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Economics (Tina) > Market Failure > Flashcards

Market Failure Flashcards

1
Q

Technical Efficiency

A

When firms pursue the least cost method of production, where firms produce at minimum average cost

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2
Q

Allocative Efficiency

A

When resources are allocated to its best use

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3
Q

Define “pareto optimality”

A

When market is in equilibrium, with no external influences

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4
Q

Define “market failure”

A

A situation when the free market under or over allocate good or services, which leads to under or over consumption and under or over production

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5
Q

Demerit goods

A

Private goods that has negative externalities associated with its consumption

e.g. smoking, porn, drugs, prostitution, alcohol

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6
Q

Merit goods

A

Private goods that has positive externalities associated with its consumption

e.g. education, medical care

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7
Q

How does government response to fix market failure?

A
  1. Direct provision
  2. Taxation
  3. Subsidizing
  4. Negative and positive advertising
  5. Extending property rights
  6. Legislation
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8
Q

Market failure can arise with…

A
  • lack of public goods to benefit society
  • inequality of wealth/income
  • people make decisions based on imcomplete information
  • people make decisions without considering long term
  • under supply of merit goods
  • over supply of demerit goods
  • abuse of monopoly power (firms)
  • externalities (4 types)
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9
Q

Public Goods Characteristics

A

Non-rivalrous – jointly consumed by people without reducing the amount available to others

Non-exclusive – good or service can be used by people who do not pay for them

Thereby consumers have no incentive to pay for the good – leads to the “free-rider” problem

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10
Q

Private goods characteristics

A

rivalrous and exclusive

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11
Q

What can a government do to intervene in response to a need for public goods?

A

From the syllabus:

  • Direct provision
  • Contracting out to the private sector
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12
Q

Common Access Resources (Common Pool)

A

The ‘gifts of nature’ over which there is no private ownership and therefore no effective means of regulating use of the resource

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13
Q

Possible solutions for Common Access Resources Issues

A
  • Privatization
  • Tradeable permits
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14
Q

Privatization

A
  • assigning private ownership of a resource
  • creates incentives for owners to protect and manage it sustainably
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15
Q

Tradeable permits

A
  • issuing permits to private users to allow limited amount of extraction in a period of time
  • limit exploitation and maintain sustainable usage
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16
Q

(Asymmetric) Information - HL ONLY

A

Decisions are based on incomplete information – either the buyer or the seller (usually the seller) has more information than the other party

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17
Q

Government solution for asymmetric information

A
  • Legislation
  • Regulation
  • Provision of information
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18
Q

Opportunistic Behaviour

A
  • This is when one party takes advantage of the fact the other party lacks information
  • Results in adverse selection or moral hazard
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19
Q

Adverse selection

A
  • Results of decisions when buyers and sellers have access to different information
  • Distorts price and quantity
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20
Q

Moral hazard

A

When a risk-protected party behaves differently due to more information, imposing costs on less-informed parties or society

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21
Q

Government solution to income inequality

A
  • Taxation system
  • Transfer payments
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22
Q

Taxation system

A
  • Progressive Tax - rate of tax increases the higher the income
  • Proportionate Tax - rate of tax is proportionate to income
  • Regressive Tax - rate of tax decreases the higher the income
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23
Q

Transfer payment

A

When government transfers income from one group of the population to another through taxation and benefits

24
Q

Externality

A

A spillover in production or consumption that results in social costs or benefits from an economic activity

25
Q

Negative Externality of Production (NEOP)

A

A spillover in production that arises in social costs when a firm undertakes an economic activity

26
Q

Government Solutions for NEOP

A
  • Taxation
  • Fines
  • Legislation/Government regulations
  • Tradeable permits (Allocating Property Rights)
27
Q

Taxation Evaluation for NEOP

A

Effective:

  • preferred by governments
  • generate extra revenue
  • cost of collecting it is relatively small

Not Effective:

  • should consider the elasticity of good
  • inelastic - burden fall on consumer = not good
  • burden should fall on producer
28
Q

Fine

A

A payment per unit of production to the government

29
Q

Fine Evalution for NEOP

A

Effective:

  • encourages firms to cut back on production without any pressure on output

Not Effective:

