Market Failure and Government Intervention Flashcards
what is an externality
when production/consumption inflicts 3rd party costs/benefits on others for which no appropriate compensation is payed
what is the social cost
private cost+ externality
Social benefit
Private benefit+ externality
what are positive externalities of production?
social cost is lower than private cost leading to government intervention
what are negative externalities of production?
social cost is higher than the private cost leading to a loss of negative externalities and so the market is allocating resources ineffiently.
what is allocative efficiency?
Every good produced up to the point where the last unit provides a benefit to consumers is equal to cost of production so it is socially efficient.
what are positive externalities of consumption?
social benefit is higher than private benefit- missed opportunities so government intervention
what are negative externalities of consumption?
Social cost is higher than private cost
what is the ideal situation?
Social benefit= social cost but producers only aim for PB=PC leading to lost externalities
What is tragedy of the commons?
Individual behaviour has a negative impact on others to the extent that everyone would be better off stopping but individually its better to continue e.g. overfishing
what ways can we control externalities?
Taxes, government policies, tradable permits
what is a free market economy?
Governed strictly by the forces of supply and demand- no government intervention
The Common Agricultural Policy reduced the milk policy by how much?
1.4%
When was the National Minimum Wage introduced
1999
What is poaching
When firms wait to hire already skilled workers instead of paying for training leads to a skills gap
