Market Failure & Govt Intervention Flashcards
4 types of market failure
1- negative externalities
2- positive externalities
3- public goods
4- information gaps
MF def
When the price mechanism leads to a misallocation of resources
Negative externalities
Costs which affect third parties outside the price mechanosim
Negative consumption expternalities
costs of consuming a product which affects third parties outside the price mechanism (alcohol and cigarettes)
negative production externalities
the costs of producing a product which affects their parties outside the price mechanism (building)
PC
the cost of consuming a product on the individual
PB
A benefit top the consumer inside the price mechanism
EC
The cost of consuming a product on society
EB
The benefit of consuming a product on society
formula for social cost
social cost= private cost + external cost
Social benefit EQ
social benefit= private benefit + external benefit
On an externality what is S
Supply Is equal to marginal cost
Social efficient equilibrium
point on externality diagram where there is no net welfare loss
Axis on an externality graph
for free market eq = Pm & Qm
For social efficient equilibrium = Ps & Qs
Solving negative externalities
- Tax
- Pollution Permints (EU)
- Min Price (Alcohol in Scotland)
Tax as a solution to negative externalities
Indirect tax: increases cost
Specific- indirect tax
ad valorem tax- tax at direct rate 20% VAT
how to choose right tax- no externality- production at societal eq
Internalised externality
when an externality has been removed
Pollution permits
Cap and trade (EU)
Cap- market emissions
Release permits
give permits to pre-existing firms
auction remaining permits
create a secondary exchange market
govt gets tax rev
Minimum price
the lowest a good can sell for
Minimum price in Scotland
1 unit has to be sold for at least 50p
Regulation
More extreme market intervion
In 1997 firearms act banned handguns in the UK
Less strict regulation includes notices on cigarette packers
Positive externalities
benefits which affect thrive parties outside of the price mechanism
Positive consumption externalities
benefits which effect third parties from the consumption of a good
Positive production externalities
benefits which affect third parties form the production of a good
Methods to tacke positive externalities
Subsidies
Max price
Max price
set below EQ
impact of a subsidy
internalised economies
Public gods
goods which are non excludable and non rival
the military
non excludable
when you cannot stop someone using a good
Non rival
when one person’s consumption of a good cannot stop or limit another persons consumption
free rider problem
consumers wait for others to buy a good and then consume their good
only happens with public goods
what does the free rider problem lead to
a misallocation of resources
State provision of gods
when the government provides public goods paid for by tax
Quazi Public goods
Goods which are excludable and non rival or non excludable but rival
pure public good
flood defences such as the thames barrier
Tradagy of the commons
The commons represents a natural public good
Because there is moral hazard, in that those who collect the good because the cost of overconsumption doesn’t lie on any one person
Information gaps
Imperfect information
lack if info to make decisions
more info helpful to close information gaps
2 types of information gap
1 incomplete information
2 asymmetric informaiton
Incomplete information
when someone doesn’t have full information about a product or situation
this will lead to over or under consumption
correction of incomplete information
- regulation
- info provision
- subsidy
asymmetric information
when one party has more info than another party
government intervention in the second hand car market
if a used car breaks within 6 months of the sale then the provider must
replace
repare
refund
Merit goods
goods which are under consumed with positive externalities often with information gaps
Demerit goods
goods which are over consumed with negative externalities
Value judgement
a normative decision weighing up the pros and cons
such as- is education a merit good
Geographical immobility of Labour
being unable to move from one area to another
Occupational immobility of Labour
lacking the skills to do a job
3 types of government intervention for structural unemployment
1 education
2 training
3 aprentaships
Equitable
fair
equal
the same as
2 criticisms of progressive tax
1 higher tax leads to lower income as wage rises these tax payers will consume less in the economy
2 can create dependants on the government
3 does nothing to tax wealth
Fiscal drag
7 types of missing market
1 exernalitites
2 public goods
3 information gaps
4 merit and demerit goods
5 monopoly power
6 factor immobility
7 unequal distribution of wealth
Missing market
where there is demand but no supply
Which 3 market failure are market imperfections
information gaps
monopoly power
factor immobility
