MARKET FAILURE AND GOVT FAILURE Flashcards
WHAT IS MARKET FAIILURE?
WHEN MARKET FORCES FAIL TO ACHIEVE AN ECONOMICALLY EFFICIENT EQUILIBRIUM.
WHAT ARE THE DIFFERENT TYPES OF MARKET FAILURE?
- IRRATIONAL BEHAVIOUR
- PUBLIC GOODS
- EXTERNALITIES
- IMPERFECT INFO
- INEQUALITY
- FACTOR IMMOBILITY
- MARKET POWER
WHAT IS IRRATIONAL BEHAVIOUR?
CONSUMERS DON’T ALWAYS ACT IN THEIR BEST INTERESTS TO MAXIMISE UTILITY.
WHAT IS THE PUBLIC GOODS EXPLANATION?
THE PRICE MECHABISM FAILS TO PROVIDE SOME GOODS AND SERVICES E.G STRET LIGHTING
WHAT IS THE EXPLANATION FOR EXTERNALITIES?
THE EFFECT ON A 3RD PARTY NOT INVOLVED IN THE ECONOMIC DECISION E.G POLLUTION
WHAT IS THE EXPLANATION FOR IMPERFECT INFORMATION?
THERE MAY NOT BE ENOUGH INFO TO MAKE A RATIONAL DECISION.
WHAT IS THE EXPLANATION FOR FACTOR IMMOBILITY?
IT MAY BE DIFFICULT TO MAKE FACTORS OF PRODUCTION FROM 1 TYPE OF PRODUCT TO ANOTHER
WHAT IS THE EXPLANATION FOR MARKET POWER?
IF ONE FIRM HAS TOO MUCH MARKET POWER, IT CAN USE THIS TO EXPLOIT CONSUMERS AND RAISE PRICES.
WHAT ARE WAYS THAT THE GOVT CAN INTERVENE WITH MARKET FAILURE?
- PROVISION OF INFO
- REGULATION
- STATE PROVISION
- TRADEABLE PERMITS
- MAX PRICES
- MIN PRICES
- SUBSIDIES
- INDIRECT TAXATION
- NUDGES
WHAT IS THE EXPLANATION FOR PROVISION OF INFO?
TO ENSURE CONSUMERS R WELL INFORMED, THE GOVT CAN PUBLISH INFO.
WHAT IS THE EXPLANATION FOR REGULATION?
THE GOVT WILL PASS LAWS WHICH ALTER THE PRICE/QUALITY /QUANTITY OF THE PRODUCT AVAILABLE
WHAT IS THE EXPLANATION FOR STATE PROVISION?
IF THE MARKET UNDER PROVIDES A GOOD/SERVICE, THE GOVT CAN DO THIS DIRECTLY.
WHAT IS THE EXPLANATION FOR TRADEABLE PERMITS?
FIRMS R GIVEN PERMITS TO POLLUTE WHICH THEY CAN BUY/SELL TO MAKE A PROFIT.
WHAT IS THE EXPLANATIOJ FOR MAX PRICES?
IF CONSUMERS CAN’T AFFORD PRODUCTS, THE GOVT MAY LIMIT THE PRICE.
WHAT IS THE EXPLANATION FOR MIN PRICES?
IF PRODUCERS R GOING BANKRUPT/TO DISCOURAGE CONSUMPTION, THE GOVT MAY SET A MIN PRICE.
WHAT IS THE EXPLANATION FOR SUBSIDIES?
TO ENCOURAGE CONSUMPTION, THE GOVT CAN FUND THE PRODUCTION OF A PRODUCT.
WHAT IS THE EXPLANATION FOR INDRECT TAXATION?
TO DISCOURAGE CONSUMPTION, THE GOVT CAN INCREASE THE PRICE OF A PRODUCT.
WHAT IS THE EXPLANATION FOR NUDGES?
A PSYCHOLOGICAL TACTIC TO ENCOURAGE CONSUMERS TO MAKE A CHOICE.
WHY MAY ECONOMIC AGENTS HAVE IMPERFECT KNOWLEDGE?
- ASYMMETRIC INFO
- ADVERSE SELECTION
- MORAL HAZARD
WHAT IS ASYMMETRIC INFO?
A SITUATION WHERE 1 ECONOMIC AGENT HAS MORE INFO THAN ANOTHER.
WHAT IS THE EXPLANATION FOR ASYMMETRIC INFO?
