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ECONOMICS - YEAR 1 > MARKET FAILURE AND GOVT FAILURE > Flashcards

MARKET FAILURE AND GOVT FAILURE Flashcards

1
Q

WHAT IS MARKET FAIILURE?

A

WHEN MARKET FORCES FAIL TO ACHIEVE AN ECONOMICALLY EFFICIENT EQUILIBRIUM.

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2
Q

WHAT ARE THE DIFFERENT TYPES OF MARKET FAILURE?

A
  1. IRRATIONAL BEHAVIOUR
  2. PUBLIC GOODS
  3. EXTERNALITIES
  4. IMPERFECT INFO
  5. INEQUALITY
  6. FACTOR IMMOBILITY
  7. MARKET POWER
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3
Q

WHAT IS IRRATIONAL BEHAVIOUR?

A

CONSUMERS DON’T ALWAYS ACT IN THEIR BEST INTERESTS TO MAXIMISE UTILITY.

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4
Q

WHAT IS THE PUBLIC GOODS EXPLANATION?

A

THE PRICE MECHANISM FAILS TO PROVIDE SOME GOODS AND SERVICES E.G STREET LIGHTING

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5
Q

WHAT IS THE EXPLANATION FOR IMPERFECT INFORMATION?

A

THERE MAY NOT BE ENOUGH INFO TO MAKE A RATIONAL DECISION.

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6
Q

WHAT IS THE EXPLANATION FOR MARKET POWER?

A

IF ONE FIRM HAS TOO MUCH MARKET POWER, IT CAN USE THIS TO EXPLOIT CONSUMERS AND RAISE PRICES.

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7
Q

WHAT ARE WAYS THAT THE GOVT CAN INTERVENE WITH MARKET FAILURE?

A
  1. PROVISION OF INFO
  2. REGULATION
  3. STATE PROVISION
  4. TRADEABLE PERMITS
  5. MAX PRICES
  6. MIN PRICES
  7. SUBSIDIES
  8. INDIRECT TAXATION
  9. NUDGES
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8
Q

WHAT IS THE EXPLANATION FOR REGULATION?

A

THE GOVT WILL PASS LAWS WHICH ALTER THE PRICE/QUALITY /QUANTITY OF THE PRODUCT AVAILABLE

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9
Q

WHAT IS THE EXPLANATION FOR STATE PROVISION?

A

IF THE MARKET UNDER PROVIDES A GOOD/SERVICE, THE GOVT CAN PROVIDE IT DIRECTLY.

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10
Q

WHAT IS THE EXPLANATION FOR TRADEABLE PERMITS?

A

FIRMS R GIVEN PERMITS TO POLLUTE WHICH THEY CAN BUY/SELL TO MAKE A PROFIT.

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11
Q

WHAT IS THE EXPLANATION FOR MAX PRICES?

A

IF CONSUMERS CAN’T AFFORD PRODUCTS, THE GOVT MAY LIMIT THE PRICE.

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12
Q

WHAT IS THE EXPLANATION FOR MIN PRICES?

A

IF PRODUCERS R GOING BANKRUPT/TO DISCOURAGE CONSUMPTION, THE GOVT MAY SET A MIN PRICE.

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13
Q

WHAT IS THE EXPLANATION FOR SUBSIDIES?

A

TO ENCOURAGE CONSUMPTION, THE GOVT CAN FUND THE PRODUCTION OF A PRODUCT.

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14
Q

WHAT IS THE EXPLANATION FOR INDRECT TAXATION?

A

TO DISCOURAGE CONSUMPTION, THE GOVT CAN INCREASE THE PRICE OF A PRODUCT.

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15
Q

WHAT IS THE EXPLANATION FOR NUDGES?

A

A PSYCHOLOGICAL TACTIC TO ENCOURAGE CONSUMERS TO MAKE A CHOICE.

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16
Q

WHY MAY ECONOMIC AGENTS HAVE IMPERFECT KNOWLEDGE?

A
  1. ASYMMETRIC INFO
  2. ADVERSE SELECTION
  3. MORAL HAZARD
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17
Q

WHAT IS ASYMMETRIC INFO?

A

A SITUATION WHERE 1 ECONOMIC AGENT HAS MORE INFO THAN ANOTHER.

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18
Q

WHAT IS THE EXPLANATION FOR ASYMMETRIC INFO?

