Market Failure And Government Intervention Flashcards
What is our definition for market failure?
Market failure occurs when the price mechanism fails to allocate scarce resources efficiently (to where they maximise utility and/or equitability).
What is the starting point for building chains of analysis after you have brought in a negative externality?
….impact [of a negative externality] is not reflected in the market price as those who suffer negative externalities have no way of using the market to gain compensation
If we are talking about market failure, it is decent to explain what we mean by a market working well. How can this be done?
When a market economy is working well, scarce resources are allocated efficiently, being employed where they generate the most utility
How do we phrase the ideas that externalities cannot easily be valued? - e.g. unit tax
The policy is not without its problems, chiefly that externalities are difficult to value and there is an information problem, so that the government does not know exactly at what level to set the unit tax
How do we phrase the idea that it is problematic for a country to set environmental policy in isolation (good conclusion point)?
However, it is important to recognise that for any of these policies [taxes, property rights, regulation for pollution] to be effective there is the need for international coordination of policy. Countries taking unilateral action penalise themselves by raising production costs for firms located in that country. The country’s economy then becomes less competitive in relation to others which disproportionately punishes firms from this country. This has been the case with the Air Passenger Duty (an example of a tax) adopted in the UK but not in other countries.
What is the default literary economic example to dash in when talking about self-interest?
…In the words of Adam Smith, “it is not from the benevolence of the butcher, the brewer or the baker that we expect out dinner, but from their regard to their own self-interest.”
What is the default explanation sequence for e.g. negative externalities in consumption of cars?
- [As shown by Fig. 1] The marginal social benefit (MSB) is less than the marginal private benefit (MPB).
- These negative impacts on third parties are not reflected in market prices for these cars
- Those who suffer the negative externalities have no way of using the market to gain compensation for the harm done to them.
- Too many resources are allocated to the production of these cars.
- This misallocation of resources can therefore be considered a market failure.
- The products are overconsumed as shown by the difference between the SEO and the MMO (market mechanisms output)
- The consumer deadweight welfare loss is shown by the shaded triangle.
How do we explain in one sentence what the tragedy of the commons is?
People acting in their best interests will cause this resource to be overused, leading to resource degradation.
How do we argue for property rights (based on simplicity) and name drop an economist?
The greatest advantage of the allocation of property rights (as suggested by American economist Coase) is its simplicity: the authorities do not have to judge for themselves the optimal level of pollution. Instead this is simply revealed by the market negotiations of the two companies.
How do we define excess demand?
Excess demand is defined as when the quantity demanded is greater than the quantity supplied at the prevailing price
What is the argument involving XED that you say for a traditional solution to reducing excess demand in NHS (subsidies)?
Even if private healthcare is relatively cheaper due to subsidies, people may still be reluctant to use it if the NHS is still free at the point of consumption because the cross elasticity of demand may therefore be low
Why might it not be a good idea to nationalise an industry, e.g. water ?
Without the discipline of market forces, nationalised industries may allocate resources inefficiently, leading to overstaffing or under-utilisation of assets - this might be reflected in a loss of productive efficiency. Nationalised industries have in the past made heavy losses which ultimately must be borne by taxpayers.
