Market Failure Flashcards
What are the government’s two main microeconomic objectives?
i)Efficiency in allocative resources; and
ii)Equity in distribution of goods and services
What is Market Failure?
Market Failure occurs when the free market/price mechanism fails to bring about an efficient allocation of resources. It occurs where the marginal social benefit does not equal to marginal social cost.
What is an externality?
An externality is a cost or benefit of production or consumption of a product that is borne by third parties who are neither the buyer nor seller, and for which no payment or compensation is made
What is Adverse Selection?
Adverse selection occurs due to the asymmetric information between the buyer and seller before the transaction has been completed.
What is Moral Hazard?
Presence of hidden actions taken by economic agent AFTER the transaction has been completed
What is Screening?
Screening refers to economic agents gathering information to make the right decision
What is Signalling?
Signalling refers to seller’s attempt to reveal credible information about what they have to sell in order to make themselves more attractive to the buyer.
Why is Co-payment effective in tackling market failure involving moral hazard?
It is likely to be very effective due to consumers’ loss aversion. To avoid such losses, consumers will try to avoid over consumption.
The effectiveness can be further enhanced by making such co-payments even more apparent through public education/ marketing campaigns to enhance consumers’ salience bias to influence their behaviour.
What is Factor immobility?
Factor immobility or immobility of factors of production is a constraint experienced by producers when making production decisions. As a result of this constraint, producers may make production decisions that do not lead to the most efficient outcomes (such as employing inefficient labour-capital combinations ).
What is Occupational immobility?
Occupational immobility occurs when there are barriers to the mobility of factors of production between different industries and occupations.
What is Geographical immobility?
Geographical immobility occurs when people are less able or willing to from one region to another in search of jobs.
What are the different time lags in the causes of government failure?
Recognition lag (identifying and determining the problem) , decision lag (deciding on the type of policies to use in order to resolve the problem) , implementation lag (implementing the policies) .
As a result of these time lags, policies implemented may be overdue, or worsen an existing problem
What are the causes of government failure?
-High administrative costs
-Information gaps
-Time lags, bureaucratic procedures & red tape
-Corruption & the power of self interest
-Regulatory capture
-Short termism
-Disincentive effects
-Electoral pressures & political considerations
What is Sunk Cost Fallacy?
Describes our tendency to follow through on an endeavour if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits
What is Loss Aversion?
-Describes the fact that the impact of losses feels much worse than the impact of gains
-we are more likely to avoid losses than seek out gains
-we may feel that our past investment will be ‘lost’ if we don’t follow through on the decision, and make a decision based on loss aversion rather than consider the benefits that would be gained if we did not continue our commitment
