Market failure

Question 1

Market failure

Answer 1

When the price mechanism fails to allocate resources efficiently, or when the operation of market forces leads to a net social welfare loss.

Question 2

Externalities

Answer 2

The benefit or cost to a third party not including price of economic activity. check book for diagram

Question 3

Reasons for market failure

Answer 3

Public goods
Positive and negative externalities
Merit and demerit goods
Monopoly

Question 4

Merit goods

Answer 4

Merit goods occur from partial market failure.
- They are under provided and under consumed
eg. seatbelts, healthcare, education

Question 5

Demerit goods

Answer 5

Demerit goods occur from partial market failure.
- They are over provided and over consumed
eg. alcohol, tobacco, high caffeine energy drinks

Question 6

Public goods

Answer 6

Goods that are provided by the government and are non-rivalrous, non-excludable & non-rejectable.

Question 7

Examples of quasi public goods

Answer 7

*Schooling eg. private schools
*Roads eg. London congestion charge

Question 8

Common access resources

Answer 8

Resources that are not owned by anybody an no payment is required to use them eg. land & oceans.

They are non-excludable and non-rivalrous.

Question 9

Tragedy of commons

Answer 9

When people act in self interest over benefits to society in relation to common access resources.

Question 10

Different types of government intervention (TRMS)

Answer 10

Taxes and subsidies eg. pigouvian taxes
Regulating the markets
Maximum and minimum prices
State funding / provision

Question 11

Types of direct taxes

Answer 11

Income tax
Corporation tax
Windfall tax - excess profits

Question 12

Types of indirect taxes

Answer 12

VAT
Excise Duties

Question 13

Difference between Specific and Ad Valorem tax

Answer 13

Specific taxes are not based on value of the product
- £1 on Litre of alcohol consumed

Ad Valorem taxes are based on value of the product
- 25% tax imposed on alcohol

Question 14

Asymmetrical information
How do we resolve this?

Answer 14

When one party knows more information than another party eg. vapes and used cars

Resolved by inspections, regulation, info campaigns.

Question 15

Reasons for government failure (PPLCR)

Answer 15

*Policy myopia (short term benefits, long term costs).
*Political self interest (political aims, rather than socio-economic benefits)
*Law of unintended consequences (eg. high minimum wage leading to unemployment)
*Costs of administration and enforcement (costs outweigh the benefits of intervention)
* Regulatory capture - (government favour producers over consumers)

Question 16

Evaluation of government failure

Answer 16

Crowding out - government spending –> higher demand for goods and services –> Inflation.
Deadweight loss - social surplus is lost as producer / consumer surplus changes eg. carbon tax.

Question 17

Property rights

Answer 17

Legal rights to the ownership of a resource. If a property is damaged, the economic agent can claim compensation (Reduces MPC)

Question 18

Pollution permits (check book for diagram)

Answer 18

Sets a limit to pollution in an industry and allows firms to choose how much they’re willing to pay to pollute.

Encourages firms to invest into renewable energy if prices are too low.

Question 19

Buffer stock - agricultural market failure

Answer 19

The government set a target price where P=Q.
if there is a poor harvest, the government will release some of its buffer stock to shift supply back to P=Q.
If there is a bumper harvest , the government will buy up stock to increase price back to P=Q.