Market failure Flashcards
types of market failure
PUMPIN
Public goods
Unequal distribution of income & wealth
Monopolies
Positive externalities
Immobility
Negative externalities
Three characteristics of public goods
non excludable
non rival
non rejectable
the free rider problem
as public goods are non excludable, it is difficult to charge people for benefitting once a product is available, leading to the under provision of a good and thus causing market failure
quasi public goods
near public goods as they have some of the characteristics of public goods. they are semi-non-excludable and semi-non-rival
income
a flow of money going to factors of production (wages from jobs, rental income from property, interest from savings, profits flowing to shareholders)
wealth
the current value of a stock of assets owned by someone or society as a whole (savings in bank accounts, ownership of property, shares/stocks in businesses, wealth held in pension schemes)
the 45° line on a lorenz curve represents
perfect equality
the further the lorenz curve is from the 45° line…
the more unequal the distribution of wealth and income
Gini coefficient- definition + equation
a measure of statistical dispersion intended to represent the income or wealth distribution of a country’s residents
Gini coefficient = A / A+B
if Gini coefficient is 0
perfect equality
if Gini coefficient is 1
maximal inequality
UKs gini coefficient
0.34
underlying causes of inequality
-education & qualifications
-impact of state (nmw, tax etc)
-inheritance
-virtuous cycle of W & Y inequality
-luck
policies to lower inequality
-higher minimum wage
-improved education services
-more progressive income tax
-increase benefits
-increase personal allowance
what does the laffer curve show
the relationship between tax rates and the amount of tax revenue collected by governments
why might total tax revenues fall if tax rate increases
-increased rates of tax avoidance
-greater incentive to evade taxes
-possible disincentive effects in labour market
-possible brain drain effects
absolute poverty
when a household doesn’t have sufficient income to sustain a basic acceptable standard of living. less than $1.90 a day
relative poverty
a household income that is considerably lower than the median level of income within a country. household disposable income of less than 60% of medians
inequality can lead to
-social unrest, tensions & civil disobedience
-a self-perpetuating poverty cycle can become embedded
-a loss of allocative efficiency
pros of inequality
-incentive effect
-entrepreneurs require rewards
-trickle down effect
-fairness
information failure
when people have inaccurate or incomplete data and so make potentially wrong decisions
causes of information failure
-long term consequences
-complexity
-asymmetric information
-price information
moral hazard
when the party with superior information alters their behaviour in such a way that benefits them while imposing costs on those with inferior information
policies for addressing information failure
-compulsory labelling
-improved nutritional information
-campaigns to raise awareness
-consumer protection laws
-industry standards/guarantees for selling used products
pure monopoly
a single seller. the firm is the industry
working monopoly
any firm with greater than 25% of total sales
dominant monopoly
a firm that had over 40% of the market share
oligopoly
when a few firms dominate the market
duopoly
when two firms dominate the market
monopoly power
the ability to set price
formation of monopolies
-first mover advantage
-exclusive ownership of a scarce resource
-government grant firm monopoly status
-parents or copyrights
-firms merge
barriers to entry
designed to block rival businesses from entering a market profitably
structural barriers
arising from differences in average production costs e.g integrating, economies of scale
strategic barriers
deliberately created by the behaviour of incumbent firms e.g advertisement, predatory pricing
statutory barriers
entry barriers given force of law e.g trademark, patent, broadcasting licenses
DWL
dead weight loss
the mis allocation of resources
how does monopoly power lead to market failure
-makes higher profits at a loss of allocative efficiency
-monopolist will extract a price that is above cost of resources
-high prices means consumer wants are not satisfied as the product is under-consumed
-loss of consumer surplus and welfare, disproportionately affecting low income families
benefits of monopoly power
-research and development
-economies of scale
-international competition
-regulation
negatives of monopoly power
(SPEW)
Service (standard)
Price (high)
Efficiency (not productively)
Welfare (DWL)
occupational immobility
when there are barriers limiting the transition of labour from the industry to another leading to these factors remaining unemployed or being used inefficiently
why labour immobility is a problem
-causes structural unemployment and economic vulnerability
-causes persistent relative poverty
-loss of economic efficiency and social welfare
geographical immobility
barriers which restrict labour from moving to areas where there is applicable work available
reasons for geographical immobility
-family and social ties
-financial costs of moving
-variations in house prices
-cost of living
-migration controls
-language barriers
policies to help geographical immobility
-infrastructure projects
-regional policies to create jobs and businesses
-rise in house-building to lower prices
-immigration laws, visa controls
policies to help occupational immobility
-funding education system
-more effective workplace training
-teaching new skills (e.g coding)
-an expansion of apprenticeship/internship programmes
externalities
spillover effects onto a third party not involved in the economic transaction
(they lie outside the initial price we pay)
how do externalities cause market failure
cause market failure if the price mechanism does not take account of the social costs and benefits of production and consumption
shadow pricing
calculating a monetary value to assign to the externality
compensation
estimate the cost of putting right an externality
revealed preference
how much people are willing to pay to avoid an externality
merit goods
goods and services that have positive externalities associated with them and are under-consumed in a free market due to information failure e.g healthcare, education
demerit goods
goods and services that have negative externalities associated with them and are over-consumed in a free market due to information failure e.g violent games, tobacco products
