ezy econ Flashcards
internal costs/benefits
costs/benefits gained by the economic agent for producing or consuming a product
private costs =
internal costs
private costs =
internal costs
whether consuming or producing a product is good for an agent depends on
whether the private benefits are greater than the private costs
external costs/benefits
the costs/benefits gained by other economic agenst in society for producing or consuming a product
social costs =
internal costs + external costs
social benefits =
internal benefits + external benefits
whether consuming or producing a product is good for society depends on whether
the social benefits are greater than the social costs
individual decisions are based on
private costs and benefits
social welfare is maximised
by weighing up social costs and benefits
externalities
external costs and benefits that affect third parties but are not considered by the decision maker
merit good
a good that is underprovided by a market
demerit good
a good that is overprovided by a market
2 reasons why goods are over/under provided for
- externalities
- imperfect information
classifying goods as a merit or demerit good often is a
valued judgment
tragedy of the commons
in some circumstances individuals action rationally in their own interests may not do the best thing in the interest of the whole group
- over exploitation
e.g over fishing in a pond not enough fish to breed and reproduce … no fish for anyone
which types of market failure can indirect taxation help
- product is overprovided for in a market
increases the price and reduces demand and market output
what are 2 types of fiscal government intervention
- indirect tax
- subsidy
how to measure the value of a tax on a graph
measured by the verticle distance between the 2 supply curves
what affects the effectivness of a tax
the PED
how to work out tax revenue on a graph
tax revenue = tax value x new quantity
internalising the externaility
increasing prices (imposing indirect tax) to reflect negative externalities
which types of market failures can subsidies help
product is under provided for by the market
- decrease the price, increasing demand and market output
aka merit good
how do you measure the value of a subsidies
the length between the 2 supply curves
subsidy cost =
subsidy value x output
3 issues with subsidies
- cost - provided by tax, so need to tax more
- benefit - who benefits, if rich people could increase inequality more
- imperfect information - hard to estimate value and worth of positive externalities
why are price controls set
market price:
- are consumers being exploited (max price)
- are producers receiving fair price (min price)
what happens to market supply and market demand when a max price is set
- market supply decreases
- market demand increases
- leaves excess demand and potential market failure, do the excess demand consumers get goods abroad or a black market…
non-binding maximum price
ineffective intervention by the government in the market
(setting a max price above the market equilibrium price)
- incentiveses producers to keep selling at the same price or even higher cause they can get away with it
why might the government set a non-binding maximum price
to create stability in case of future shocks
-e.g agriculture, don’t know if its a good or bad harvest, if bad prices tend to rise quite high and this sets them to a binding maximum price
what happens to market supply and demand when a minimum price is set
- market supply increases
- market demand decreases
- excess supply
non-binding minimum price
ineffective intervention by the government in the market
why might a minimum price be set (2)
- to protect producers, giving them a fairer price
- to counter demerit goods such as alcohol making it more expensive to buy
what are the 3 problems price controls create in the market for max prices
- deadweight loss, supply want to produce more, consumers demand more
- black markets, excess demand find elsewhere
- imperfect information, government failure
state provision
where government directly provide a good or service
mixed economy
an economy which combines free markets with state intervention
nationalisation
opposite to privatisation
3 issues with state provision
- may encourage inefficiency (no competition)
- may discourage innovation and invention (do not have to answer to customers, they exist whether they make a profit or a loss each year)
- allocation or resources (does it provide the most efficient allocation of resources)
regulation
rule created and enforced within a market
- aim to change behavior and improve societies welfare
3 problems with regulation
- imperfect information
- excessive regulation, (unnecessary costs for businesses and may become outdated)
- ineffective enforcement, regulatory capture (biased friends with people having to regulate)
geographical immboility
barriers which prevent factors of production moving location (geographical labour as example)
3 reasons why geographical labour immobility occurs
- workers don’t want to leave family and friends
- frictions (costs) in housing market, buying and selling
- regional cost variances (cost of living can vary across country)
occupational immobility
barriers which prevent factors of production changing industry
e.g only skilled in coal mining
why does factor immobility cause market failure
