Market Failure Flashcards
1
Q
What are Negative externalities?
A
- Social cost of production exceeds the private cost
2
Q
What are positive externalities?
A
- When the social benefit of consumption exceed the private benefit.
3
Q
What is imperfect information or information failure?
A
- Means that merit goods are under-produced while demerit goods are over-produced or over-consumed.
4
Q
What is a monopoly?
A
- A firm dominating in a certain sector.
- Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition, causing consumer welfare to be damaged.
5
Q
What are factor immobility?
A
- Causes unemployment and a loss of productive efficiency.
6
Q
What are the equity issues?
A
- Markets can generate an ‘unacceptable’ distribution of income and consequent social exclusion which the government may choose to change.
7
Q
What is non-excludability?
A
- Person paying for the benefit cannot prevent anyone else from also benefitting.
- Non-rivalry- Large external benefits relative to cost - socially desirable but not profitable to supply.
8
Q
What is the rationing function?
A
- As prices rise, excess demand is removed and only those consumers with the ability to pay are able to purchase the good.
- Price change is uncontrollable, happens due to a decrease in supply.
- Firms will aim to get more supply, same high demand, but less supply.
9
Q
What is the signalling function?
A
- When prices provide important market signals to market participants, e.g. to producers to either increase or decrease production.
10
Q
What is the incentive function?
A
- Increased prices strengthen incentives to firms to produce more in order to make a profit.
- Factors like advertising, increase demand.
11
Q
What is the allocative function?
A
- Acts to divert resources to where they can maximise their returns and away from users where they do not.