A

THIS CAN OFTEN LEAD TO CONSUMERS BEING OVERCHARGED OR SOLD A GOOD OF INFERIOR QUALITY AS THEY DON’T KNOW HOW TO ASSESS THE VALUE OF A PRODUCT.

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19
Q

WHAT R EXAMPLES OF ASYMMETRIC INFO?

A
  1. BUYING A HOUSE
  2. LOANS
  3. MOTs
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20
Q

WHAT IS THE EXPLANATION FOR ADVERSE SELECTION?

A

OCCURS WHEN PARTICIPATION IN THE MARKET IS AFFECTED BY ASYMMETRIC INFO E.G HEALTH INSURES DON’T KNOW IF U R A SMOKER OR NON SMOKER SO OFFER THE AVERAGE PRICE. NON SMOKERS FEEL THAT IT’S TOO EXPENSIVE AND LEAVE THE MARKET PUSHING UP THE PRICE AS ONLY HIGH RISK SMOKERS REMAIN

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21
Q

WHAT R EXAMPLES OF ADVERSE SELECTION?

A

HEALTH INSURANCE
2ND HAND CARS
ALL U CAN EAT BUFFETS

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22
Q

WHAT IS THE EXPLANATION FOR MORAL HAZARD?

A

OCCURS WHEN PEOPLE R LIKELY TO BEHAVE MORE RECKLESSLY BECAUSE THEY HAVE INSURANCE E.G U MAY BE LESS PROTECTIVE OF UR MOBILE PHONE IF IT’S INSURED.

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23
Q

WHAT R EXAMPLES OF MORAL HAZARD?

A

BENEFITS
BANK BAILOUTS
GREEK EUROZONE DEBT
CRASH FOR CASH

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24
Q

WHAT R EXAMLLES OF STATE PROVISION OF INFO?