THIS CAN OFTEN LEAD TO CONSUMERS BEING OVERCHARGED OR SOLD A GOOD OF INFERIOR QUALITY AS THEY DON’T KNOW HOW TO ASSESS RHE VALUE OF A PRODUCT.
WHAT R EXAMPLES OF ASYMMETRIC INFO?
- BUYING A HOUSE
- LOANS
- MOTs
WHAT IS THE EXPLANATION FOR ADVERSE SELECTION?
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
WHAT R EXAMPLES OF ADVERSE SELECTION?
HEALTH INSURANCE
2ND HAND CARS
ALL U CAN EAT BUFFETS
WHAT IS THE EXPLANATION FOR MORAL HAZARD?
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.
WHAT R EXAMPLES OF MORAL HAZARD?
BENEFITS
BANK BAILOUTS
GREEK EUROZONE DEBT
CRASH FOR CASH
WHAT R EXAMLLES OF STATE PROVISION OF INFO?
ANTI SMOKING ADS
FOOD LABELLING
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.
WHAT R THE ADVANTAGES OF STATE PROVISION OF INFO?
- ENSURES PRODUCERS AND CONSUMERS R WELL INFORMED WHICH SHOULD LEAD TO LOWER CONSUMPTION OF HARMFUL PRODUCTS.
- CONSUMERS RILL RETAIN CHOICE (AVOIDS BLACK MARKET)
WHAT R THE DISADVANTAGED OF STATE PROVISION OF INFO?
- CONSUMERS MAY NOT UNDERSTAND/ IGNORE THE INFO
- CONSUMERS MAY BEHAVE IRRATIONALLY ( HABIT/PEER PRESSURE )
- RISK OF REGULATORY CAPTURE
- OPPORTUNITY COST
WHAT IS REGULATORY CAPTURE?
WHEN THE GOVT ACTS IN INDUSTRY INTERESTS.
WHAT IS NUDGE THEORY?
NUDGE THEORY SUGGESTS THAT CONSUMER BEHAVIOUR CAN BE INFLUENCED BY SMALL SUGGESTIONS AND POSITIVE REINFORCEMENTS.
WHAT R THE DIFFERENT TYPES OF NUDGES?
- STATUS QUO BIAS
- CONFORMING
- FEEDBACK
- CHOICE ARCHITECTURE
- FRAMING
- NAMING CONVENTIONS
- POSITIONING
WHAT R THE ADVANTAGES OF NUDGES?
USES HUMAN PSYCHOLOGY TO ENCOURAGE PEOPLE TO MAKE THE BEST CUOICE BUT CRUCIALLY CONSUMERS R STILL LEFT WITH THE FREEDOM TO MAKE A CHOICE.
WHAT R THE DISADVANTAGES OF NUDGES?
- MAY NOT WORK IF DESIRES R TOO STRONG E.G SMOKING ADDICTION
- MAY HE SEEN AS UNDERHAND/SNEAKY BY CONSUMERS
- DOESN’T ENCOURAGE PEOPLE TO THINK FOR THEMSELVES
- ONLY WORKS IF IT CHANGES THE CULTURE DUE TO HERDING BEHAVIOUR
WHAT IS A PRIVATE GOOD?
ECONOMIC GOODS THAT R EXCLUDABLE, RIVALROUS AND REJECTABLE.
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.
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.
WHAT DOES REJECTABLE MEAN?
YOU HAVE THE CHOICE WHETHER TO CONSUME IT E.G IT IS NOT COMPULSORY TO BUY A WIRELESS STEREO.
WHAT R EXAMPLES OF PRIVATE GOODS?
- BANANAS
- CARS
- PHONE
- SURGERIES
WHAT R PUBLIC GOODS?
GOODS THAT R NON-EXCLUDABLE, NON-RIVALROUS AND NON-REJECTABLE.
WHAT R EXAMPLES OF PURE PUBLIC GOODS?
- STREET LIGHTING
- NATIONAL DEFENSE
- LIGHTHOUSES
- FLOOD PROTECTION
WHAT R QUASI PUBLIC GOODS?
A GOOD WHICH FULFILS THESE CRITERIA UP TO A POINT
WHAT R EXAMPLES OF QUASI PUBLIC GOODS?
- ROADS
- PARKS
- WIFI NETWORK
- LECTURES
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.
WHAT WILL THE GOVT DO BECAUSE OF THE FREE RIDER PROBLEM?
GOVT MUST PAY FOR PRODUCTION OF PUBLIC GOODS WITH TAX REVENUE
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.
