Market Failure Flashcards
What is a private good?
A private good is where consumption by one person means the good is not available for consumption by another.
Eg. Steak
What is a public good?
A public good is a good that can be consumed by everybody, and the consumption by one person doesn’t mean other cannot benefit from it.
Eg. Street lighting
What does non-rival mean?
The consumption of the good by one person doesn’t reduce or limit the amount available for another.
What does non-excludability mean?
Once provided, no person can be excluded from benefitting or suffering from it.
What is a merit good?
A merit good it one that benefits both individuals and society
What is a demerit good?
A demerit good is one that does not benefit individuals or society
What methods can be used to increase consumption of merit goods?
Direct provision
Subsidy
Regulation
What is social costs?
The costs to society from an activity
Eg. Pollution from driving a car
What is private cost?
Any cost that a person or firm pays in order to buy or produce goods and services
Eg. Profits to a business
What are negative externalities?
When social costs are greater than private costs
What are positive externalities?
When social benefits are greater than private benefits
What are common examples of negative externalities?
Pollution and poor health
What are common examples of positive externalities?
Education and activities that raise taxes
What 3 things cause market failure?
Large fluctuations in price
Too high a price
Too low a price
What is minimum price scheme?
There is a ‘price floor’ in place that the seller can’t sell below. This guarantees a certain price for suppliers.
What is maximum price scheme?
Where a ‘price ceiling’ is put in place on a good that the seller can’t sell above.
What are the cons of minimum price schemes?
regressive, leading to more income inequality.
They can encourage a hidden economy- harder to regulate prices & consumption
What is government failure?
Government failure is when government intervention leads to a net welfare loss (rather than a gain)
Why may government failure occur?
Inadequate information
Conflicting objectives
Administrative costs (costs to run)
Unintended consequences
What is public choice theory?
It is assumed that politicians will want to maximise welfare for society. However public theory suggests this may not be the case and politicians may choose to act in their own best interests.
What are the effects of government failure?
Lower tax revenue (policies could encourage smuggling)
Opportunity cost (Tax revenue can’t be spent on everything)
Wastage (eg, money spunked on HS2)
Other welfare losses (pollution may be caused)
What is a free rider?
People who benefit without paying
Eg. Movie piracy, people who use parks or recreational facilities without paying
What is tragedy of the commons?
The idea that common goods that everyone has access to are often misused and exploited
What are market based policies?
Policies designed to manipulate markets, prices and incentives to correct market failures
What is the principal agent problem?
Those who stand to gain or lose from a decision are different to those making a decision on their behalf
Eg. Board of directors making decisions on behalf of shareholders
What is labour immobility?
The difficulty of moving workers to where they are needed to benefit society
What is capital immobility?
The difficulty of moving equipment where it is needed to benefit society
What way does the potential welfare triangle point if it the externality is positive?
The potential welfare triangle will point right
What way will the welfare triangle point if the externality is negative?
The welfare loss triangle will point left
What is inadequate information?
Governments don’t know how to do everything nor have all data/ expert opinion
What are conflicting objectives?
Opportunity cost resulting from a government decision
What are administrative costs?
Costs of policies come from budget, sometimes so much it outweighs the welfare benefit from correcting
What are market distortions?
When one government intervention could lead to other market failures
What are market distortions?
When one government intervention could lead to other market failures
What is the acronym STRIPS and what is it used for?
STRIPS shows the different ways to correct market failure.
Subsidy
Tax
Regulation
Information
Pollution permits
State provision
