Introduction to Markets and Market Failure (most on quizlet) remember to do this through quizlet

Question 1

What is the maximum price?

Answer 1

The legally imposed maximum price a business can sell a product at, known as the price ceiling.

Question 2

How does an indirect tax affect the MPC on a diagram?

Answer 2

The Mpc shifts to the left, remaining parrallel to the previous MPC, but it goes through the socially optimum quantity.

Question 3

Where is the maximum price set in order for it to be effective?

Answer 3

It needs to be set below the price equilibrium in order to be effective as it aims to encourage consumption by reducing price

Question 4

What does setting a maximum price below the equilibrium do?

Answer 4

It reduces the price of a good, encouraging consumption

Question 5

What is the aim of an indirect tax on preventing market failure?

Answer 5

It aims to increase the private costs of producers so that they pay the full social cost and supply is reduced. This is known as ‘internalizing’ the negative externality

Question 6

What are some of the evaluation points of the impact of indirect tax (e.g. to reduce pollution)?

Answer 6

• depends on the level of Taxation
• If demand is inelastic there may be little change in pollution
• The right pollutants would need to be taxed
• The level of pollution may not have been accurately measured
• How big are the collection costs, is it worth it?
• Pollution taxes may hit low income homes hard
• Could lead to a loss of investment and jobs

Question 7

What are maximum prices used in?

Answer 7

• Goods and services twitch a positive externality to encourage consumption
• Goods/services supplied by monopoly firms which may have been raised above an efficient level
• goods that suffer from an information gap and as a result are under consumed
• goods and services that need to be cheaper to promote factor mobility such as transport costs
• Goods / services that need to be cheaper for some members of society in order to improve basic living standards

Question 8

What are the pros of a maximum price?

Answer 8

This protects consumers from exploitation
It could make sure that firms are more efficient by forcing them to pay more attention to costs.
Encourages the consumption of goods with a positive externality
Protects consumers from monopoly markets exploiting them.

Question 9

What are the cons of a maximum price?

Answer 9

A maximum price could deter firms from entering the market.
It could also limit investment into the industry as the amount of profit firms can make is limited.
Firms could cut costs too aggressively in an attempt to boost profit, leading to poor quality goods, etc.

Question 10

What are the pros of minimum prices?

Answer 10

By having a minimum price, suppliers can get a reasonable price for their goods.
Prevents the over consumption of goods with a negative externality

Question 11

what is government regulation?

Answer 11

A set of rules, normally imposed by a government that seeks to determine the behaviour of firms, individuals and organisations, usually to prevent market failure.

Question 12

What is a regulator?

Answer 12

An organisation, independent of the government that ensures that regulations and rules are followed.

Question 13

What is deregulation?

Answer 13

The process of removing rules/Regulations from an industry in order to make it more competitive.

Question 14

What is a fine?

Answer 14

Money that must be paid if a law or regulation is broken, it usually comes in the form of a financial penalty

Question 15

What are examples of regulation?

Answer 15

• Smoking bans
• Minimum wage laws
• maximum co2 emissions for vehicles
• Recycling directives
• Speed limits
• Fishing quotas

Question 16

What are the advantages of government regulations?

Answer 16

• Prevents consumers from being exploited
• Can be used in conjunction with other policies and actions to alter the behaviour of firms, individuals and industries
• Typically quite quick to implement
• Can encourage or discourage the consumption of goods with externalities
• Can make consumers more confident on buying different goods or services
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Question 17

What are the disadvantages of government regulation?

Answer 17

• Bureaucracy can be costly and time consuming
• May lead to ‘cheating’ or illegal behaviour to circumvent the rules
• Raises businesses costs to comply with regulations which reduces competitiveness
• Poor government information could mean the regulations are misguided and have a negative impact
• There is a risk of regulatory capture, when a regulation only suits a minorities needs
• the wrong things could be regulated

Question 18

What is regulatory capture?

Answer 18

A form of government failure, it occurs when a government agency operates in favour of producers rather than consumers, it usually happens when suppliers have significance and lobbying power within government agencies.

Question 19

What are the causes of regulatory capture?

Answer 19

• asymmetric information means regulators may rely on information that is not true or accurate
• Under sourced regulatory agencies may not have sufficient funding to effectively scrutinize an industry
• Information gaps, People working for regulators may not understand the complexity of an industry

Question 20

What are the impacts of regulatory capture?

Answer 20

• regulatory capture can mean regulators fail to hold suppliers accountable and fail to enforce a minimum standard of service
• Prices will be higher leading to lower real incomes and regressive effects on lower income households
• there can be damaging externalities and a social welfare loss if regulators fail

Question 21

What are the two main examples of regulatory capture?

Answer 21

OFWAT

Financial Services Authority (FSA)

Question 22

How was OFWAT (water industry regulator) involved in regulatory capture?

Answer 22

The water industry regulator was accused of allowing water bills charged by monopile’s to be raised more than they should, the regulators relied on firms for information about costs and had become sympathetic to the costs regarding price levels.

Question 23

How was the FSA (financial services authority) involved in regulatory capture?

Answer 23

They were heavily criticised for monitoring the lending activity of commercial banks in the run up to the 2008 financial crisis.