Market Failure Flashcards
Restrictive trade practice
Any agreement or arrangement between firms to raise price
What are the 4 types of market failure?
Market power, externalities, public goods, common property goods
Characteristics of a competitive market
Large number of firms, free entry, bare differentiation,
Characteristics of monopolies
One firm, no competition, high prices, total market power, high barrier to entry
Imperfect market
At least one characteristic is not met from large number of firms, free entry/exit, little product differentiation
How do firms become monopolistic or oligopolistic?
Control scarce resource, government licence, patent, technological advances, restricts entry of new firms, collusive behaviour
Patent
Protection from competition on an invention for up to 17 years (Australia)
How can a firm restrict entry of new firms into the market?
Extensive product differentiation, brand proliferation, large advertising budget, controlling retail outlets
Collusion
Firms agreeing to share markets, fix prices or quantities, or other forms to seek more market power than they would competitively
Why will the socially optimal output likely not be achieved in an imperfect market?
Private interest of the firms to maximise profit clashes with society’s interest
Why are perfect markets “perfect”?
Total surplus is maximised → efficient
Cartel
Firms agree to collide/act together instead of competing
Market sharing
A market divided into small markets all supplied by one firm, reducing competition
Collusive bidding
Auction bidders bid in a predetermined manner to keep prices low
Collusive tendering
Firms agree to set ridiculously high prices to ensure high profits and shared work between collusive members
Predatory pricing
A company with high market power sets prices at a low level to eliminate or damage competition
Resale price maintenance
Supplier sets the price that a retailer sells its product and refuses to supply to retailer that sells at a discount price
Exclusive dealing
An imposed restrictions on a buyers freedom to choose who, in what or where they deal
Collective boycott
A group of competitors agree not to buy goods from/supply to a business to damage them
Merger
Two or more firms join to form a larger firm, prohibited if it reduces competition substantially
When are most forms of collusion prohibited?
When market power is used to eliminate or damage a competitor SUBSTANTIALLY
Externalities
Unintended consequences of economic activity
Why does the existence of externalities cause market failure?
Market outcome will be inefficient
Negative externalities
Economic activity from production or consumption that creates an external cost
Positive externalities
Economic activity from production or consumption that creates an external benefit to a third party
Why do externalities occur?
Lack of property rights, no price to restrict use, free goods are exploited and overused, no incentive to use in socially optimal manner
What is the point of government intervention?
Internalise externalities, reduce production of goods causing negative/increase consumption of goods creating positive
Internalising externalities
Forcing the market to acknowledge external cost or benefit in their market price
What does the negative production externality curve show?
Government tax equal to the external cost to force polluter to pay
What does the positive consumption externality curve show?
Subsidy equal to the external benefit (PoP2) to decrease price paid and increase quantity supplied
Rival in consumption
Consumption by one person decreases supply available to others
Excludable
Non-payers are excluded from consuming the good
Private goods
Rival and excludable, property rights and legal ownership, adequate amounts because they are willing to pay → profit incentive for producers
Exclusion principle
Those who are willing and able to purchase a product gain exclusive rights of ownership and all the benefits that come with it
Club goods (quasi-public goods)
Nonrival and excludable, collectively consumed
Free riders
People who consume goods without paying for them
Public goods
Nonrival and nonexcludable
Merit goods
Create positive externalities
Demerit goods
Cause negative externalities