fop cannot adapt to changes, resources become unused
- therefore, misallocation of resources
3 ways to solve geographical immobility
- reduce housing market friction (costs)
- provide subsidy for relocation
- bring jobs to workers, encourage businesses to move to areas of high unemployment
3 ways to solve occupational immobility
- provide re-training and education schemes
- slow down decline of struggling industries
- incentives other industries to employ redundant workers
equality in the distribution of income and wealth
all economic agents hold the same stock of wealth and receive the same flow of income
inequality in the distribution of income and wealth
economic agents hold different stocks of wealth and receive the different flow of income
why might inequality in the distribution of income and wealth cause market failure
individuals unable to provide labour, unnecessary state spending for necessities that cannot be afford
- both are missalocation of resources, leads to market failure
5 solutions to imperfect information
- screening procedures, extract missing information (e.g job interview)
- signalling procedures, informs other side of the quality (a degree)
- product standards, labeling on packets (cigarette packaging)
- legal enforcement, (MOT test)
- direct intervention, (drink driving campaigns)
why do governments intervene in the free market
free markets sometimes produces imperfect outcome, intervene in order to improve society’s welfare
government failure
government intervention which has a harmful effect upon society’s welfare, costs greater than the benefits
why might intervention result in government failure
- information failure - valuing externailities is a valued judgement
- law of unintended consequences, unforseen effects
- costs of maintaining and enforcing policy outweigh benefits
- regulatory capture, work in interest of firm instead of society (biased)
what are the 3 functions of the price mechanism
- rationing, allocates the goods to consumers who value the most
- signalling, prices signal information about a market to economic agents (shows whether in equilibrium)
- incentive, high price supply more, consumers buy less
partial market failure
A market exists but too much or too little of a good or service is produced.
if XED value is positive what good is it
a substitute good
if XED value is negative what good is it
a compliment
ignore the sign if the XED value is greater than 1
they are elastic
- goods are both closely related
ignore the sign if the XED value is less than 1
they are inelastic
- they are weakly related
ignore the sign if the XED value is 0
then they are perfectly inelastic
- they have no relation
short run economic growht
growth in real ouput due to use of idle resources, thereby taking up the slack in the economy, caused by increase in AD
Long run economic growth
growht in real output caused by increase in quality, quantity or efficiency of factors of production, an increase in the economy’s productive capacity
cyclical unemployment
demand deficient unemployment, lack of AD causes unemployment because labour is a derived demand
structual unemployment
occupational, geographical immobility
frictional unemployment
time taken between jobs searching for a new position
expansionary fiscal policy conflic trade offs
- increase in demand pull inflation
- current account deficit (more inports)
- worsening of gov finances
expansionary monetary policy conflicts
- increase in demand pull infaltion
- current account deficit (more imports) (CAD)
monetary policy
changes to interest rates, the money supply, and exchange rate by the central bank in order to influence the level of AD in the economy and achieve monetary economic objectives
real wage unemployment
voluntary unemployment caused by sticky wages
joint demand
complimentary good
competitive demand
substitute goods
derived demand
demand for a good or service that comes from the demand for something else
composite demand
increase in production of one good decreases the production of another
e.g cheese and butter
joint supply
increase in production of one good leads to increase supply of other good (bi-product)
e.g beef and leather
quasi public good
can share aspects of a pure good, but can also be rival and excludable
public good
non-excludable and non-rival
how is a public a market failure leading to a complete market failure
free rider problem, have the incentive to not contribute anything at all, but still benefit the same as if they were to contribute
if everyone does this no one pays leads to a missing market and complete market failure
what are 6 types of marketr failure
- self interest, (negative/positive externalities and tragedy of the commons)
- info failure (merit/de-merit)
- free rider problems/profit motivated firms (public goods)
- inequality (income inequality)
- factor immobility
- monopoly power (consumers exploited with high prices)
how does imperfect information lead to market failure
imperfect info mean irrational decisions are being made which leads to over consumption/under consumption, leading to a missaclocation of resources and market failure
market failure definition
when the free market fail to allocate scarce resources at the socially optimal level of output
how does setting a minimum price on an inelastic good lead to government failure
due to inequality and burdening the poor
