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Microeconomics Y12 > Market Failure > Flashcards

Market Failure Flashcards

1
Q

What is allocative efficiency

A

Occurs when a market is at equilibrium/occurs where consumer satisfaction is maximised/ occurs where quantity supplied equals quantity demanded

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2
Q

In market failure what is demand

A

Marginal benefit

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3
Q

In market failure what is supply

A

Marginal cost

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4
Q

What is market failure

A

Where the free market mechanism fails to achieve economic efficiency

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5
Q

What are externalities

A

Occurs when a third party is affected by the consumption and/or production of others (can be positive or negative) (spillover effect)

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6
Q

What are incomplete markets

A

Private sector doesn’t/cannot meet the requirements of the market and some intervention from the state is needed

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7
Q

What are missing markets

A

Public goods cannot normally be produced at a profit in the private sector

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8
Q

What is information failure

A

Some of all of the participants in an economic exchange do not have perfect knowledge
One participant in an economic exchange knows more than the other, a situation where it is asymmetric or unbalanced information

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9
Q

What is a lack of property rights

A

Producers and consumers have the right of ownership of the resources exchanged. Markets are less effective when property rights do not exist

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10
Q

What is factor immobility

A

Geographical immobility- people can’t move region for a job

Occupational immobility- wrong qualifications

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11
Q

What is lack of competition

A

A market that isn’t competitive is called a monopoly

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12
Q

6 elements to consider regarding costs and benefits

A 
Private costs 
Private benefits 
External costs 
External benefits 
Social costs 
Social benefits
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13
Q

What are private costs

A

Costs to individuals or firms of consuming or producing an item

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14
Q

What are private benefits

A

The gains to individuals or firms from consuming or producing an item

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15
Q

What are external costs

A

The costs to other people or organisations of decisions taken by a person or business

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16
Q

What are external benefits

A

The benefit that a consumer or producers economic activity gives others

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17
Q

What are social costs

A

Private costs + external costs

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18
Q

Why does a negative externality lead to market failure

A

In free unregulated markets, externalities cause private and social costs to diverge
This leads to allocative inefficiency

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19
Q

What does the area of overconsumption represent on a graph

A

MSC>MPC

Area of dead weight welfare loss to society

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20
Q

What are positive externalities of production and consumption

A

When the production or consumption of a good or service creates a spillover benefit that help a 3rd party

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21
Q

How to draw the graphs of negative and positive externalities of production and consumption

A

Negative and positive externalities of consumption is the demand curve
Negative and positive externalities of production is the supply curve

22
Q

Where we are on the curve is what, and where do we want to be

A

We are at the private cost/benefit

Where we want to be social cost/benefit

23
Q

How do externalities affect markets

A

Negative- over-production

Positive- under-production

24
Q

What are merit goods

A

Goods and services that people will underconsume and generate positive externalities

25
Q

Why are merit goods market failure

A

Create positive externalities
Prone to information failure
Create inequality if uneven

26
Q

What does the government do about merit goods

A

Universally free to the point of use

Subsidise

27
Q

What are demerit goods

A

They are over-consumed if provided by the free market

28
Q

What is information failure

A

Some or all of the participants in an economic exchange do not have perfect knowledge

29
Q

What is asymmetric information

A

Information is not equally shared between two parties

Consumer could over-estimate the private benefit causing demand to be too much

30
Q

What are unstable markets

A

Producers and consumers have little or no idea what is going to happen in the market in the next time period

31
Q

What is a private good

A

Where someone consumes the good and then no one else can use that particular good

32
Q

What is a public good

A

Commodities or services provided without profit, to all members of society

33
Q

Features of public goods

A

Non-rivalry

Non excludability

34
Q

What is a quasi public good

A

If something has one characteristic of a public good but not the other

35
Q

What are free riders

A

Someone who receives the benefit but allows others to pay for it

36
Q

What is a direct tax

A

Paid directly by the taxpayer to the government

37
Q

What is an indirect tax

A

Tax on a good or service that a consumer pays at the point of sale

38
Q

Indirect taxes rules

A 
Ad valorem (eg VAT 20%) or specific (54p per pint) 
Payment is made by the seller shifting the supply curve 
Businesses cannot pass on the full size of the tax to consumers
39
Q

Arguments in favour of indirect taxes

A

Can change the pattern of demand
Can correct externalities
Less easy to avoid

40
Q

When drawing graphs for indirect taxes how does PeD affect them

A

When supply is more elastic than demand, consumers bear most of the tax burden
When demand is more elastic than supply, suppliers bear most of the tax burden

41
Q

what is regulation

A

principle or rule used to control, direct or manage an activity
they are non-market based solutions and can affect either demand or supply

42
Q

why are regulations effective

A

quick to act
fines used to correct the problem or used to overcome information failure
have more effect as backed by law

43
Q

why regulations don’t work

A

expensive to monitor
increases costs to businesses
loopholes
black markets may emerge

44
Q

what does the effectiveness of regulations depend on

A

how difficult it is to enforce
opportunity cost of enforcement
government failure

45
Q

what must happen for minimum prices to be effective

A

must be set above normal free market equilibrium

46
Q

what do minimum and maximum price graphs demonstrate

A

disequilibrium

47
Q

arguments in favour of price controls

A

people pay the social cost
discourages young people from overconsumption of demerit goods
positive effect on the more respected substitutes

48
Q

arguments against price controls

A

reduce living standards for those on low incomes- minimum price is regressive
encourages people to switch to illicit substances
easy way for supermarkets to increase their profits

49
Q

what are economies of scale

A

cost advantages of production on a large scale

50
Q

internal economies of scale

A

technical- technological advancement lowers LRAC
purchasing- reduced unit cost due to bulk buying
managerial- lowers LRAC due to specialisation
financial- cost savings large firms may receive when borrowing money
risk bearing- diversify into other product areas
marketing- lower advertising costs per unit

51
Q

External economies of scale

A

Local colleges- may offer qualifications needed by a big local employer to reduce the firm’s training costs
Large companies locating in an area to improve road networks or local public transport
Firms specialising in the same way as others nearby, so they can reduce costs by sharing resources
Suppliers may locate in the same area to reduce transport costs

52
Q

Average cost curves

A

Average cost
Average variable cost
Average fixed cost
Marginal cost

Microeconomics Y12 (7 decks)

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