIT → PE → LS
- could lead to LOWER LS + POVERTY if ppl still consumer despite higher P (spend high proportion of income on demerit means less on food and necessities → health problems, decreased productivity + increased G speding)

Question 18

define SUBSIDY

Answer 18

govt’s financial assistance to lower COP and encourage production

Question 19

analyze the impacts of SUBSIDY on different stakeholders

Answer 19

• producer: less COP → more profit
• consumer: cheaper + more + better quality
• worker: more job
• govt: budget deficit + oppo cost in **short term; increased GDP + EG in **long term

Question 20

define MAXIMUM PRICE

Answer 20

price ceiling, below eP
→ makes a g/s more affordable for low-income, but can cause shortage

Question 21

analyze the effects of MAXIMUM PRICE on different stakeholders

Answer 21

• producer: less revenue/profit → profit incentive fall → S fall, quality fall
•consumer: some can buy cheaper, but shortage + poor quality makes others unsatisfied
• worker: S fall → UE
•govt: black market may arise → extra cost to fix

Question 22

how can the government reduce shortage under maximum price?

Answer 22

subsidy

Question 23

define MINIMUM PRICE

Answer 23

price floor, above eP
→ higher profit for producers, but can cause surplus

Question 24

analyze the effects of MINIMUM PRICE on different stakeholders

Answer 24

• producer: higher revenue+profit
• consumer: more expensive; more + better quality
•worker: more job
•govt: budget deficit (to buy+store excess supply + oppo cost

Question 25

define REGULATION
what are pros and cons?

Answer 25

rules imposed by govt to correct market failure
+ straightforward, quick effect
- expensive to check if ppl are following

Question 26

define NATIONALIZATION
what are pros and cons?

Answer 26

private ownership → govt ownership
+ consider full costs & benefits
+ don’t abuse market power
- lack of competition → inefficient, low quality

(PRIVATIZATION IS THE OPPOSITE!)