WHAT IS A PRIVATE COST?
COSTS INTERNAL TO AN EXCHANGE AND PAID BY AN INDIVIDUAL ECONOMIC AGENT.
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.
WHAT IS A SOCIAL COST?
OVERALL COST TO SOCIETY OF AN ECONOMIC DECISION (PRIVATE +EXTERNAL COST)
WHAT IS A PRIVATE BENEFIT?
BENEFITS INTERNAL TO AN EXCHANGE AND R RECEIVED BY AN INDIVIDUAL ECONOMIC AGENT
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
WHAT IS A SOCIAL BENEFIT?
OVERALL BENEFIT TO SOCIETY OF AN ECONOMIC DECISION (PRIVATE+EXTERNAL BENEFIT)
WHAT ARE EXAMPLES OF EXTERNAL COSTS OF PRODUCTION?
POLLUTION
OVERFISHING
FLY TIPPING
DEFORESTATION
WHAT ARE EXAMPLES OF EXTERNAL COSTS OF CONSUMPTION?
NOISE POLLUTION
CONGESTION
PASSIVE SMOKING
LITTER
VANDALISM
WHAT ARE EXAMPLES OF EXTERNAL BENEFITS OF PRODUCTION?
JOBS
INNOVATION
BIODIVERSITY
WHAT ARE EXAMPLES OF THE EXTERNAL BENEFITS OF CONSUMPTION?
TRAINING AND EDUCATION
VACCINATIONS
RECYCLING
HOW CAN INTRODUCING INDIRECT TAXES REDUCE NEGATIVE EXTERNALITIES?
BY CHARGING PRODUCERS AN ADDITIONAL AMOUNT EQUAL TO THE EXTERNALITY, THE EXTERNALITY HAS BEEN INTERNALISED.
WHAT R THE ADVANTAGES OF INDIRECT TAXES?
- FORCES POLLUTER TO PAY AND HENCE INTERNALISE THE EXTERNALITY
- INCENTIVISES FIRMS TO INNOVATE TO AVOID TAX
- RAISES REV FOR GOVT
WHAT R THE DISADVANTAGES OF INDIRECT TAXES?
- REGRESSIVE
- MAY ENCOURAGE BLACK MARKET USE
- ASYMMETRIC INFO MAY LEAD TO THE TAX BEING SET AT THE WRONG LEVEL
- IF DEMAND IS INELASTIC, INEFFECTIVE POLICY
WHAT R THE ADVANTAGES OF MIN PRICES?
- REDUCES CONSUMPTION OF HARMFUL GOODS
- TARGETED AT GROUPS MOST LIKELY TO BE ABUSING THE PRODUCT
- NO COST TO GOVT
WHAT R THE DISADVANTAGES OF MIN PRICES?
- NO EFFECT IF SET BELOW EQUILIBIUM
- LESS EFFECTIVE WHEN DEMAND IS INELASTIC
- NO EXTRA TAX REV GAINED (+LOSS OF VAT AND EXCISE DUTY)
WHAT R THE ADVANTAGES OF REGULATION?
- ENSURES SOCIAL OPTIMUM IS REACHED
- REQUIRED IF DEMAND IS INELASTIC AND POLICIES CHANGING PRICES DON’T WORK
- CAN INCENTIVISE FIRMS TO INNOVATE E/G E-CIGARS
WHAT IS THE EXPLANATION FOR EXTENDED PROPERTY RIGHTS?
IF A RESOURCE HAS NO OWNER, ITS LIBALE TO BE OVERUSED OR ABUSED. THIS IS OFTEN CALLED THE TRAGEDY OF THE COMMONSM THE GOVERNMENT THEREFORE ADVOCATES OWNERSHIP RIGHTS OF AN AREA TO AN ORGANISATION WHO CAN CHARGE OR SUE THROUGH THE COURTS FOR THE USE OR ABISE OF THIS RESOURCE.
WHAT IS AN EXAMPLE OF RESOURCES THAT HAVE NO OWNER BEING ABUSED?
OVERFISHING IN THE SEA
WHAT R THE ADVANTAGES OF EXTENDED PROPERTY RIGHTS?
- ENSURES EXTERNALITIES R INTERNALISED.
- OWNERS CAN BE COMPENSATED
WHAT R THE DISADVANTAGES OF EXTENDED PROPERTY RIGHTS?
