Econs - 2.9, 2.10, 2.11 Flashcards
market failure - definition
occurs when the market forces of demand and supply are unsuccessful in allocating resources efficiently and cause external costs / benefits
causes of market failure
- public goods
- merit goods
- demerit goods
- abuse of monopoly power
- factor immobility
public goods
- goods / services that are non-excludable and non-rivalrous, which are a cause of market failure as there is a lack of profit motive to produce them
- eg. street lighting, road signs, national defense
merit goods
- goods / services which when consumed create positive spillover effects in an economy
- both public and private sector
- eg. education, vaccinations, healthcare services
demerit good
- goods / services which when produced or consumed cause negative spillover effects in an economy
- over-produced and over-consumed
- eg. alcohol, junk food, gambling
abuse of monopoly power
- without government intervention, private sector firms can become monopolies and exploit their market power
- charge higher prices / reduce supply for profit maximisation
factor immobility
- difficult for factors of production to move / switch between uses / locations
- geographic and occupational immobility
consequences of market failure
- inefficient allocation of resources
- income and wealth inequality
- negative externalities
- under-provision of public goods
- overconsumptions of demerit goods
- underconsumption of merit goods
inefficient allocation of resources - consequences
wasted / not used when needed the most
income and wealth inequality
further gap between rich and poor
negative externalities
harmful side effects from economic activity that aren’t paid for by the producer
under-provision of public goods
essential goods (national defense, vaccinations) aren’t provided bec theres no profit motive
overconsumption of demerit goods
harmful products consumed too much …. underestimate harm / lack of knowledge
underconsumption of merit goods
beneficial goods (education, healthcare) are underused causing poorer societal outcomes …. people may not be able to afford / they don’t know abt it
3 types of economic system
- market economy
- planned economy
- mixed economy
market economy (free market)
- in private sector
- relies on demand and supply to allocate resources
- minimal government intervention
- eg. Singapore, New Zealand, Hong Kong
planned economy
- in public sector
- relies on government too allocate resources
- eg. North Korea, Cuba, Venezuela
mixed economy
- combination of market and planned economy
- some resources own by government and others controlled by private individuals / firms
- eg. Japan, Spain, Italy
economic system - definition
- describes the way in which an economy is organised / run, including alternative views of how sarce resources are best allocated
market economic system - advantages
- efficiency : competition helps businesses improve
- freedom of choice : no government regulations
- motivation : businesses work harder bec of profit motivation
market economic system - disadvantages
- income and wealth inequalities : rich have more freedom (purchasing power), basic services and poorer society will be forgotten
- environmental issues : main focus is profit
- lack of public goods : poverty will suffer
maximum price, mixed economy - definition
occurs when government sets a price below the market equilibrium price in order to encourage consumption (merit goods)
minimum price, mixed economy - definition
occurs when the government sets a price above the market equilibrium price in order to encourage output for a certain good / service
(demerit goods)
government interventions to fix market failure
- INDIRECT TAXATION on demerit goods with inelastic demand
- SUBSIDES to encourage consumption of public / merit goods
- RULES AND REGULATIONS (minimum ages, forced vaccinations)
- EDUCATE the younger generation abt the negative side-effects
- PRIVATISATION / NATIONALISATION
- DIRECT PROVISION to help poverty
