Market failure and government intervention Flashcards
Define market failure
where the free market mechanism fails to achieve economic efficiency
Define productive efficiency
where production takes place using the least amount of scarce resources
Define economic efficiency
where both allocative and productive efficiency are achieved
Define inefficiency
any situation where economic efficiency is not achieved
Define information failure
a lack of information resulting in consumers and producers making decisions that do not maximise welfare.
Example of information failure
where some consumers are not aware of the benefits and in some cases the harmful effects of consuming a particular product
Define asymmetric information
information not equally shared between two parties
Example of asymmetric information
Health care - when visiting the doctor you must rely on the doctor’s knowledge
Define externalities
an effect whereby those not directly involved in taking a decision are affected by the actions of others
Define private costs
the costs incurred by those taking a particular action
Define private benefits
the benefits directly accruing to those taking a particular action
Define external costs
the costs that are the consequences of externalities to third parties
Define external benefits
the benefits that accrue as a consequence of externalities to third parties
Define social costs
the total costs of a particular action
Define social benefits
the total benefits of a particular action
Define negative externalities
this exists where the social cost of an activity is greater than the private cost.
Define positive externalities
this exists where the social benefit of an activity exceeds the private benefit
Define merit goods
these have more private benefits than their consumers actually realise
Define demerit goods
their consumption is more harmful than is actually realised
Define public goods
goods that are collectively consumed and have the characteristics of non-excludability and non-rivarly
Define non-excludability
situation existing where individual consumers cannot be excluded from consumption
Define non-rivalry
situation existing where consumption by one person does not affect the consumption of all others
Methods of government intervention
Taxation
Subsidies
Legislation
Define direct tax
one that taxes the income of people and firms and that cannot be avoided
Define indirect tax
a tax levied on goods and services
Problems of taxation
- hard to determine amount of tax
- producers do not always pay full amount of tax
- inelastic goods may not be as effected as intended.
Define subsidy
a payment, to encourage production or consumption
Examples of legislation
environment - legislation relating to amounts of pollution
transport - governing the compulsory use of seatbelts
