Econ theme 1 - Market Failure & Government Intervention Flashcards
market failures
when price mechanism leads to misallocation of resources
What is an externality?
An externality is a cost or benefit incurred by a third party who did not choose to incur that cost or benefit.
What is a negative externality?
Negative externalities are costs which affect third parties outside the price mechanism
Which of the following is an example of a negative externality? A) Education B) Pollution C) Vaccination
B) Pollution
What is the primary way to address externalities?
Through government intervention or regulation.
What is a public good?
A public good is a product that one individual can consume without reducing its availability to others.
characteristic of a public good?
1 Non-excludability
2
True or False: Subsidies can be used to encourage positive externalities.
True
What is an example of a positive externality?
Education, as it benefits society by creating a more informed population.
What role do taxes play in addressing negative externalities?
Taxes are used to internalize the external costs associated with negative externalities.
What is the difference between private and social costs?
Private costs are incurred by the producer, while social costs include both private costs and external costs.
What is the term for the economic inefficiency that arises when externalities are present?
Deadweight loss
Market failure examples
- negative externalities
- positive externalities
- public goods
- information gaps
negative production externalities diagram
s curve = MPC
d curve = MPB = MSB
add a MSC curve above MPC curve
negative consumption externalities diagram
no diagram girly
solving negative production externalities
-indirect tax = internalise negative externalities
- diagram on notes
-tradable pollution permits (Europe’s Emissions Trading Scheme (ETS))
-minimum prices (Scotland did to reduce crime
-regulation(Firearms act in UK)
solving negative consumption externalities
-indirect tax = internalise negative externalities
- diagram = shift s curve to the left with s+tax
cap and trade system
Firstly, the government sets a cap on how much pollution it will allow each year - this is the estimated socially efficient level of pollution. It then divides up its permits between firms until the cap is reached.
and keeps 10% of it to auction them to get moneyyy
evaluating externalities
OQT
-Opposite externalities
-Quantify
-Time
positive consumption externality diagram
look at notes
positive externalities
benefits which affect third parties outside the price mechanism
positive consumption externality diagram
no diagram girly
solving positive externalities
subsides (size of external benefit between MSC and MPC)
max prices
internalise positive externalities
public goods
- non -excludable
-non-rival
non -excludable
can’t exclude people from using them. You can’t stop others from using the light from a streetlight
non-rival
Lots of people can use these goods at the same time. If I’m using the light from a streetlight/lighthouse, so can you.
free rider problem
you cannot charge someone for a
non-excludable good as someone else will gain the benefit from it without paying. A free rider is someone who receives the benefits without paying for it.
Private sector producers will not provide public goods because won’t make profit , due to non-excludability of public goods. if provision of public goods left to the market mechanism = market failure so they are provided by the gov.
State provision +EXAMPLES
when the gov. provides a good
-flood defences
-police force (BUT if big crime less police for other crimes)
-roads (BUT toll booths)
information gap
when ppl lack information to make informed decision
-incomplete information
-asymmetric information
market failure
incomplete information
when someone doesn’t have full information about benefits/costs of their decisions so leads to overconsumption or underconsumption
e.g. students under consume education/ smoking
solution = regulation/ providing info/subsidising/indirect taxes
asymmetric information
-one party knows more than another party in a transaction
e.g. insurance/second-hand cars
solution = regulation
