E2B Market Failture Flashcards
define MARKET ECONOMIC SYSTEM
PM allocates resource
private sector only
minimal govt intervention
what are the PROS of a MARKET ECONOMY?
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…
what are the CONS of a MARKET ECONOMY?
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…
define MARKET FAILURE
when PM fails to allocate resources efficiently as decision-makers don’t consider all costs and benefits
define PRIVATE costs/benefits
affect those who are involved in p/c
define EXTERNAL costs/benefits
affect third parties who aren’t involved in p/c
define SOCIAL costs/benefits
affecte the whole society (private + external)
define POSITIVE EXTERNALITY
PB < SB
PC > SC
(negative externality is vice-versa)
define MERIT goods
define DEMERIT goods
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
how can govt encourage the p+c of MERIT goods?
advertise the benefits
compulsory consumption
subsidy, cut tax, free provision
how can govt discourage the p+c of DEMERIT goods?
advertise the harm
regulation
tax
identify some MERIT goods + explain
HEALTHCARE - besides PB, EB are better productivity and less spread of disease
EDUCATION - besides PB, EB are better productivity and lower crime rate
identify some DEMERIT goods + explain
CIGARETTE - besides PC, EC are air pollution and passive smoking
CARS - besides PC, EC are air pollution, noise pollution, congestion, accidents
define PUBLIC GOOD
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
analyze the impacts of INDIRECT TAX on different stakeholders
• 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)
illustrate the effects of INDIRECT TAX on a D&S graph
COP increase → QS decrease → P rise → QD contract
evaluate: what does the EFFECT OF INDIRECT TAX in addressing market failure DEPEND UPON?
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)
define SUBSIDY
govt’s financial assistance to lower COP and encourage production
analyze the impacts of SUBSIDY on different stakeholders
- 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
define MAXIMUM PRICE
price ceiling, below eP
→ makes a g/s more affordable for low-income, but can cause shortage
analyze the effects of MAXIMUM PRICE on different stakeholders
• 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
how can the government reduce shortage under maximum price?
subsidy
define MINIMUM PRICE
price floor, above eP
→ higher profit for producers, but can cause surplus
analyze the effects of MINIMUM PRICE on different stakeholders
• producer: higher revenue+profit
• consumer: more expensive; more + better quality
•worker: more job
•govt: budget deficit (to buy+store excess supply + oppo cost
define REGULATION
what are pros and cons?
rules imposed by govt to correct market failure
+ straightforward, quick effect
- expensive to check if ppl are following
define NATIONALIZATION
what are pros and cons?
private ownership → govt ownership
+ consider full costs & benefits
+ don’t abuse market power
- lack of competition → inefficient, low quality
(PRIVATIZATION IS THE OPPOSITE!)
