Market Failures Flashcards
What is consumer surplus?
Measure of welfare that people gain from consuming goods and services
What is producer surplus?
The measure of the welfare producers gain from producing the goods and services
What is a value judgment?
Statements or opinions expressed that are not tested or cannot be verified and depend very much on the views of the individual and the values they hold
What is a normative statement?
Opinions that require value judgements to be made
What is a positive statement?
Statements that CAN BE TESTED against real world data
What are the 4 economic resources?
- Land
- Labour
- capital
- enterprise
What is capital?
Stock of goods used to make goods and services eg-machinery / equipment / tools
What is the economic problem?
- Resources are scarce
- Wants are infinite
- Economics is the study of the allocation of resources in society
- requires trade offs / opportunity costs
- decisions are made on rationality
- rationality means maximising own welfare
What is an opportunity cost?
The loss of the next best alternative
What is the production possibility boundary?
Indicates the maximum possible output that can be achieved given a fixed set of resources in technology in a particular time period
- shows capacity, greatest productivity
What factors shift PPB to the right?
- Investment in new technology
- introduction of new resources such as minerals
- increased labour supply through the increase in population and migration
- improvements in human capital through education and training
- Increased productivity.
What factors shift PPB to the left?
- Emigration
- war
- disease
- disaster
What is productive efficiency?
- Achieved in an economy when it is not possible to make anyone better off without making someone worse off
- you cannot produce more of one good without making less of another
What is allocative efficiency?
Occurs when the available economic resources ere used to produce the combination of goods and services that best matches peoples tastes and preferences
What is excess supply?
When quantity supplied at a particular price is greater than QD, there is a disequilibrium
What is a minimum price?
A price floor below which the price of a good service is not allowed to decrease eg min wage
What is market failure?
Occurs when the free market, left alone, fails to deliver an efficient allocation of resources
What is partial market failure?
Where a market exists but contributes to misallocation
What is complete market failure?
Results in a missing market
What is a missing market?
A situation in which there is no market because the functions of price have broken down
What is a free market?
One with no govt intervention
What are the main causes of market failure? (7 market failures)
- Positive and negative externalities
- merit and demerit goods
- Public goods
- Monopoly
- factor immobility
- inequalities
- imperfect information
What is a public good?
A good that possesses the characteristic of non-rivalry in consumption non- excludability , non - rejectable
What is non-excludability?
Once provided no person can be excluded from benefitting
- non payers can enjoy the benefits of consumption at no financial costs (free rider)
What is non -rivalry?
Consumption of the good by one person does not reduce the amount available for consumption by another person
What is an externality?
Costs or benefits that spill over to third parties external to a market transaction
What is a positive externality?
A positive spillover effect to third parties of a market transaction; social benefits exceed private benefits
What is a negative externality?
A negative spillover effect to third parties of a market transaction; social costs exceed private costs
What is a marginal private cost?
The cost to a individual or firm of an economic transaction
What is a marginal external cost?
The spill over cost to third parties of an economic transaction
What is a marginal social cost?
The full cost to society of an economic transaction. Including private and external costs
What is marginal private benefit?
The benefit to an individual or firm of an economic transaction
What is marginal external benefit?
The spillover benefit to third parties of an economic transaction
What is marginal social benefit?
Full benefit of an economic transaction including private and external benefit
What is a merit good?
A good that would be under consumed in a free market as individuals do not fully perceive the benefits obtained from consumption
What is a demerit good?
A good that is over consumed in a free market
What is a direct tax?
Tax on income
What is an indirect tax?
A tax on spending
What is a subsidy?
Any form of government support given to firms or consumers
What are 3 evaluations for subsidising producers?
- costly to government due to opportunity costs
- effectiveness is limited by ped
- disincentivises firm to be efficient
- costly to implement and monitor
What are 3 evaluations for subsidising consumers?
- Opportunity costs
- effectiveness is limited by ped
- unintended consequence of higher price
- imperfect info (size of externality)
What are the 7 market failures?
- merit and demerit goods
- inequalities
- immobility of factors of production
- externalities
- monopoly’s
- public goods
- imperfect information
What is asymmetric information?
When one party has more information than the other
What is imperfect information?
Misinformation / false information
What is occupational immobility?
As patterns of demand and employment change, many workers find it difficult to easily secure new jobs since they may lack the necessary skills
What is income?
Money from work
What is wealth?
Value of assets
