Limits of markets: ch14

Question 1

Why is the market economy effective in achieving prosperity?

Answer 1

it creates incentives for economic actors to work, invest, and innovate.

Question 2

What shortcomings does a completely free market economy have?

Answer 2

• 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

Question 3

Why is the main cause to the shortcomings of a free market economy?

Answer 3

markets pay attention to private economic interests instead of broader social interests

Question 4

What is market failure?

Answer 4

• 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

Question 5

What are the goals of the government while it intervenes in markets?

Answer 5

• achieve a better allocation of resources
• a more equitable distribution of income
• greater economic stability

Question 6

How can government intervention be damaging for a market?

Answer 6

can create its own market failures- stifling innovation, efficiency and growth.

Question 7

The two characteristics of public goods are…

Answer 7

they are non-excludable and non-rival

Question 8

Why does undersupply occur in the free market for some products? What are these products?

Answer 8

• 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

Question 9

What is an example of a demerit good that once wasn’t?

Answer 9

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

Question 10

What are free riders and what is the result of them?

Answer 10

• 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

Question 11

Are all collective goods provided by the government public goods? Give an example.

Answer 11

• no
• e.g. public transport service is not a public good because people have to pay to use it, making it excludable

Question 12

What is a natural monopoly? Provide an example and why they exist.

Answer 12

• 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

Question 13

How does inequality of income occur in a market economy?

Answer 13

• 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

Question 14

Relative poverty

Answer 14

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

Question 15

Absolute poverty

Answer 15

where individuals have only just enough income to enable survival

Question 16

Difference between relative and absolute poverty.

Answer 16

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.

Question 17

How could inequality become entrenched in a market economy? How is it especially severe in the past 5 years?

Answer 17

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

Question 18

How can the government improve inequality? Provide specific examples.

Answer 18

• free education until completion of hs
• special ed assistance programs and scholarships
• living allowances for students

Question 19

welfare state

Answer 19

a comprehensive system of welfare benefits like pensions and healthcare created for a more equal society

Question 20

Example of positive externality.

Answer 20

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

Question 21

Example of negative externality.(specific examples)

Answer 21

• 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

Question 22

Monopolisation

Answer 22

• 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

Question 23

Price discrimination

Answer 23

• 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

Question 24

Exclusive dealing

Answer 24

When a firm sets conditions for supply that exclude retailers from dealing with other competitors
- secures market share and saves distribution costs

Question 25

Collusion and market sharing

Answer 25

when firms get together and agree in a pricing and market- sharing arrangement (often known as a cartel) that reduces effective competition between them
- also inhibits entry of new competition
- may attract criminal penalties under the competition and consumer act

Question 26

What are some ways for firms to exploit customers in the free market?

Answer 26

• monopolisation
• price discrimination
• exclusive dealing
• collusion and market sharing

Question 27

The business cycle

Answer 27

It describes the tendency of economic growth rates in a market economy to fluctuate between boom periods of high economic growth and bust periods of harsh recession.

Question 28

Impacts of high inflation

Answer 28

• distort market decision making
• reduce consumer’s purchasing power
• force an increase in interest rates

Question 29

how does high inflation cause recession?

Answer 29

• reduce purchasing power, increase uncertainty
• higher interest rates (less people borrow money to spend)
• businesses hesitant to invest due to high cost
  , all of which can contribute to a recessionary environment.

Question 30

impacts of recession

Answer 30

• increase unemployment
• business failures
• other economic and social problems

Question 31

Difference between government macroeconomic and microeconomic policies.

Answer 31

Macro:
influence entire economy
e.g. fiscal and monetary
Micro:
influence individual firms and industries
e.g. competition policy and trade policy

Question 32

barriers to entry

Answer 32

refer to factors that make it difficult for new firms to enter a particular market or industry
e.g. Access to Distribution Channels, Brand Loyalty and Reputation, Regulatory Barriers, economies of scale

Question 33

Economies of scale, what is it and how can it be different for different people?

Answer 33

• It is the cost advantages that arise when production increases
• Existing firms may benefit from economies of scale.
• Larger firms can often produce goods or services at a lower average cost than smaller firms due to efficiencies in production, distribution, or marketing.
• High economies of scale can make it challenging for new entrants to compete effectively, especially if they cannot achieve similar levels of production volume.

Question 34

how does The geography and population of Australia makes it particularly susceptible to monopolies?

Answer 34

• large geographic size–> higher transportation cost—> hard to form competitive market across nation
• concentration in urban centres–> natural forms monopolies
• limited resources and specialization
• regulatory environment–> limited entry to market

Question 35

How does the GFC represent the problems of market instability

Answer 35

Global Financial Crisis was the result of a combination of factors:
- speculative bubbles in the housing market
- excessive risk-taking by financial institutions
- regulatory failures
- lack of transparency
- global imbalances.
These factors converged to create a perfect storm that led to a severe and widespread financial crisis with far-reaching economic consequences.

Question 36

Explain what is an externality.

Answer 36

An externality occurs when an exchange between a buyer and seller has an impact on a third party who is not part of the exchange.