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Economics > Market Failure > Flashcards

Market Failure Flashcards

1
Q

When does market failure occur

A

Market failure occurs when a market allocates resources inefficiently

Society suffers as a result

Government often tries to intervine to try and stop it

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2
Q

Describe complete market failure

A

No market exists I.e. ‘missing market’

E.g. national defence

No market which allocates national defence therefore gov needs to provide it

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3
Q

Describe partial market failure

A

Market functions but qty supplied of a good or service is wrong

If left to market forces:,
People unable to afford treatment they need -> government may intervine and provide free health care

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4
Q

What do externalities affect

A

Third parties

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5
Q

What are externalities

A

The effects that producing or consuming a good/service who aren’t involved in the making, buying/selling and consumption of good/service

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6
Q

What are externalities

A

The effects that producing or consuming a good/service who aren’t involved in the making, buying/selling and consumption of good/service

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7
Q

What are the two types of externalities

A

Positive or negative externalities

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8
Q

What are positive externalities

A

External benefits to a third party

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9
Q

Negative externalities

A

External costs to a third party

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10
Q

Why does market failure occur

A

Because externalities are being ignored

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11
Q

What is a private cost

A

The cost of doing something to either a consumer or a firm

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12
Q

What are external costs

A

Caused by externalities e.g. dropping litter

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13
Q

What are external costs

A

Caused by externalities e.g. dropping litter

Create an external cost to the council who then have to pay someone to clean it up

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14
Q

What is social cost

A

Full cost to society

Private costs + external costs = social costs

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15
Q

What is private benefit

A

Benefit gained by a consumer or firm by doing something

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16
Q

What is external benefit caused by

A

Caused by externalities

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17
Q

What is social benefit

A

Private benefit + social benefit

Full benefit received by society from pollution

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18
Q

What does ignoring negative consumption externalities lead to

A

It leads to overconsumption

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19
Q

What does ignoring positive production externalities lead to

A

Leads to underproduction

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20
Q

What does merit goods do to society

A

It benefits society

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21
Q

What do demerit goods do to society

A

Do the opposite to demerit goods

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22
Q

Merit goods have

A

Greater social benefits than private benefits

Consumption is beneficial to the individual and society

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23
Q

Demerit goods have

A

Greater social costs than private costs

Consumption is harmful to people and society
However people are usually unaware or don’t care

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24
Q

What does the market do to merit and demerit goods

A

Merit goods are over underprovided

Demerit goods are overprovided

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25
Q

What does ignoring negative production externalities lead to

A

Overproduction

26
Q

What does ignoring positive production externalities lead to

A

Leads to underproduction

27
Q

Ignoring negative consumption externalities leads to

A

Overconsumption

28
Q

What does ignoring positive consumption externalities lead to

A

Underconsumption

29
Q

Government can intervene In markets for merit and demerit goods

A

.

30
Q

Why does government intervene in a market

A

Failure of the market to meet socially optimum levels

31
Q

How can the government influence the market

A

Taxes

Subsides -> increase/decrease in consumption

32
Q

What are the two characteristics of a public good

A

Non excludability - people cannot be stopped from consuming the good even though they haven’t paid for it

Non rivalry - one person benefitting from the good doesn’t stop others

33
Q

Examples of a public good

A

Firework displays, lighthouses

34
Q

What are private gooda

A

Excludable

People have a choice to consume

Most goods are private goods

35
Q

What are non-pure (quasi) public goods

A

Public good, but not fully

E.g. roads

36
Q

Public goods are underprovided in the free market

A

..

37
Q

What is the free rider problem

A

Once a public good is provided, it is impossible to stop someone from benefitting from it, even if they haven’t paid

38
Q

What cannot work if there are free riders

A

Price mechanism

Because instead people will wait for someone to pay

39
Q

What happens when producers overvalue the benefits of a public good

A

Price goes up

40
Q

What is it an example of something where no market exists for externalities

A

Example of missing market

41
Q

Symmetric information

A

Everyone has equal and perfect knowledge

42
Q

What does a competitive market have

A

Perfect information

43
Q

What does symmetric information allow

A

It allows efficient allocation of resources

This situation is very rare however buyers don’t have time or resources to obtain full info on prices before buying

44
Q

What is asymmetric information

A

Lack of perfect information in the market

Sellers have more info on product than buyers or vice versa

Information is imperfect

45
Q

What does information failure cause

A

Market failure

46
Q

What does imperfect information cause

A

Market failure

Underconsumption of merit goods - consumers may not know the benefit

Overconsumption of demerit goods - no info on how bad it is

Merit goods may be underprovided and demerit overprovided

47
Q

Consumption by an individual depends on

A

Wealth and income

48
Q

What is income

A

Amount of money received over a set period of time

49
Q

What is wealth

A

Value in money of assets held

50
Q

Money + wealth is not distributed equally in a market economy

A

..

51
Q

How would government try to distribute income and wealth more equally

A

Government intervention

E.g. progressive taxes

52
Q

What are the disadvantages of government trying to distribute wealth and income more equally

A

Removes incentive for individuals+firms to work hard -> market failure

Immobile factors of production (one that cannot be easily moved to another area of the economy)

E.g. Land, capital

However capital is mobile and immobile

53
Q

Mobile labour

A

Able to move from one job to another

Occupational or geographical

54
Q

Why would there be geographical immobility

A

Reluctance to leave family + friends

Dislike of change

Imperfect information for jobs

Large house price, rent, cost of living

55
Q

Why would there be occupational immobility

A

Lack of training, education and skills

Lack of required qualifications

Lack of work experience

56
Q

What do monopolies cause

A

They cause market failure and misallocation of resources

57
Q

What do monopolies cause

A

Market failure and misallocation of resources

58
Q

Draw a negative production externalities diagram

A

….

59
Q

Draw a positive production externalities diagram

A

…

60
Q

Draw a negative consumption externalities diagram

A

….

61
Q

Draw a positive consumption externalities diagram

A

…

Economics (38 decks)

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