MARKET FAILURE AND GOV INTERVENTION Flashcards
What is market failure
Market failure is when the price mechanism or invisible hand leads to a misallocation of resources.
What are the 4 types of market failure
public goods
positive externality
negative externality
information gaps
What is meant by private costs
A cost to a producer or consumer inside the price mechanism.
What is meant by negative externalities
Costs which affect third parties outside the price mechanism
Socially efficient equilibrium
Where MSC = MSB and society’s welfare is maximised.
Tradable pollution permits
Permits which allow firms to pollute up to a certain limit. These permits can then be traded between firms.
Minimum price
The lowest price a good can be legally sold for.
Regulation
When the government makes changes to the law to address market failure.
Negative consumption externalities
When the consumption of a good creates costs to third parties outside the price mechanism.
Negative production externalities
When the production of a good creates costs to third parties outside the price mechanism.
Describe what the negative production externality diagram looks like
Where MSC is above MPC because we have to add on the external costs. Show diagram
What is meant by a tax internalising a negative production externality
To correct a negative production externality, a tax must be set = the size of the external cost between MSC and MPC at Qs.
What is the framework to bang out full marks on a price elasticity of demand question?
NASBIT
Necessity or luxury, addiction an habit
substitutes
branding
income
Time
What is the framework to bang out full marks on a price elasticity of supply question?
TEASS
Time
state of Economy
available factors
Spare capacity
Stockpiles
What is the framework for evaluating externalities
OQT
Opposite externalities
Quantify, may be difficult to quantify, cant accurately measure
Time
Whats another term for negative production externalities
External costs
Within the price mechanism we only consider what kind of costs and benefits
Private costs and private benefits
When producers and consumers don’t consider the external costs of their actions they end up…
Overproducing and overconsuming
how can the government prevent this welfare loss from external costs
Indirect taxation like specific and ad valorem taxes
To fully internalise a negative externality, the size of the tax must be equal to:
the external cost at the socially efficient quantity
MPC is equal to..
Free market supply
MPB is equal to
Free market demand
Describe a diagram that shows the effects of maximum price on a diagram
What is maximum price
The highest price a good can be legally sold for.
What is meant by private benefits
A benefit to a consumer inside the price mechanism.
Positive production externalities
When the production of a good creates benefits to third parties outside the price mechanism.
What is the supply curve equal to to when drawing an externality diagram
Marginal Private Cost, S = MPC
What is the demand curve equal to when drawing an externality diagram
Marginal Private Benefit, D = MPB
What are the two types of information gaps
Asymmetric information
Incomplete information
What is asymmetric information
refers to a situation where one party in an economic transaction has more or better information than the other.
What is incomplete information
When someone doesn’t have full information about the benefits or costs of their decisions.
What is meant by information gaps
When consumers or producers lack the information needed to make an informed decision.
