Market Failure

Question 1

What is Market Failure

Answer 1

When the market is not as efficient as possible

Question 2

What are the 6 causes of market failure

Answer 2

Externalities
Missing Markets
Imperfect competition
Lack of information
Immobility of factors of production
Imperfect distribution of income and Wealth

Question 3

What are externalities

Answer 3

Costs and benefits to third parties which are not included in the market price of goods and services

Question 4

What are the four concepts of externalities

Answer 4

Private Costs
Private benefits
Social Costs
Social Benefits

Question 5

Look at Descriptions of causes of market failure pg 45 - 48

Question 6

What are Missing Markets

Answer 6

When a market cannot meet the demand for certain goods

Question 7

What are the 5 characteristics of public goods

Answer 7

Non-Rivalry
Non-excludability
Social benefits outstrip private benefits
Infinite consumption
Non-reject ability

Question 8

What are Merit Goods

Answer 8

Goods that are highly desirable for welfare but not demanded by the market
Have positive externalities

Question 9

What are the options for the state to provision merit goods (3)

Answer 9

Provide them in part
Statutory requirements
Outsourcing

Question 10

What are demerit goods

Answer 10

Goods regarded as socially harmful for consumption but highly demanded by the market
Often oversupplied

Question 11

Describe imperfect competition (3)

Answer 11

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

Question 12

Describe Lack of Information (3)

Answer 12

Consumers lack full information on products
Workers don’t know all available job opportunities
Entrepreneurs lack information on factors of production

Question 13

Describe immobility of factors of production (4)

Answer 13

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

Question 14

Describe imperfect distribution of income and wealth (4)

Answer 14

The market system is neutral
Discrimination distorts earnings
Illnesses distort earnings
Price discrimination - Goods are sold at different prices to different groups

Question 15

What are the 5 consequences of market failure

Answer 15

Inefficiencies
Externalities
Government intervention
Taxes and Subsidies
Government involvement in production

Question 16

What are inefficiencies

Answer 16

Consumers paying prices that are too high
Goods not being available in the correct quantity

Question 17

What are the 2 types of inefficiencies

Answer 17

Productive - Goods could be produced cheaper
Allocative - Product mix does not suit consumer’s tastes

Question 18

Look through positive and negative externalities pg 49 and 50

Question 19

What is an example of a negative externality

Answer 19

Pollution

Question 20

What are the 3 methods a government can implement to reduce negative externalities

Answer 20

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

Question 21

What does rules and regulations consist of

Answer 21

Direct control measures - laws and regulations
Non -Competitive markets - Artificial monopolies and Natural monopolies

Question 22

What does government intervention consist of

Answer 22

Rules and regulations

Question 23

What are the four instruments that a government uses to limit allocative distortions

Answer 23

Competition from abroad
Competition promotion
Control Bodies
Statutory requirements

Question 24

Read Page 52

Question 25

Why do minimum wages exist

Answer 25

To enforce redistribution because unskilled workers are disadvantaged in negotiation of employment conditions

Question 26

Why are maximum prices implemented

Answer 26

To benefit the poor to ensure that very high prices aren’t charged and goods are accessible

Question 27

Why are minimum prices implemented

Answer 27

To ensure that certain goods are produced as they may not be financially feasible without them

Question 28

What are subsidies

Answer 28

Financial grants by the government to support the production of goods and services

Question 29

What are the 2 types of subsidies

Answer 29

Direct - Cash grants or interest free loans
Indirect - Depreciation write-offs, rent rebates

Question 30

Look at methods of improving income and wealth distribution page 56

Question 31

What are the 4 parts of government involvement in production

Answer 31

Incomplete markets
Macroeconomic stability
Demand-side of the market
Supply-side of the market

Question 32

Read through description of government involvement pg 56

Question 33

What is cost benefit analysis

Answer 33

A technique for evaluating the total social cost and total social benefits associated with an economic project

Question 34

When should a cost benefit analysis be done

Answer 34

Where it is expected there will be a significant difference between private and social cost and benefits

Question 35

Look at description of cost benefit analysis pg 57-59