- DIFFICULT TO CALCULATE VALUE OF DAMAGES
- EXTERNALITIES DIFFICULT TO TRACE
- TIME TAKEN TO RESOLVE
- DIFFICULT TO USE FOR INTERNALISED ISSUES
WHAT IS THE EXPLANATION FOR TRADABLE PERMITS?
INVOLVES THE GOVT SETTING A QUOTA ON THE AMOUNT OF POLLUTION ALLOWED IN AN INDISTRY THEN ALLOCATING POLLUTION PERMITS TO INDIVIDUAL FIRMS. EACH FIRM IS ALLOWED TO POLLUTE UP TO THE LEVEL SET BY ITS PERMIT. ALSO POSSIBLE FOR FIRMS TO BUY AND SEEL PERMITS OR TO BANK THEM FOR UEE IN FUTURE.
WHAT R THE ADVANTAGES OF TRADABLE PERMITS?
- INTERNALISES EXTERNALITY
- REVENUE FOR GOVT IF AUCTIONED
- INCENTIVE TO INVEST IN CLEAN TECH
- MARKET DECIDES ON PRICE OF CARBON
WHAT R THE DISADVANTAGES OF TRADABLE PERMITS?
- DIFFICULT TO ISSUE THE RIGHT NUMBER OF PERMITS DUE TO IMPERFECT INFO OR REGULATORY CAPTURE
- HIGH COST OF MONITORING FOR GOVT PARTICULARLY FOR CARBON ASSETS IN DEVELOPING COUNTRIES
- PRICE MAY GO TOO HIHH DUE TO SPECULATION OR MARKET RIGGING BY LARGE FIRMS
WHAT R THE ADVANTAGES OF SUBSIDIES?
- ENSURES EXTERNAL BENEFITS
- LOWER PRICES FOR THE CONSUMER(INCREASED CONSUMER SURPLUS
- HIGHER PRICES FOR FIRMS ( INCREASED PRODUCER SURPLUS)
- REDUCED INEQUALITY
WHAT R THE DISADVANTAGES OF SUBSIDIES?
- PRODUCTIVE INEFFIENCY IF FIRMS RELY ON SUBSIDIES
- OPPORTUNITY COST FOR GOVT
- DIFFICULT TO QUANTIFY EXTERNAL BENEFITS WHICH MAY MEAN AMOUNT OF SUBSIDY IS INCORRECT
- MAY BE GIVEN OUT FOR POLITICAL AND NOT ECONOMIC REASONS
WHAT R THE ADVANTAGES OF MAX PRICES?
- REDUCES INEQUALITY
- STOPS EXPLOITATION OF CONSUMERS (IMPORTANT IN MONOPOLIES)
- LOW COST TO GOVT
- MIGHT ENCOURAGE MORE PRODUCTIVE EFFIENCY
WHAT R THE DISADVANTAGES OF MAX PRICES?
- SHORTAGES
- NO EFFECT IF SET BELOW EQUILIBRIUM
- NEED FOR GOVT TO ENFORCE AND MONITOR
- NO INCENTIVE TO IMPROVE QUALITY
- LESS PROFIT FOR PRODUCERS MEANS LESS INVESTMENT
WHAT R THE ADVANTAGES OF GURANTEED MIN PRICES?
- PRODUCES REASONABLE LEVEL OF INCOME FOR PRODUCERS
- STOPS FARMERS BEING EXPLOITED BY WHOLESALERS
- PROVIDES CUSHION AGAINST FUTURE SUPPLY SHOCKS
- MORE CERTAINTY ABOUT INCOME WOULD HELP FACILITATE INVESTMENT
WHAT R THE DISADVANTAGES OF GURANTEED MIN PRICES?
- NO EFFECT IF SET BELOW EQUILIBRIUM
- HIGHER PRICES FOR CONSUMERS
- MAY CREATE INCENTIVES FOR WASTEFUL EXCESS SUPPLY
- OPPORTUNITY COST TO GOVT OF BUYING EXCESS PRODUCTION
- ALLOCATIVELY INEFFICIENT (LARGE DWL)
WHAT IS GOVERNMENT FAILURE?
WHEN GOVT INTERVENTION CAUSES A NET WELFARE LOSS LEADING TO ALLOCATION OF RESOURCES WORSE THAN THE FREE MARKET OUTCOME.
WHAT R REASONS FOR GOVT FAILURE?
- DISTORTION OF PRICE SIGNALS
- UNINTENDED CONSEQUENCES
- EXCESSIVE ADMINISTRATION COSTS
- INFORMATION GAPS