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Microeconomics > Market Failure > Flashcards

Market Failure Flashcards

1
Q

Types of market failure?

A 
Lack of property rights 
Lack of competition 
Missing markets 
Unstable markets
Incomplete markets 
Information failure
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2
Q

Information failure

A

Not all of the principles in an economic exchange have perfect knowledge about the details of that exchange

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3
Q

What are the two types of information failure?

A

Imperfect knowledge

Asymmetric information- information is not equally shared between two parties

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4
Q

Incomplete markets

A

Private sector does not/cannot completely meet the requirements of the market (under-provides) and some intervention from the state is needed

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5
Q

Unstable markets

A

Primary product markets can become unstable and require intervention to help them stabilise

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6
Q

Missing market

A

Services which are not viable for private sector to provide

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7
Q

Lack of competition

A

A market which is not competitive called a monopoly

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8
Q

Lack of property rights

A

Markets are less effective when property rights do not exist

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9
Q

Name some ways the government can intervene to correct or reduce market failure?

A 
Taxation and subsidies 
Government expenditure
Buffer stock systems 
Price controls
Legislation and regulation
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10
Q

Free rider problem?

A

Someone who receives the benefit but allows others to pay for it

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11
Q

On a graph, where would the welfare loss arrow be for a positive externality of production?

A

Below equilibrium, pointing right

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12
Q

When trying to find the welfare loss, what should you do from equilibrium?

A

Compare social benefits to social costs

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13
Q

Where would the welfare arrow be if it is a positive externality of consumption?

A

Above equilibrium, pointing right

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14
Q

Social costs

A

Are the total cost to society of a given economic activity

Social costs= private cost + external costs

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15
Q

Social benefits

A

Are the total gain to society from a given economic activity

(Social benefits= private benefits + external benefits)

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16
Q

In this market failure topic what does the demand curve become?

A

D=MPB

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17
Q

In this market failure topic what does the supply curve become?

A

S=MPC

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18
Q

Negative externality

A

Are the costs incurred by third parties (external costs) as a result of an economic transaction

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19
Q

On a graph, which way would the welfare loss arrow point for a negative externality?

A

Left

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20
Q

On a graph is it’s a negative externality of consumption, where would the welfare loss arrow be?

A

Below equilibrium, pointing left

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21
Q

On a graph, if it is a negative externality of production, where would the welfare loss arrow be?

A

Above equilibrium, pointing left

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22
Q

On a graph which way would the welfare loss arrow point for a positive externality?

A

Right

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23
Q

External benefits

A

Is the benefit that a consumer or producers economic activity gives others

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24
Q

Allocative efficiency

A

Is where the scarce resource are used to produce the goods and services that consumers actually want

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25
Q

Externality

A

Occurs when a third-party is affected by the consumption and/or production of others

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26
Q

If it is a positive externality of production, describe the graph?

A

MSC shifted right/down, price would have decreased but QD increased
Welfare loss pointing right, below equilibrium

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27
Q

If it is a positive externality of consumption describe the graph?

A

MSB has shifted right/up price would have increased as well as quantity
Welfare loss pointing right, above equilibrium

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28
Q

If it is a negative externality of consumption, describe the graph?

A

MSB/MPB has shifted left/down price would have decreased as well as quantity
Welfare loss pointing left below equilibrium

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29
Q

If it is a negative externality of production describe the graph?

A

MSC has shifted left/up above MPC, price would have increased, QD decreased
Welfare loss pointing left, above equilibrium

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30
Q

When does market failure occur?

A

When the free market fails to allocate resources efficiently

31
Q

Merit goods

A

Are those goods and services that the government feels that consumers will under-consume and which ought to be subsidised or provided free at point of use

32
Q

Examples of demerit goods

A

Alcohol
Tobacco
Gambling
Junk foods

33
Q

Demerit goods

A

A good that brings less benefit to consumers than they expect, such that too much would be consumed by individuals in a free market

34
Q

Name some examples of merit goods

A

Healthcare
Public libraries
Museums

35
Q

What are merit goods essentially?

A

Positive externalities of consumption

36
Q

Difference between demerit goods and negative externalities

A

Demerit goods focus mainly on the harm to actual consumer of the good. Negative externalities focus on the harm inflicted on third parties

37
Q

Moral hazard

A

Occurs when entity has an incentive to increase its exposure to risk because it does not bear the full costs of that risk

E.g. phone cover if phone becomes lost

38
Q

What would the impact be if buffer stocks are used when a commodity is under pressure in rising in price?

A

Government release supply causing S to shift right

39
Q

What would the impact be if buffer stocks are used when a commodity is under pressure in falling in price?

A

Government buy up the excess stock causing D to shift right

40
Q

How will an indirect tax affect the S/D diagram?

A

Shift supply to the left
Price increase
Quantity decrease

41
Q

What are some of the problems which could be said that won’t make the indirect tax effective

A

1) price inelastic demand-due to the addiction very few substitutes the therefore won’t effect the quantity
2) setting tax at a right level (govt doesn’t have perfect knowledge)
3) black markets- criminal activity if tax too much!

