Essay revision

Question 1

Market Failure

Answer 1

a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value.

Question 2

What leads to market failure

Answer 2

1) When people see little benefit to working, our labour resources are utilised less efficiently
- absolute and relative policy
2) Resources being distributed according to needs and wants of the wealthy instead of society as a whole.
- consumer sovereignty
3) Inequality is also correlated with social tensions, crime rates, health issues
4) The amount of inequality created by the free market is not socially optimal, and therefore income redistribution is needed.

Question 3

Pareto Efficient

Answer 3

an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worse off.

Question 4

How does the Government fix market failure

Answer 4

1) legislation – enacting specific laws (school attendance)
2) direct provision of merit and public goods – governments control the supply of goods that have positive externalities. (education)
3) taxation – placing taxes on certain goods to discourage use and internalize external costs. (cigarettes)
4) subsidies – reducing the price of a good based on the public benefit that is gained. (college tuition costs)
5) tradable permits – permits that allow firms to produce a certain amount of something, commonly pollution. Firms can trade permits with other firms to increase or decrease what they can produce.
6) extension of property rights – creates privatization for certain non-private goods like lakes, rivers, and beaches to create a market for pollution. Then, individuals get fined for polluting certain areas.
7) advertising – encourages or discourages consumption.
8) international cooperation among governments – governments work together on issues that affect the future of the environment.

Question 5

Market Structures

Answer 5

1) Perfect Competition
- Many firms, low concentration, homogenous products (identical), low profit, low barrier to entry, low price and quantity, incentive to be innovative/efficient is high
2) Monopolistic Competition
- Low market concentration, product is slightly different, low/mid economic profit, medium barrier to entry, mid/low price with mid/high quantity but still a high incentive to be innovative and efficient.
3) Oligopoly
- Mid market concentration. Homogenous and product differentiation. Mid economic profit. High barriers to entry. Price-high and quantity-low. Incentive to be innovative or efficient is high.
4) Monopoly
- High market concentration. Product has no close substitutions, high economic profit, high barriers to entry, price high, quantity low, incentive to be innovative or efficient is low.

Question 6

Reserve Bank of Australia

Answer 6

RBA = aims to: stabilise the Aus currency, full employment, economic prosperity

• set monetary policy
• producers and distributes Australia’s bank rates (prints money
• Banker for the Australia government and other banks
• Operates Australia’s payment system
• Financial stability
• Manages Australia’s FOREX