Market failure and governments response Flashcards
What is price mechanism?
Price mechanism is the process of demand and supply be in the market forces to determine a price
What is market failure?
When the market forces of demand and supply fail to allocate resources efficiently
What are the instances of market failure?
- Positive externalities.
- Negative externalities.
- Under provision of public goods.
- Under provision of merit goods.
- Overprovision of demerit goods.
- Abuse of monopoly power.
Explain why most businesses bring about market failure by seeking maximisation of profit
Businesses may prioritise profit maximisation without fully accounting for the external costs or benefits that their activities impose on society. Negative externalities such as pollution may be overlooked, leading to social and environmental harm that is not factored into the financial decision-making.
Assess market failure in a free-market economy or less developed countries
In well developed countries, the government and the general public have all access to necessary tool is the fight against injustices perpetrated by the market
However, less developed countries do not have the power to change things and to fight injustices. Whilst the government and other administrative bodies are more often than not tainted with corrupt practices.
Identify examples of public goods
Roads, Street lighting, traffic lights, roadsigns etc
Explain why the public sector will not provide public goods
The aim of the private sector is to provide goods and services that creates profit, but public goods do not create revenue, so the private sector will not be willing to provide public goods due to a lack of a profit motive
Identify and explain examples of merit goods and demerit goods
Merit goods are goods and services, such as healthcare and education
Demerit, goods or goods, such as cigarettes and alcohol
Explain why merit goods are undersupplied and demerit goods are over supplied in the free market/ private sector
Merit goods generate positive externalities, and if merit goods, such as healthcare and education are left solely to the free market, some individuals would not be able to afford them so governments tend to offer merit goods
Demerit goods are oversupplied because they are profitable to produce and people tend to act irrational and make poor choices
Mention Waze how the government can intervene with the under production of merit goods and overproduction of demerit goods
- Placing taxes on demerit goods.
- Prohibition of certain demerit goods.
- Educational campaigning against the negative effects of demerit goods.
- Offering merit goods for three
- Also subsidies to reduce the price for consuming or producing merit goods
Identify examples of positive externalities and negative externalities
Positive;
1. Consumption of public transport instead of individual transport.
2. Consumption of merit goods, such as being educated.
3. Gardening
Negative;
1. Air pollution from the smokers.
2. Household waste
3. Methane emissions from cows
4. Noise pollution from cars.
Why are negative externalities not accounted for
-Lack of market prices
- Difficulty in quantifying external effects
- Businesses short-term profit focus
- Absence of legal frameworks
What are social costs?
Private costs and external costs added together
What is a private cost or benefit?
A producer or suppliers cost/benefit of providing goods and services. It is also the cost/benefit of an individual consuming a good or service
What is an external benefits or cost?
A cost or benefit enjoyed/borne by someone who did not have a direct part in the transaction
