market failure

Question 1

Market failure

Answer 1

Market failure occurs when resources are not allocated efficiently - in other words total economic surplus is not maxised

Question 2

Reasons for market failure

Answer 2

Public goods

Common resources

Externalities

Market Power

Question 3

what is market power

Answer 3

A firm has market power if it can affect the market price by varying its output.

The term market power refers to the ability of a firm (or group of firms) to raise and
maintain price above the level that would prevail under a competitive market.

Question 4

What is an imperfect market

Answer 4

An imperfect market refers to
any economic market that does not meet the rigorous standards of the hypothetical perfectly—or purely—competitive market

Question 5

An imperfect market exits:

Answer 5

• there are relatively small number of firms
• firms have market power
• firms use market differentiation
• barrier to entry are used to restrict competition

Question 6

what is an example of barriers to entry

Answer 6

• controlling a scarce resource - if a mining company pegged the only diamond mine in the country, it would have sole rights ot he mine the gems
• a government license granting a legal monopoly e.g. Australia Post
• technological advantage -e.g. Microsoft has considerable market power because it supplies the operating system used in most computers
• a patent or invention gives protection from competition(up to 17 years in Australia)

Question 7

WHAT IS A BARRIERS TO ENTRY ARE AN IMPORTANT FEATURE

Answer 7

• controlling a scarce resource - if a mining company pegged the only diamine mine in the country, it would have sole rights ot he mine the gems
• a government license granting a legal monopoly e.g. Australia Post
• technological advantage -e.g. Microsoft has considerable market power because it supplies the operating system used in most computers
• a patent or invention gives protection from competition(up to 17 years in Australia)

Question 8

WHAT IS MARKET FAILURE

Answer 8

The term anti-competitive behaviour refers to any agreements or arrangements between firms that seek to restrain competition and thereby remove the automatic regulation that competitive markets achieve.

Question 9

WHY IS COMPETITION MPORTANT

Answer 9

Competition (producers) provides the spur for businesses to improve their performance, develop new products and respond to changing circumstances

Competition (consumers) offers the promise of lower prices and improved choice for consumers and greater efficiency

Question 10

ANTI-COMPETITIVE BEHAVIOUR

Answer 10

The term anti-competitive behaviour refers to any agreements or arrangements between firms that seek to restrain competition and thereby remove the automatic regulation that competitive markets achieve.