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Economics (MICRO) > Market failure and externalities > Flashcards

Market failure and externalities Flashcards

1
Q

What is the acronym for the function of prices

A

RISA

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2
Q

What are the 4 functions of prices rising

A
  • Ration resources by decreasing consumption
  • Incentivise firms to increase output to maximise profit
  • Signal excess demand and need for more resources
  • Allocate resources efficiently
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3
Q

What are the 4 functions of prices falling

A
  • Ration resources by increasing consumption
  • Incentivise firms to decrease output to maximise profit
  • Signal excess supply and need for less resources
  • Allocate resources efficiently
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4
Q

What are the two characteristics of pure public goods?

A
  • Non excludable
  • Non rival
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5
Q

What is non excludability (public good)?

A

No price can be charged for the good (does not exclude anyone)

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6
Q

What are the two reasons why no price can be charged for a pure public good?

A

-The benefits of consuming the good cannot be confined to the individual which has paid
- There is no cost efficient way to price it (may be too expensive)

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7
Q

What is non rival (public goods)

A
  • The quantity of the good doesn’t diminish upon consumption
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8
Q

Explain the free rider market failure with pure public goods

A

Where individuals have the incentive not to contribute anything to the provision of public goods and wait for others contributions and ‘free ride’

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9
Q

What is the the characteristics of pure public goods which allows the free rider issue to occur?

A

Pure public goods are non excludable and non rival

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10
Q

What could the free rider issue with pure public goods lead to if everyone in the market chooses to free ride?

A

May lead to a missing market

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11
Q

What is a Quasi public good?

A

It is a public good which may display the characteristics of a private good ( be excludable and rivalry )

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12
Q

Give an example of a Quasi public good

A

Roads
Excludable - (Congestion charge, tolls)
Rivalry - (Rush hour, consumption diminishes availability)

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13
Q

What is a merit good?

A

Goods which are deemed to be more beneficial to consumers than they realise, which generate positive externalities in consumption

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14
Q

Why can merit goods lead to market failure?

A

They are under produced and under consumed

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15
Q

What is the reason why merit goods are under produced and under consumed?

A

Imperfect information

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16
Q

What are 2 reasons for imperfect information

A

Information failure
Asymmetric information

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17
Q

What is information failure?

A

Information not present, clear or consumers choose to ignore

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18
Q

What is asymmetric information?

A

Information exists but is not shared equally between two parties

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19
Q

Give 3 examples of a merit good?

A

Healthcare
Education
Exercise

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20
Q

Draw the diagram for merit goods

A

https://youtu.be/wiHjVeX3DKc?si=pnotu9sSEKDVbh7Z

At 2:24

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21
Q

What is a demerit good?

A

A good which is deemed more harmful to consumers that they realise which generate negative externalities in consumption

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22
Q

Why do demerit goods lead to market failure?

A

They are overproduced and overconsumed

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23
Q

Why are demerit goods overproduced and overconsumed?

A

Due to imperfect information

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24
Q

Give 3 examples of demerit goods

A

Cigarettes, alcohol, gambling

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25
Q

Draw the diagram for demerit goods

A

https://youtu.be/wiHjVeX3DKc?si=Z2Npg3PC15UjZMGW

At 5:06

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26
Q

What is a positive externality?

A

Benefit to third parties as a result of the actions of a separate agent

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27
Q

What is a positive externality in consumption?

A

Benefits to third parties as a result of the actions of consumers

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28
Q

What is the relationship between social benefit and private benefit for positive externalities in consumption ?

A

MSB > MPB

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29
Q

Draw the diagram for positive externalities in consumption

A

https://youtu.be/mcQvtKDiTho?si=PXDtj1wIpduHyDnI

At 1:40

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30
Q

Give an example of a good or service which generates positive externalities in consumption

A

Education

31
Q

What is a positive externality in production?

A

A benefit to third parties as a result of the actions of producers

32
Q

Give an example of a positive externality in production

A

Training, R and D

33
Q

What is the relationship between social cost and private cost for positive externalities in production?

A

MPC > MSC

34
Q

Draw the diagram for positive externalities in production

A

https://youtu.be/mcQvtKDiTho?si=6SBNxB0ukjzjUWWH

5:35

35
Q

Why are resources allocated at the private optimum and not the social optimum for goods which generate externalities in production

A

Producers act within their own self interest

36
Q

Why are resources allocated at the private optimum and not the social optimum for goods which generate externalities in consumption

A

Consumers act within their own self interest

37
Q

What are negative externalities?

