Economics Theme 1 section 5 Flashcards
What is complete market failure
complete market failure is when there is no market at all.
A good or a service is not provided at all
e.g public goods
What is partial market failure
when there is a miss allocation of resources
the market is unable to efficently allocate scarce resources to meet society’s needs
what is production or technical efficiency
producing at the lowest cost
what is allocative efficiency
distributing resources according to optimise their use
what is economic efficiency
incorporating both allocative efficiency and productive efficiency plus full employment of resources
What are the types of market failure
competition is restricted (monopoly arises)
public goods are not provided
merit goods are underprovided
demerit goods are overprovided
income inequality increases
External costs are ignored
what is a monopoly situation
in a market situation where there is little competition the consumer may be adversely affected as they may have to pay higher prices
They have fewer choices and may get poorer service and quality
what are public goods
have the two characteristics of
non excludability and non rivalry
e.g defence, police, street lights,
public goods are not provided in a completely free market system because producers would make no profit
markets are likely to underproduce public goods because no profit maximising producer would produce a free product/service
government therefore provides public goods because they are essential for wellbeing
what are merit goods
merit goods are good that are given to people who merit (need) them either free or at reduced price
A merit good is a product which society values and believes everyone should have them
Merit goods are socially desirable but would be underproduced if left to the free market
e.g school and healthcare
these both can be produced privately, but if the gov didnt step in many families would be unable to afford
how are merit goods and public goods different
for merit goods there are rivals if you are using a hospital bed this prevents someone else from using it
merit goods are also excludable you can be excluded from using a merit good e.g hospital goods are given to those who need them
What are demerit goods
Demerit goods are products or services that are over consumed or consumed to a greater extent than is considered socially desirable
Often have negative externalities
consumption leads to harmful effects to the individuals or society
e.g
cigarettes
alcohol
junk food
gambling
What is income inequality increasing
in a market economy an individual’s ability to consume a good depends on their income
Unequal distribution of income may result in unsatisfactory allocation of resources and can lead to increased crime with negative impacts on society
In the uk there is a large decree of income inequality
top fifth takes 36% of countries income
what are external costs being ignored
an external cost or externality is the cost or benefit to a third party received from an economic transaction outside of the market of mechanism. The spill over effect of the production or consumption of a good or service
externalities can be positive e.g educated society, medical breakthrough
or can be negative e.g pollution, congestion or environmental damage
what is a free market
an economic system in which prices are determined by unrestricted competition between privately owned businesses.
what is the opposite of a free market
is a planned, controlled, or command economy. The government controls the means of production and the distribution of wealth, dictating the prices of goods and services and the wages that workers receive.
What is an oligopoly
Oligopoly. A market in which a few large firms dominate. Barriers prevent entry to the market, and there are few close substitutes for the product
what is a negative externality
This is a cost that is imposed to an innocent third party
it is a negative spill over harmful side effect of an action imposed onto the rest of society
What are examples of negative externalities
a chip shop doesn’t include the cost of tidying up wrappers in the street
a paper mill doesn’t include the cost of cleaning the polluted river which has been used for its disposal waste
These costs will be borne by the tax payers for the clean up or those who are effected
what is social costs
The cost to society of all the resources used at a result of the production and consumption of the product
What is an external benefit (positive externalities)
The production and consumption of some products that give benefit to some consumers who don’t pay for them
e.g herd immunity
building of new motorway benefits motorway cafes
what is social benefit
social benefit mesures the total benefit obtained from the consumption of a product
what is welfare gained
welfare gained is where the social cost is lower than the private cost and society gains so they don’t have to pay for the difference. This is a benefit to society
what is welfare lost
welfare lost is where the social cost is higher than the private cost and society loses out as there is a loss of overall benefit
what are negative externalities
negative externalities are caused by demerit goods. these are associated with information failure as the consumer isn’t aware of the long run implications of consuming the goods and are usually over provided
e.g have a negative effect for society like smoking has a negative externality to the third party due to second hand smoke
What is a positive externality
a positive externality is caused by a merit good. these are also caused through information failure because the consumer doesn’t understand the long term benefit to consuming the good
they are underprovided in a free market
e.g education and healthcare the positive externality to a third party is a higher skilled work force through education
what are private costs
private costs are what producers are concerned with for production
for example the rent and cost of machinery
determines how much the producer will supply
could refer to the market price which the consumer pays for the good
what are social costs
social costs are calculated through private cost plus external costs
what are external costs
external costs are the difference between private costs and social costs
what is marginal social cost
marginal social cost is the extra cost on society dervied per extra unit consumed
what is marginal social cost
marginal social cost is marginal external cost + marginal private cost
what is private benefit
consumers are concerned with the private cost derived from the consumption of a good. the price the consumer is willing to pay determines this
Also the revenue gained to the firm from selling a good
what is social benefit
social benefit is the benefit plus external benefit
