Market Failure Flashcards
1
Q
Functions of prices
A
- Rationing function: as price rise, excess demand is removed and only those consumers with the ability to pay are able to purchase the good.
- Signalling function: prices provide important market signals to market participants to producers to either increase or decrease production.
- Incentive Function: increased prices strengthen incentives to firms to produce more in order to make a profit.
- Allocative Function: acts to divert resources to where they can maximise their returns and away from uses where they do not
2
Q
Advantages of price mechanism:
A
- Allows the consumer to gain sovereignty in the market.
- Allocation of resources in efficient
3
Q
Disadvantages of price mechanism
A
- Impersonal method of allocating resources.
- May be inequality in income and wealth
- Under provision of public and merit goods
4
Q
Causes of market failure:
A
- Positive and negative externalities
- Public goods
- Merit and Demerit goods
- Monopoly and other market imperfections
- Inequality in distribution of income and wealth
5
Q
Free rider problem
A
people who do not pay for the good still receive benefits from it.
6
Q
Why demerit goods are over-consumed?
A
- People may not me aware of the damage to their health.
- Goods are too cheap
- Individuals do not take into account the wider external costs
7
Q
Why do merit goods cause market failure if is positive ?
A
It will never produce enough for everyone in the society.
8
Q
Why are merit goods under-consumed?
A
- People are not aware of the potential private benefits to themselves.
- People may not be able to afford the product
- People may not take into account the wider benefits to society.
9
Q
Imperfect Information
A
when economic agents do not know everything they need to know in order to make a fully informed decision