A

Costs on third parties as a result of the actions of a separate agent

38
Q

What is a negative externality in production

A

Cost to third parties as a result of the actions of producers

39
Q

Give 2 examples of negative externalities in production

A

Air pollution (From factory work)
Resource depletion (From mining)

40
Q

What is the relationship between social cost and private cost for negative externalities in production

A

MSC > MPC

41
Q

Draw the diagram for negative externalities in production

A

https://youtu.be/2bI_EX3U5xc?si=HeDPJwW-VKSet-En

At 1:40

42
Q

What do negative externalities in production lead to

A

Over production/consumption
Misallocation of resources

43
Q

What is a negative externality in consumption

A

Cost to third parties as a result of the actions of consumers

44
Q

Give 2 examples of goods which generate negative externalities in consumption

A

Smoking
Alcohol

45
Q

What is the relationship between social benefit and private benefit for negative externalities in consumption

A

MPB > MSB

46
Q

What do MSB and MPB represent diagrammatically

A

Demand

47
Q

What do MSC and MPC represent diagrammatically

A

Supply

48
Q

Are goods which generate positive externalities over or under consumed/produced ?

A

Under consumed/ produced

49
Q

Are goods which generate negative externalities over or under consumed/produced ?

A

Over consumed/produced

50
Q

Draw the diagram to show how a subsidy can be used to solve positive externality in consumption market failure

A

https://youtu.be/qowvXCwDBtI?si=n74RvBCG1iyiYhen

51
Q

Draw the diagram to show how indirect taxation can be used to solve negative externality in consumption market failure

A

https://youtu.be/6XO8O4szNj0?si=b98vXfUykxgkwIRm

52
Q

Draw the diagram to show how indirect taxation can be used to solve negative externality in production market failure

A

https://youtu.be/VSSGFzyFHEQ?si=cnUV8YaVpweVNq3T

53
Q

Draw the diagram to show how a subsidy can be used to solve positive externality in production market failure

A

https://youtu.be/EKpCkJZGFnk?si=pAm1JyoGTkq9yK1j

54
Q

What can be used to help solve positive externality market failure

A

Subsidies

55
Q

What can be used to help solve negative externality market failure

A

Taxation

56
Q

What is regulation in order to solve market failure?

A

It is a rule or law enacted by the government that must be followed by economic agents to encourage a change in behaviour

57
Q

What type of approach is legislation/regulation to solve market failure

A

Non - market based aproach

58
Q

Give one benefit of using legislation to solve market failure compared to a subsidy or tax?

A

It doesn’t depend on the elasticity of the good or service

59
Q

Give examples of commands within regulation to solve market failure

A

Bans
Age limits
Compulsories
Caps (maximum number available to purchase for example)

60
Q

What are the two factors which make up regulation

A

Command and control

61
Q

Give the two examples of controls within regulation to solve market failure

A

Enforcements
Punishment

62
Q

What is the purpose of solving market failure?

A

To get to the socially optimum level of output and price (achieve allocative efficiency)

63
Q

Give 4 negatives of using regulation to solve market failure

A

Costly
Difficult to set the correct regulations (too strict or too loose)
Black markets arise
Risk of government failure

64
Q

Draw the tax incidence diagram

A

In notes

65
Q

What is government failure

A

When the costs of government intervention within a market outweigh the benefits

66
Q

What is the result of government failure

A

A worsening of the allocation of scarce resources

67
Q

What are the 4 causes for government failure

A

Information failure
Admin & enforcement costs too high
Regulatory capture
Unintended consequences

68
Q

What is information failure which leads to government failure

A

Policymakers not having full information especially when it comes to valuing externalities

69
Q

Give 3 examples of policies which fall under high admin and enforcement costs as a cause of government failure

A

Regulation
Subsidies
State provision

70
Q

Give examples of unintended consequences which lead to government failure

A

Black markets arising
Impact on the poor (Tax)
Firms dependent on subsidies

71
Q

What is regulatory capture

A

When the interests of society are overlooked for the interest of CEOs and managers

72
Q

When can regulatory capture occur

A

When regulating monopoly power
(Monopolies good for CEOs and bosses but not for consumers)

73
Q

What is the law of unintended consequences

A

Actions of people, especially of government, always have effects that are unanticipated or unintended.

Economics (MICRO) (10 decks)

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