A

ANTI SMOKING ADS
FOOD LABELLING

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25
WHAT IS THE EXPLANATION OF STATE PROVISION OF INFO?
INFO GAPS CAUSE MARKET FAILURE. GOVTS CAN INTERVENE BY THE PROVISION OF INFO THROUGH SOCIAL MEDIA, SUCH AS THE INTERNET. ALTERNATIVELY, THEY CAN FORCE COMPANIES TO PUBLISH DATA.
26
WHAT R THE ADVANTAGES OF STATE PROVISION OF INFO?
1. ENSURES PRODUCERS AND CONSUMERS R WELL INFORMED WHICH SHOULD LEAD TO LOWER CONSUMPTION OF HARMFUL PRODUCTS. 2. CONSUMERS RETAIN CHOICE (AVOIDS BLACK MARKET)
27
WHAT R THE DISADVANTAGES OF STATE PROVISION OF INFO?
1. CONSUMERS MAY NOT UNDERSTAND/ IGNORE THE INFO 2. CONSUMERS MAY BEHAVE IRRATIONALLY ( HABIT/PEER PRESSURE ) 3. RISK OF REGULATORY CAPTURE 4. OPPORTUNITY COST
28
WHAT IS REGULATORY CAPTURE?
WHEN THE GOVT ACTS IN INDUSTRY INTERESTS.
29
WHAT IS NUDGE THEORY?
NUDGE THEORY SUGGESTS THAT CONSUMER BEHAVIOUR CAN BE INFLUENCED BY SMALL SUGGESTIONS AND POSITIVE REINFORCEMENTS.
30
WHAT R THE DIFFERENT TYPES OF NUDGES?
1. STATUS QUO BIAS 2. CONFORMING 3. FEEDBACK 4. CHOICE ARCHITECTURE 5. FRAMING 6. NAMING CONVENTIONS 7. POSITIONING
31
WHAT R THE ADVANTAGES OF NUDGES?
USES HUMAN PSYCHOLOGY TO ENCOURAGE PEOPLE TO MAKE THE BEST CHOICE BUT CRUCIALLY CONSUMERS R STILL LEFT WITH THE FREEDOM TO MAKE A CHOICE.
32
WHAT R THE DISADVANTAGES OF NUDGES?
1. MAY NOT WORK IF DESIRES R TOO STRONG E.G SMOKING ADDICTION 2. MAY HE SEEN AS UNDERHAND/SNEAKY BY CONSUMERS 3. DOESN'T ENCOURAGE PEOPLE TO THINK FOR THEMSELVES 4. ONLY WORKS IF IT CHANGES THE CULTURE DUE TO HERDING BEHAVIOUR
33
WHAT IS A PRIVATE GOOD?
ECONOMIC GOODS THAT R EXCLUDABLE, RIVALROUS AND REJECTABLE.
34
WHAT DOES EXCLUDABE MEAN?
PEOPLE OTHER THAN WHO THE GOOD WAS PRODUCED FOR CANNOT BENEFIT FROM IT E.G BUYING A CAR STOPS OTHERS FROM DRIVING IT.
35
WHAT DOES RIVALROUS MEAN?
CONSUMPTION OF THE GOOD AFFEFTS ABILITY OTHERS' ABILITY TO CONSUME THE GOOD E.G 2 PEOPLE CANNOT WEAR THE SAME SHIRT AT THE SAME TIME.
36
WHAT DOES REJECTABLE MEAN?
YOU HAVE THE CHOICE WHETHER TO CONSUME IT E.G IT IS NOT COMPULSORY TO BUY A WIRELESS STEREO.
37
WHAT R EXAMPLES OF PRIVATE GOODS?
1. BANANAS 2. CARS 3. PHONE 4. SURGERIES
38
WHAT R PUBLIC GOODS?
GOODS THAT R NON-EXCLUDABLE, NON-RIVALROUS AND NON-REJECTABLE.
39
WHAT R EXAMPLES OF PURE PUBLIC GOODS?
1. STREET LIGHTING 2. NATIONAL DEFENSE 3. LIGHTHOUSES 4. FLOOD PROTECTION
40
WHAT R QUASI PUBLIC GOODS?
A GOOD WHICH FULFILS THESE CRITERIA UP TO A POINT
41
WHAT R EXAMPLES OF QUASI PUBLIC GOODS?
1. ROADS 2. PARKS 3. WIFI NETWORK 4. LECTURES
42
WILL ENOUGH PUBLIC GOODS BE PROVIDED BY THE FREE MARKET?
IN A PURE FREE MARKET, THERE'D BE UNDER PROVISION OF PUBLIC GOODS DUE TO EXISTENSE OF FREE RIDERS BECAUSE PUBLIC GOODS R NON EXCLUDABLE, IT IS DIFFICULT TO CHARGE PEOPLE FOR BENEFITTING FROM A GOOD/SERVICE ONCE IT IS PROVIDED. IF NOT ENOUGH PEOPLE R WILLING TO PAY THEM, THERE WON'T BE ENOUGH MONEY TO PRODUCE SUFFICIENT QUANTITIES OF THE GOOD AND IT WILL BE UNDER PRODUCED.
43
WHAT WILL THE GOVT DO BECAUSE OF THE FREE RIDER PROBLEM?
GOVT MUST PAY FOR PRODUCTION OF PUBLIC GOODS WITH TAX REVENUE
44
WHY IS IT DIFFICULT TO THE GOVT TO WORK OUT THE VALUE OF PUBLIC GOOD PROVISION?
