Market Failure

Question 1

Restrictive trade practice

Answer 1

Any agreement or arrangement between firms to raise price

Question 2

What are the 4 types of market failure?

Answer 2

Market power, externalities, public goods, common property goods

Question 3

Characteristics of a competitive market

Answer 3

Large number of firms, free entry, bare differentiation,

Question 4

Characteristics of monopolies

Answer 4

One firm, no competition, high prices, total market power, high barrier to entry

Question 5

Imperfect market

Answer 5

At least one characteristic is not met from large number of firms, free entry/exit, little product differentiation

Question 6

How do firms become monopolistic or oligopolistic?

Answer 6

Control scarce resource, government licence, patent, technological advances, restricts entry of new firms, collusive behaviour

Question 7

Patent

Answer 7

Protection from competition on an invention for up to 17 years (Australia)

Question 8

How can a firm restrict entry of new firms into the market?

Answer 8

Extensive product differentiation, brand proliferation, large advertising budget, controlling retail outlets

Question 9

Collusion

Answer 9

Firms agreeing to share markets, fix prices or quantities, or other forms to seek more market power than they would competitively

Question 10

Why will the socially optimal output likely not be achieved in an imperfect market?

Answer 10

Private interest of the firms to maximise profit clashes with society’s interest

Question 11

Why are perfect markets “perfect”?

Answer 11

Total surplus is maximised → efficient

Question 12

Cartel

Answer 12

Firms agree to collide/act together instead of competing

Question 13

Market sharing

Answer 13

A market divided into small markets all supplied by one firm, reducing competition

Question 14

Collusive bidding

Answer 14

Auction bidders bid in a predetermined manner to keep prices low

Question 15

Collusive tendering

Answer 15

Firms agree to set ridiculously high prices to ensure high profits and shared work between collusive members

Question 16

Predatory pricing

Answer 16

A company with high market power sets prices at a low level to eliminate or damage competition

Question 17

Resale price maintenance

Answer 17

Supplier sets the price that a retailer sells its product and refuses to supply to retailer that sells at a discount price

Question 18

Exclusive dealing

Answer 18

An imposed restrictions on a buyers freedom to choose who, in what or where they deal

Question 19

Collective boycott

Answer 19

A group of competitors agree not to buy goods from/supply to a business to damage them

Question 20

Merger

Answer 20

Two or more firms join to form a larger firm, prohibited if it reduces competition substantially

Question 21

When are most forms of collusion prohibited?

Answer 21

When market power is used to eliminate or damage a competitor SUBSTANTIALLY

Question 22

Externalities

Answer 22

Unintended consequences of economic activity

Question 23

Why does the existence of externalities cause market failure?

Answer 23

Market outcome will be inefficient

Question 24

Negative externalities

Answer 24

Economic activity from production or consumption that creates an external cost

Question 25

Positive externalities

Answer 25

Economic activity from production or consumption that creates an external benefit to a third party

Question 26

Why do externalities occur?

Answer 26

Lack of property rights, no price to restrict use, free goods are exploited and overused, no incentive to use in socially optimal manner

Question 27

What is the point of government intervention?

Answer 27

Internalise externalities, reduce production of goods causing negative/increase consumption of goods creating positive

Question 28

Internalising externalities

Answer 28

Forcing the market to acknowledge external cost or benefit in their market price

Question 29

What does the negative production externality curve show?

Answer 29

Government tax equal to the external cost to force polluter to pay

Question 30

What does the positive consumption externality curve show?

Answer 30

Subsidy equal to the external benefit (PoP2) to decrease price paid and increase quantity supplied

Question 31

Rival in consumption

Answer 31

Consumption by one person decreases supply available to others

Question 32

Excludable

Answer 32

Non-payers are excluded from consuming the good

Question 33

Private goods

Answer 33

Rival and excludable, property rights and legal ownership, adequate amounts because they are willing to pay → profit incentive for producers

Question 34

Exclusion principle

Answer 34

Those who are willing and able to purchase a product gain exclusive rights of ownership and all the benefits that come with it

Question 35

Club goods (quasi-public goods)

Answer 35

Nonrival and excludable, collectively consumed

Question 36

Free riders

Answer 36

People who consume goods without paying for them

Question 37

Public goods

Answer 37

Nonrival and nonexcludable

Question 38

Merit goods

Answer 38

Create positive externalities

Question 39

Demerit goods

Answer 39

Cause negative externalities