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A-Level Economics Year 1 > Market failure, Externalities, Public Goods- MM > Flashcards

Market failure, Externalities, Public Goods- MM Flashcards

1
Q

What is market failure?

A

Market failure exists when the competitive outcome produced by the operation of the free market is not the best outcome for society

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2
Q

When does an externalitiy occur?

A

When the production or consumption of a good or service causes an impact for an unrelated third party

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3
Q

What is a negative externality of production?

A

When the process of producing a good or service creates a negative consequence for individuals or groups outside the business e.g. pollution

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4
Q

What is a negative externality of consumption?

A

When the process of consuming a good or service creates a negative consequence for individuals or groups not consuming it e.g. second-hand smoking

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5
Q

What is a positive externality of production?

A

When the process of producing a good or service creates a positive consequence for individuals or groups outside the business e.g. a business builds an attractive tourist attrction

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6
Q

What is a positive externality of consumption?

A

When the action of consuming a good or service creates a positive consequence for individuals or groups not consuming it e.g. individuals cycling & not driving reduces traffic congestion

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7
Q

How do you get social costs?

A

Private costs + External costs

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8
Q

What is a private cost?

A

Something affecting the individual only

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9
Q

What is an external cost?

A

Something affecting others

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10
Q

What are the 1) demand & 2) supply curve also known as?

A

1) MPB
2) MPC

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11
Q

What is it called when MPB=MPC?

A

Free market allocative efficiency

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12
Q

When is it allocative efficiency?

A

When MSB=MSC

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13
Q

What could the P axis also be labelled as?

A

Costs & benefits

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14
Q

If there is a positive externality in production, what happens on the diagram?

A

The D/MPB curve = MSB
The S/MPC curve shifts right, with this curve being MSC

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15
Q

If there is a negative externality of production, what happens on the diagram?

A

The D/MPB curve = MSB
The S/MPC curve shifts left, with this curve being the MSC

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16
Q

If there is a positive externality of consumption, what happens on the diagram?

A

The S/MPC = MSC
The D/MPB curve shifts right, with this curve being the MSB

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17
Q

If there is a negative externality of consumption, what happens on the diagram?

A

The S/MPC = MSC
The D/MPB curve shifts left , with this curve being the MSB

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18
Q

Where do you find welfare loss after an externality in production?

A

Find the vertical distance between the MPC & MSC and shade the triangle

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19
Q

Where do you find welfare loss after an externality in consumption?

A

Find the vertical distance between the MPB & MSB and shade the triangle

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20
Q

If the externality is 1) Positive & 2) Negative which way does the triangle point?

A

1) Right
2) Left

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21
Q

What is marginal social cost (MSC)?

A

The additional cost of producing one extra unit of a good

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22
Q

What is marginal social benefit?

A

The additional benefit that society gains from consuming an extra unit of a good

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23
Q

What is information failure?

A

A type of market failure where individuals or firms have a lack of information about economic decisions

24
Q

When does information failure occur?

A

When economic agents make incorrect decisions due to a lack of appropriate information- causing a welfare loss to society

25
Q

What are the 4 types of information failure?

A

1) Asymmetric information failure
2) Moral hazard
3) Merit goods
4) Demerit goods

26
Q

What is asymmetric information failure?

A

When one party has access to information the other party doesn’t (one sided info)

27
Q

What is moral hazard?

A

Where one party engages in risky behaviour or fails to act in good faith because it knows the other party will bear the economic consequences of the behaviour

28
Q

What are merit goods?

A

Goods (mainly services) that will be under-consumed by the public as they don’t fully appreciate their benefit

29
Q

What does a merit good cause on a diagram?

A

D/MPB shifts right to MSB

30
Q

What are demerit goods?

A

Opposite to merit goods- goods over-consumed by the public as they fail to recognise the dangers that they can cause

31
Q

What does a demerit good cause on a diagram?

A

MSB curve lies underneath the D/MPB curve (shift left)

32
Q

Which way does the welfare loss triangle point on a 1) Merit diagram and 2) Demerit diagram?

A

1) Right
2) Left

33
Q

When do missing markets occur?

A

When there is a big demand for a good or service but no free market wants to provide

34
Q

When do incomplete markets occur?

A

When there is a big demand for a particular good or service but not enough private sector businesses are interested in meeting this demand

35
Q

What is a private good?

A

A good that when consumed, no one else can consume that particular good (e.g. our curry)- they have a large profit incentive

36
Q

What are public goods?

A

Commodities or services provided without profit to all members of a society, usually by the government- no profit incentive

37
Q

What are 4 characteristics of a pure-public good?

A

1) Non-rivalry
2) Non-excludability
3) Zero marginal cost of production
4) Non-rejectability

38
Q

What is non-rivalry?

A

When consumption of a good by 1 individual doesn’t reduce the amount available for consumption by another e.g. street lights, radio station

39
Q

What is non-exludability?

A

When consumption of a good by 1 person makes it impossible to exclude any other individual from having the opportunity to consume e.g. public road, street lighting

40
Q

What is zero marginal cost of production?

A

Once a public good is provided the cost of providing another is zero e.g. UK armed forces defend the country- one more family adds 0 cost

41
Q

What is non-rejectability?

A

Once a public good has been provided, the beneficiaries of that good cannot avoid consuming it e.g. if in England, you cannot choose to be defended by the US instead

42
Q

What is a quasi-public good?

A

A good that has only some of the traits of a public good e.g. public roads

43
Q

How do public goods cause market failure?

A

The existence of free riders

44
Q

What is a free rider?

A

A consumer or business that benefits from a good or service but does not pay for it

45
Q

Can merit goods always be provided privately?

A

Yes

46
Q

What are 4 possible evaluation points for the consumption of merit goods?

A

1) Duration
2) Gvnmt failure (politicians)
3) Size
4) Unforeseen circumstances

47
Q

What are 4 possible evaluation points for the consumption of demerit goods and its impact on society? (do= depends on)

A

1) Elasticity of demand
2) do size of consumption
3) do overseas relativity
4) do government failure

48
Q

What are 2 possible evaluation points for the production of merit goods?

A

1) Type (importance)
2) Economic position

49
Q

What are 4 key roles for the state in a mixed economy?

A

1) Merit goods
2) Public goods
3) Welfare services
4) Regulation

50
Q

What are quasi-public goods?

A

Semi non-rival or semi non-excludable (roads- can be banned from driving)

51
Q

What impact does technology have on public goods?

A

Making them more excludable

52
Q

What are 2 reasons public goods are important?

A

1) Investment into PG helps long term economic growth & development
2) Technology needs public goods e.g. cars need roads

53
Q

What are 4 reasons that all sectors of the economy need public goods?

A

1) Corporate laws
2) Environmental laws
3) Trust in banking systems
4) Power & water treatment laws

54
Q

What are 5 reasons that government spending on public goods should increase?

A

1) Economies of scale- more efficient
2) Access & affordability- No profit incentive=affordable- important for equity
3) State provision needed for missing markets
4) Drive long-run economic growth
5) Lead to higher private sector investment

55
Q

What are 4 reasons that government spending on public goods shouldn’t increase?

A

1) Absence of profit incentive leads to X-inefficiency & diseconomies of scale (higher costs)
2) Weaker institutions= corruption or wasteful spending (gvnmt failure)
3) More effcient for gvnmt to fund but the private sector to provide
4) Market incentives may promote innovation in the long run

A-Level Economics Year 1 (10 decks)

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