Limits of markets: ch14 Flashcards
Why is the market economy effective in achieving prosperity?
it creates incentives for economic actors to work, invest, and innovate.
What shortcomings does a completely free market economy have?
- environment may suffer irreversible harm
- some things that the community wants and needs will not be provided
- some people will not earn enough money to live, inequalities within an economy may worsen
- markets can be unstable and sometimes inefficient
Why is the main cause to the shortcomings of a free market economy?
markets pay attention to private economic interests instead of broader social interests
What is market failure?
- when the price mechanism takes into account private benefits and costs of production to consumers and producers,
- but fails to take into account indirect costs such as damage to the environment- negative externalities
- causing negative externalities, abuse of market power, economic instability
What are the goals of the government while it intervenes in markets?
- achieve a better allocation of resources
- a more equitable distribution of income
- greater economic stability
How can government intervention be damaging for a market?
can create its own market failures- stifling innovation, efficiency and growth.
The two characteristics of public goods are…
they are non-excludable and non-rival
Why does undersupply occur in the free market for some products? What are these products?
- these products are public goods
- which once provided, is difficult to prevent anyone from using, regardless of whether they pay
- attracts free riders
- therefore difficult to get profit
- thus government usually provides it
What is an example of a demerit good that once wasn’t?
During covid-19, governments banned economic activities that involved people interacting closely, e.g. in restaurants and at entertainment venues
- events that require people to be in close contact effectively became demerit goods and services
What are free riders and what is the result of them?
- groups or individuals who benefit from a good or service without contributing to the cost of supplying the good or service
- resulting in under-supply in relation to the total demand
Are all collective goods provided by the government public goods? Give an example.
- no
- e.g. public transport service is not a public good because people have to pay to use it, making it excludable
What is a natural monopoly? Provide an example and why they exist.
- a market structure in which goods can be efficiently provided by only one supplier, usually because of the enormous investment required to supply that good
- occurs when competition would create inefficiency
- e.g. rail networks
- maintains government-owned to prevent private owners abusing their monopoly power through overcharging consumers
- generally try to maintain a fair price
How does inequality of income occur in a market economy?
- free markets itself tend to produce substantial inequality in distribution of income
- widens over time as wealth tend to generate more wealth
People own land and assets–> earn rent and interest from their factors of production and from growth in value of investments–> greater opportunities for developing their skills and finding rewarding employment
Relative poverty
those whose standard of living is substantially lower than the average for the economy as a whole
- often defined as a level of income below 30% of average earnings
Absolute poverty
where individuals have only just enough income to enable survival
Difference between relative and absolute poverty.
relative poverty is concerned with income or wealth inequality within a society, absolute poverty focuses on the inability of individuals or households to afford basic necessities regardless of their societal context.
How could inequality become entrenched in a market economy? How is it especially severe in the past 5 years?
child growing up in poverty:
parents have less education, cannot help with schoolwork–> financial pressures mean parents cannot afford to support them to the end of highschool or uni–> fear of student debt prevent further study–> stuck in lower paid jobs with limited prospects for advancement
- shift to remote learning enhance the problem–> without reliable equipment and internet–> learning becomes more difficult
How can the government improve inequality? Provide specific examples.
- free education until completion of hs
- special ed assistance programs and scholarships
- living allowances for students
welfare state
a comprehensive system of welfare benefits like pensions and healthcare created for a more equal society
Example of positive externality.
tourism business cleans up a polluted river in order to offer whitewater rafting expeditions
positive externality: all members of public visiting can benefit from the clean water as a result
—-
increased completion rates for university students and for apprenticeships
positive externality: higher labour productivity
Example of negative externality.(specific examples)
- company decide to reduce its freight costs by transporting goods by road rather than by rail
neg externalities: use of trailer trucks result in greater wear and tear on road surfaces–> higher costs to other road uses from damage to their vehicles, increases costs of road repairs
—- - loss of biodiversity because of land clearing
- water pollution due to mining and agricultural chemicals running into river systems
Monopolisation
- when a firm uses its dominant market position to eliminate existing competition or to prevent new firms from entering the market
- e.g. via temporary price cutting
Price discrimination
- when a firm sells the same type of good or service in different markets at different prices
- e.g. early bird pricing for event registration, higher prices at places with greater tourism
- the greater the degree of market power enjoyed, the greater ability for firms to do this
Exclusive dealing
When a firm sets conditions for supply that exclude retailers from dealing with other competitors
- secures market share and saves distribution costs
