Market Failure Flashcards
What is Market Failure
When the market is not as efficient as possible
What are the 6 causes of market failure
Externalities
Missing Markets
Imperfect competition
Lack of information
Immobility of factors of production
Imperfect distribution of income and Wealth
What are externalities
Costs and benefits to third parties which are not included in the market price of goods and services
What are the four concepts of externalities
Private Costs
Private benefits
Social Costs
Social Benefits
Look at Descriptions of causes of market failure pg 45 - 48
What are Missing Markets
When a market cannot meet the demand for certain goods
What are the 5 characteristics of public goods
Non-Rivalry
Non-excludability
Social benefits outstrip private benefits
Infinite consumption
Non-reject ability
What are Merit Goods
Goods that are highly desirable for welfare but not demanded by the market
Have positive externalities
What are the options for the state to provision merit goods (3)
Provide them in part
Statutory requirements
Outsourcing
What are demerit goods
Goods regarded as socially harmful for consumption but highly demanded by the market
Often oversupplied
Describe imperfect competition (3)
The power lies with producers
They can prevent new businesses from entering the market and thus the market can’t adjust to changes in demand
Businesses can also delay products from entering the market until it suits them
Describe Lack of Information (3)
Consumers lack full information on products
Workers don’t know all available job opportunities
Entrepreneurs lack information on factors of production
Describe immobility of factors of production (4)
Labour - Takes time to move occupationally and geographically
Physical Capital - Infrastructure cannot move at irregular intervals
Structural changes - Only occur slowly
Technological Changes - People can be replaced by machinery
Describe imperfect distribution of income and wealth (4)
The market system is neutral
Discrimination distorts earnings
Illnesses distort earnings
Price discrimination - Goods are sold at different prices to different groups
What are the 5 consequences of market failure
Inefficiencies
Externalities
Government intervention
Taxes and Subsidies
Government involvement in production
What are inefficiencies
Consumers paying prices that are too high
Goods not being available in the correct quantity
What are the 2 types of inefficiencies
Productive - Goods could be produced cheaper
Allocative - Product mix does not suit consumer’s tastes
Look through positive and negative externalities pg 49 and 50
What is an example of a negative externality
Pollution
What are the 3 methods a government can implement to reduce negative externalities
Carry out campaigns to persuade people from causing negative externalities
Levy taxes on goods that cause negative externalities
Pass laws and regulations to prevent activities that cause them
What does rules and regulations consist of
Direct control measures - laws and regulations
Non -Competitive markets - Artificial monopolies and Natural monopolies
What does government intervention consist of
Rules and regulations
What are the four instruments that a government uses to limit allocative distortions
Competition from abroad
Competition promotion
Control Bodies
Statutory requirements
Read Page 52