  • costly to the government to monitor, enforce, and prosecute since they need to use 3rd party company to monitor
  • fine needs to be the right amount
  • too little = cheaper for firms to pay fine and keep producing
  • too much = drive firms out of business = unemployment
30
Q

Legislation

A

Laws that are passed to reduce production/consumption

30
Q

Legislation Evalutation for NEOP

A

Effective:

  • when law is specific and easy to enforce

Not Effective:

  • difficult for govenment to balance costs and benefits
  • legislation too tough = too restrictive on firms output since theres no point in producing
  • legislation too loose = no incentive for firms to cut back
30
Q

Allocating Property Rights

A
  • using market forces to solve the externality
  • property rights transfers ownership of a good or resource from the public to a private firm
31
Q

Allocating Property Rights Evalution for NEOP

A

(e.g. forest)

  • No property rights = everyone chop down any tree they see
  • With property rights = each person has their piece of land, has to cut back production or else no more tree left = young trees could be protected, reseeding

(e.g. oysters) - oyster farm

  • An incentive to maintain clean water
  • Farmers may sue firms that polute the water to protect river
  • Private sector responsible for monitoring, enforcing and clean up
32
Q

Positive Externality of Production

A

A spillover in production that arises in social benefits when a firm undertakes an economic activity

33
Q

Government Solutions for PEOP

A
  • Subsidies or Vocational Training
  • Legislation or Government Funding or Decrease Tax
  • Advertising to influence behaviour
  • Direct provision of goods and services
34
Q

Subsidy

A

payment per unit to produce

35
Q

Legislation for PEOP

A
  • requires firm to produce extra
  • similar effect to subsidy
  • production cost would come from firm, not government
36
Q

Government Funding or Decrease Tax

A
  • exempt tax for producers = decrease cost of production
  • decrease tax paid for the good for consumers
  • same effect as subsidy
37
Q

Negative Externality of Consumption

A

A spillover in consumption that arises in social costs when an individual undertakes an economic activity

38
Q

Government Solutions for NEOC

A
  • Taxation
  • Advertising
  • Government regulations/legislation
  • Nudges (HL)
39
Q

Taxation Evaluation for NEOC

A
  • ineffective for inelastic goods (e.g. cigarettes)
  • people would buy regardless the price (addictive)
  • cigarette price increase = more expensive, greate % of income = harms low incomers
  • good to generate extra revenue (government)
40
Q

Advertising Evaluation for NEOC

A

Effective:

  • when cost to individuals > additional benefit to society

Not Effective:

  • target wrong audience
  • cheap black market goods available
41
Q

Legislation for NEOC

A
  • government either restrict the consumption of good (18+ for alcohol)
  • criminalizes the good (e.g. heroin)
  • fines for certain behavior (chewing gum, Singapore)
  • advertising in a particular way could also be legislation (health warnings on cigarette packet)
42
Q

Advertisement for NEOC

A
  • negative advertising to inform the costs to consumers
  • in order to decrease consumption
43
Q

Legislation Evaluation for NEOC

A

effective when social costs of consuming > cost of putting legislation

e.g. heroin - high social cost

44
Q

Positive Externality of Consumption

A

A spillover in consumption that arises in social benefits when an individual undertakes an economic activity.

45
Q

Government Solutions for PEOC

A
  • Subsidies
  • Legislation
  • Advertising to influence behaviour
  • Direct provision of goods and services
  • Nudges (HL)
46
Q

Examples of Positive externalities of consumption and Merit goods

A
47
Q

Examples of Negative Externalities of Consumption and Demerit goods

A
48
Q

Subsidy Evaluation for PEOC

A

Effective:

  • size of subsidy = externality
  • if subsidy outweighs the opportunity cost of alternative uses of government funds
49
Q

Government provision Evaluation for PEOC

A
  • if additional benefit to consume the good is high, government might supply good for free

e.g. compulsory vaccines are often free because of high benefit to society

50
Q

Cost

A

everything sacrificed or given up when a policy is implemented or a choice is made

51
Q

Marginal Cost

A

The additional costs associated with a decision to do a little more or a little less of something

52
Q

Benefit

A

things gained when a policy is implemented or a choice is made

53
Q

Marginal benefit

A

the additional benefit associated with a decision to do a little more or a little less of something

Economics (Tina) (21 decks)

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