Market failure

Question 1

What are the price mechanism’s functions?

Answer 1

Signalling - price adjust to demonstrate where resources are required and where they aren’t - ensures allocative efficiency
Incentive - when price for g/s rises the profit margin increases and incentive to shift production to good or service - ensures productive efficiency
Rationing - resources are scarce not everyone can buy

Question 2

What are information gaps?

Answer 2

When people have inaccurate, incomplete, uncertain or misunderstood information = wrong decision

Question 3

What is market failure?

Answer 3

Complete = market does not exist
Partial = market exists but not producing right quantity or right price
Price mechanism causes and inefficient allocation of resources = welfare loss

Question 4

What are public goods?

Answer 4

1. Non rivalry - consumed by one consumer and doesn’t reduce stock for another consumer
2. Non excludability - when supplied it is impossible to prevent others from deriving a benefit
3. Non reject ability - consumer cannot opt out of deriving a benefit

Question 5

What is state provision of goods and its problems?

Answer 5

If public goods are not provided in free market, gov can increase welfare state by providing public goods free of charge

Problems:
- imperfect knowledge = over/under providing
- political motives
- gov is monopoly provider

Question 6

What are negative production externalities?

Answer 6

3rd parties affected by firms decisions
Private costs = directly involved in transactions
External costs = 3rd parties not directly involved in transactions
Social costs = total cost to society

Social costs = private + external

Question 7

What are positive consumption externalities?

Answer 7

Private benefits = individual directly involved in transaction
External benefits = 3rd parties not directly involved in transaction
Societal benefits = Total benefits to society of a particular decision

Question 8

What is a commodities market?

Answer 8

Soft commodities (cultivated agricultural)
Hard commodities (extracted from the ground)
Combination of the price inelastic = volatile markets

Question 9

What is the foreign exchange market?

Answer 9

Fixed = determined by gov
Float = determined by demand and supply
-interest rates
- net trade
- FDI

Question 10

What is the stock market?

Answer 10

Stock = form of debit or IOU issued by companies/ govt
Both driven by net profits

Question 11

What is the housing market?

Answer 11

Rental:
demand = price of housing, mortgage interest and confidence
supply = availability of mortgages, rules and regulations and income taxes

Owner occupied:
demand = mortgage interest rates, gov schemes
supply = planning laws, building techniques and cost of production