market failures and Govt Intervention Flashcards
what is a market failure
when in a free market, without govt intervention, there is a failure to efficiently allocate resources
what is a missing market
a missing market is when a market doesn’t exist because the functions of price are broken down. it would be pareto efficient but no such market exists
what is allocative efficiency
when the combination of goods that best suit consumer tastes and preferences are being produced
what is complete market failure
when a market doesn’t exist at all, there is a missing market
what is partial market failure
when a market exists but for various reasons such as externalities, the wrong amount of it exists
what are the types of market failures
public goods, monopolies, imperfect info, factor immobility, externalities, inequality, demerit and merit goods
what does the price equilibrium show if there is no market failure
maximum social welfare.
what is social welfare
the sum of producer and consumer surplus
what are examples of govt intervention
indirect taxes, subsidies, bans, price controls, provisions, regulations
what is a public good
a good that is non excludable- nobody can be excluded from benefiting, non rival- consumption of one person doesn’t decrease amount available for another, non rejectable- it cannot be avoided/refused
what is a quasi public good
a good which posseses some of the characteristics of a public good but not all
what is a free rider
someone who consumes a good without paying
what is a negative externality
the negative spillover effect to third parties
what is an externality
the spillover cost or benefit to third parties as a result of consumption and production. msc>mpc
whats a positive externality
the positive spillover effect onto third parties as a result of a market transaction. msb>mpb
what is the marginal external cost
the spillover cost to third parties of an economic transaction
what is the marginal private cost
the cost to individuals or producers
what is the marginal social cost
the full cost to society of an economic transaction includes private and external costs
draw the negative externalities
whats the welfare lost in positive externalities. draw the diagram
what is a merit good
a good that generates positive externalities, ought to be subsidised or free at the point of use and is underconsumed in a free market. this is because of imperfect information
what is a demerit good
a demerit good is one that is overconsumed in a free market, ought to be taxed and generates negative externalities. customers may be unaware of the negtaive externalities it generates. the social cost of consumption is higher than the private
why is there missing markets
if the market fails to price the externalities
what is excess supply
when there is more supply than demand
what is a minimum price
known as a price floor and is the lowest producers can charge for goods and service
draw a price floor
what is the unwanted consequence of price floors
excess supply
evaluation of price floors
govt will have to buy up the surplus, dependent on the ped of the good as for addicts this wont be as effective, black market, waste of scarce resources as labour will have to be used monitor and manage it
what is a price ceiling
a price ceiling is a maximum price that firms cannot sell products for more than
evaluation of price ceilings
cause an excess demand, dependent on ped, suppliers may leave the market which would worsen any shortage, causes opportunity cost as do you want a greater effectiveness but more excess.govt will have to subsidie firms in order to encourage them to produce which can be very politically unpopular
how would taxes on a good with a negative externality help
by placing a tax, the cost of production would increase, this would result in a fall in supply from s to s1 because at the same cost, less can be produced.this would result in a rise in price equilibrium from p to p1, causing a contraction in quantity demanded as consumers ration consumption at higher prices. contraction from fm to so
however the effectiveness of taxes are limited…
the extent to which consumption is reduced is dependent on the ped. for smokers, cigarteetes are a necessity with very few substitutes so the demand curve will be inelastic. this means the price rise will lead to a less than proportional fall in consumption from qfm to qso, meaning that this may be less effective for hardened smokers
evaluations of taxes
lead to a black market, inequality as its effect will differe whether one is rich or poor, depended on ped, we cannot quanitfy the mec due to imperfect info, needs montoring and policing, needs effective consequences
what is the incidence of tax
the proportion of tax passed on from producer to consumer
what is a subsidy
a sum of money granted by the state
evaluation of subsidy to producer
dependent on the ped, imperefect info means we cannot quantify the mec, opportunity cost as costly to implement and money could be used elsewhere, politically unpopular as firms may not want their money going to private profit making firms, may decentivise
evaluation of subsidy to consumer
dependent on the pes, imperefect info means we cant quantify the mec, opportunity cost, unintentional price increase
market imperfections- imperfect info
imperfect info means you cannot place a value on the externality and means theres lack of awareness of the full cost or ebnefit to society so a misallocation of resources due to uninformed decisions.
market imperfections- factor immobility
as patterns of demand and unemployment change, workers find it difficult to easily secure new jobs since they lack the necessary skills
market imperfections-monopoly
they restrict supply and raise prices causing a misalocation of resources
inequalities in distribution of income and wealth
its a market failure because not only are there some people without heating and food, the poor can benefit from the rich’s taxes
what is the rationale for govt intervention
to correct market failures
why are both public and private goods provided free
they are merit goods so underconsumed in a free market
evaluation of state provision
places burden on taxes, expensive so has opportunity costs, places govt into deficit when they already have lots already,
what is the difference between indirect and direct taxes
indiret taxes are taxes which take away from our income in various ways but are not physically deducted from our income like income tax. direct taxes are a direct tax on incomees e.g. corporation tax
What are other govt interventions
Advertising and regulation/legislation
Evaluation of advertising
-extent to which it’s successful is called into question because of the fact we have become desensitised to them
-costly to make advert so potential govt failure of administrative costs
-is it better for prevention rather than stopping
-is it better combined with other interventions
Evaluation of regulation and legislation
-needs effective consequences
-causes a black market
-expensive to monitor and waste of scarce resources for doing so
-Opportunity cost because of this
