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
Collusion and market sharing
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
What are some ways for firms to exploit customers in the free market?
- monopolisation
- price discrimination
- exclusive dealing
- collusion and market sharing
The business cycle
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.
Impacts of high inflation
- distort market decision making
- reduce consumer’s purchasing power
- force an increase in interest rates
how does high inflation cause recession?
- 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.
impacts of recession
- increase unemployment
- business failures
- other economic and social problems
Difference between government macroeconomic and microeconomic policies.
Macro:
influence entire economy
e.g. fiscal and monetary
Micro:
influence individual firms and industries
e.g. competition policy and trade policy
barriers to entry
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
Economies of scale, what is it and how can it be different for different people?
- 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.
how does The geography and population of Australia makes it particularly susceptible to monopolies?
- 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
How does the GFC represent the problems of market instability
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.
Explain what is an externality.
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.