42
Q

What could be said about the revenue generated by the government through taxation?

A

Used to fix market failure e.g. form of subsidy

Useful in solving market failure, to efficiently allocate resources

43
Q

What would the impacts of an indirect tax have

A

Increase costs of production
Internalises externality (polluter pays)
Solves over consumption/production
Promotes allocative efficiency while generating govt revenue

44
Q

Some impacts of a subsidy

A 
Lower costs of production 
Decrease price and increase quantity
Solves under consumption/production 
Allocative efficiency 
Welfare gain
45
Q

For a subsidy to work most efficiently what is needed

A

Needs to be price elastic demand, greater degree of quantity in the market, solve market failure

46
Q

State some points for government failure which could be caused by a subsidy?

A

Setting the subsidy at the right level (under-subsidise over-subsidise)
How will the firms use the subsidy, may use to increase wages and not use it for the correct intention the government had had
Creates dependency issues in the long run, if taken away

47
Q

What would the impact be on a S/D diagram when firms are given a subsidy?

A

Supply shifts right
Price decreased
Quantity increased

48
Q

Common access resources

A

Natural resources over which not private ownership has been established
‘Tragedy of the Commons’
Caused by the lack of private ownership, led to self-interest and resource depletion

49
Q

Buffer stock

A

Occurs when the government store agricultural products and commodities in order to maintain stable prices in a market

50
Q

Private benefits

A

Are the gains to individual of firms from consuming or producing an item

51
Q

Private costs

A

Are the costs to individuals or firms of consuming or producing an item

52
Q

If demand/supply is inelastic the incidence of the tax will be…

A

…greater for the consumer/producer

53
Q

If the consumer has more information that the producer then…

A

…the producer may under-estimate the private cost of producing the good or service
Supply too much

54
Q

What is Price control?

A

Is when the government set maximum or minimum prices for a good or service

55
Q

Property right

A

Confer legal control or ownership of a good

56
Q

If the producer has more knowledge than the consumer then…

A

…the consumer may over-estimate the private benefit they receive from the product
Demand too much

57
Q

Public good

A

CANNOT normally be provided by the private sector. They are commodities or services provided with out profit to all moments of society

58
Q

Quasi-public goods

A

Have characteristics of both private and public goods

59
Q

Features of public goods

A

1) non-rivalry- consumption of the good by one person does not reduce the amount available for others
2) non-excludability-once provided, no person can be excluded

60
Q

Government failure

A

They can tax, regulate and control but the outcome may be a deepening of the market failure or even worse a new failure

61
Q

Examples of public goods

A

Lighthouses
Street lighting
Defence
Clean air

62
Q

Solutions to the problems of demerit goods

A

Tax, regulating or prohibiting manufacture, sale and use

63
Q

External costs

A

Are the costs to other people of organisations of decisions taken by a person or business

64
Q

Why are demerit goods examples of market failure?

A

Government judges that certain goods will be over-consumed, left to the market mechanism
All demerit goods are capable of creating negative externalities, associated with consumption

65
Q

Why are merit goods examples of market failure?

A

Merit goods are prone to information failure

Uneven access to merit goods may create inequality

66
Q

Examples of Quasi public goods?

A

Beaches. Consumers who pay for a stay at a hotel which has a private beach. It can be excludable
They can also be rivalrous during congested times (summer) an individual reducing space for other potential individuals

67
Q

Advantages of Nationalisation

A
  • State provision can reduce inequality by redistributing money
  • Without state provision, some services might not exist as they aren’t profitable e.g. some train routes
68
Q

Disadvantages of Nationalisation?

A
  • Without a drive for profit, there is less incentive to make a service as efficient as possible
  • With asymmetric information, there is a risk of government failure
69
Q

Advantages of Privatisation?

A
  • The incentive for profit means that resources will be allocated more efficiently
  • When the government sell off their enterprise, they will gain revenue that can be put to alternative use
70
Q

Disadvantages of Privatisation?

A
  • There is a moral argument against providing some services profitably
  • The drive for efficiency means that an element of humanity might be lost. Efficiency may come in the way of delivering a fair service
71
Q

What would the impact be if a minimum price was imposed on demerit goods (NEC)?

A
  • Demand will contract
  • Q will fall as consumption is discouraged
  • P will increase
  • Q will fall to the socially optimum level
  • Externality will be internalised, will solve the over-consumption and over-production of demerit goods
  • Get to allocative efficiency, welfare maximised
72
Q

What are the possible issues with imposing a minimum price of demerit goods such as alcohol?

A
  • Regressive tax
  • Black market
  • Price Inelastic Demand
  • Whether the minimum price is set at the right level
73
Q

The main reason for the imposition of a maximum price?

A

-Encourage more consumption and equity

74
Q

What are the many indirect issues with the imposition of a maximum price?

A
  • Government create this excess demand
  • Supply is contracted but Demand is extended
  • Black market because of the shortage cause, which could see consumers be exploited

Microeconomics (12 decks)

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