VALUE OF A PRODUCT IS NORMALLY CALCULATED BY LOOKING AT WHAT CONSUMERS WOULD BE WILLING TO PAY BUT BECAUSE OF FREE RIDERS, IT IS DIFFICULT TO WORK OUT HOW MUCH PEOPLE WOULD BE WILLING TO PAY THEREFORE IT IS DIFFICULT TO WORK OUT HOW MANY PUBLIC GOODS TO PRODUCE BECAUSE VALUE CAN'T BE WORKED OUT.
45
WHAT IS A PRIVATE COST?
COSTS INTERNAL TO AN EXCHANGE AND PAID BY AN INDIVIDUAL ECONOMIC AGENT.
46
WHAT IS A NEGATIVE EXTERNALITY/ EXTERNAL COST?
COSTS FROM PRODUCTION/CONSUMPTION THAT HAVE A NEGATIVE EFFECT ON A 3RD PARTY NOT INVOLVED IN THE ECONOMIC DECISION.
47
WHAT IS A SOCIAL COST?
OVERALL COST TO SOCIETY OF AN ECONOMIC DECISION (PRIVATE +EXTERNAL COST)
48
WHAT IS A PRIVATE BENEFIT?
BENEFITS INTERNAL TO AN EXCHANGE AND R RECEIVED BY AN INDIVIDUAL ECONOMIC AGENT
49
WHAT IS A POSITIVE EXTERNALITY/EXTERNAL BENEFIT?
BENEFITS FROM PRODUCTION/CONSUMPTION THAT HAVE A POSITIVE EFFEFT ON A 3RD PARTY NOT INVOLVED IN THE ECONOMIC DECISION
50
WHAT IS A SOCIAL BENEFIT?
OVERALL BENEFIT TO SOCIETY OF AN ECONOMIC DECISION (PRIVATE+EXTERNAL BENEFIT)
51
WHAT ARE EXAMPLES OF EXTERNAL COSTS OF PRODUCTION?
POLLUTION OVERFISHING FLY TIPPING DEFORESTATION
52
WHAT ARE EXAMPLES OF EXTERNAL COSTS OF CONSUMPTION?
NOISE POLLUTION CONGESTION PASSIVE SMOKING LITTER VANDALISM
53
WHAT ARE EXAMPLES OF EXTERNAL BENEFITS OF PRODUCTION?
JOBS INNOVATION BIODIVERSITY
54
WHAT ARE EXAMPLES OF THE EXTERNAL BENEFITS OF CONSUMPTION?
TRAINING AND EDUCATION VACCINATIONS RECYCLING
55
WHAT IS GOVERNMENT FAILURE?
WHEN GOVT INTERVENTION CAUSES A NET WELFARE LOSS LEADING TO ALLOCATION OF RESOURCES WORSE THAN THE FREE MARKET OUTCOME.
56
WHAT R REASONS FOR GOVT FAILURE?
1. DISTORTION OF PRICE SIGNALS 2. UNINTENDED CONSEQUENCES 3. EXCESSIVE ADMINISTRATION COSTS 4. INFORMATION GAPS
57
WHAT R THE EXAMPLES OF IRRATIONAL BEHAVIOUR?
1. CONSIDERATION OF OTHER PEOPLE'S BEHAVIOUR 2. HABITUAL BEHAVIOUR 3. CONSUMER WEAKNESS AT COMPUTATION
58
WHAT IS THE EXPLANATION FOR CONSIDERATION OF OTHER PEOPLE'S BEHAVIOUR?
HUMANS DON'T LIKE TO FEEL LEFT OUT AND FACE PEER PRESSURE TO CONFORM. THIS HERD LIKE MENTALITY CAN BE SEEN IN VARIOUS MARKETS E.G SMOKING WHERE AN INDIVIDUAL MAY DISLIKE SMOKING BUT STILL CONTINUE TO FIT INTO A SOCIAL GROUP.
59
WHAT IS THE EXPLANATION FOR HABITUAL BEHAVIOUR?
CONSUMERS FORM HABITS AND R NOT WILLING TO RISK SOMETHING NEW WHERE THERE IS MORE UNCERTAINTY E.G CHANGING BANKS. MAY NOT WISH TO DEAL WITH THE DIFFICULTIES OF CHANGING AND R HENCE MORE LIKELY TO STICK WITH THE STATUS QUO EVEN IF CHANGING IS EASY AND THE NEW PRODUCT IS OBJECTIVELY SUPERIOR.
60
WHAT IS THE EXPLANATION FOR CONSUMER WEAKNESS AT COMPUTATION?
CONSUMERS LACK MATHEMATICAL ABILITY TO CALCULATE BEST BUYS. ALSO UNREALISTIC ABOUT THEIR OWN FUTURE BEHAVIOUR E.G SIGNING UP FOR 1 YR GYM MEMBERSHIPS.
61
WHAT IS THE EXPLANATION FOR DISTORTION OF PRICE SIGNALS?
GOVT INTERVENTION CAN CAUSE THE MARKET TO MOVE AWAY FROM EQUILIBRIUM AND CREATE SHORTAGES.
62
WHAT IS THE EXPLANATION FOR UNINTENDED CONSEQUENCES?
GOVT INTERVENTION CAN CAUSE UNEXPECTED ADVERSE EFFECTS E.G INCREASING BENEFITS MAY INCREASE UNEMPLOYMENT.
63
WHAT IS THE EXPLANATION FOR INFORRMATION GAPS?
IMPERFECT INFO MAY CREATE A WELFARE LOSS AS THE GOVT MAY UNDER SUBSIDISE/TAX/REGULATE PRODUCTS.
64
WHAT IS THE EXPLANATION FOR EXCESSIVE ADMINISTRATION COSTS?
GOVT BUREACRACY CAN HAVE HUGE COSTS FOR TAXPAYERS.

ECONOMICS - YEAR 1 (15 decks)

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