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Econ the 3rd > Market faliure > Flashcards

Market faliure Flashcards

1
Q

Indirect tax

A

A tax levied on expenditure

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2
Q

Direct tax

A

Tax levied on income

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3
Q

Incidence of tax

A

The way in which tax is spread between buyers and sellers

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4
Q

Specific tax

A

A tax of fixed amount on purchases of a commodity

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5
Q

Ad valorem tax

A

A tax levied on a commodity as a percentage of the selling price

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6
Q

Excess burden of sales tax

A

The loss to society following the imposition of a sales tax

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7
Q

Polluter pays principle

A

The idea that a firm causing damage to society should be forced to pay for that damage

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8
Q

Externality

A

A cost/benefit to a 3rd party

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9
Q

Hypothecation of tax

A

Spending tax revenue in the area it was generated

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10
Q

What is the effect of a specific tax

A

It reduces supply by increasing the producers costs

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11
Q

If a good has an inelastic PED what effects would imposition of a sales tax have

A

Higher revenue for government
Smaller fall in consumption

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12
Q

What factors affect the effectiveness of a sales tax on reducing externalities

A

The size of the tax
The elasticity of the good/service

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13
Q

Advantages of using tax to correct market failure

A

Market based solution
Raises revenue for government

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14
Q

Disadvantages of using tax to correct market failure

A

Difficult to measure externalities
Indirect taxed are regressive
Some taxes may be difficult to collect

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15
Q

Regressive

A

Has a larger effect on people with lower incomes

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16
Q

What is the effect of a subsidy

A

Shifts supply to the right

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17
Q

Why may a subsidy be better than taxation as a method of correcting market failure

A

Encourages consumption of merit goods instead of discouraging consumption of demerit goods
Taxes can be used to fund the subsidy

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18
Q

Why may a subsidy be worse than taxations

A

Costs money

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19
Q

Government expenditure

A

Where the government provides goods instead of a private firm

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20
Q

Why may state provision compare favourably to subsidy

A

Subsidy cannot provide public goods
State provision ensures fairer distribution of wealth

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21
Q

Why may state provision compare unfavourably to subsidy

A

State provision is more expensive
The lack of freedom in the market may stifle innovation

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22
Q

Advantages of state provision

A

Reduces inequality - All citizens have the same access
Supports macroeconomic objectives

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23
Q

Disadvantages of state provision

A

Expensive for government
Non-market based solution
Encourages dependence on government

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24
Q

Price control

A

A legal minimum or maximum price

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25
Q

Why may setting a maximum price be worse than using a subsidy

A

Maximum prices fail to increase consumption

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26
Q

Why may using taxation be better than setting a minimum price

A

Taxation raises revenue

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27
Q

Advantages of maximum prices

A

They are cheap
Reduces a monopolies purchasing power

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28
Q

Disadvantages of setting a maximum price

A

Supply is decreased because there is less profit
Will often lead to shortages
Black markets may emerge

29
Q

Advantages of setting a minimum price

A

Encourages investment
Can cause stockpiles to build up

30
Q

Disadvantages of setting a minimum price

A

Lowers utility
High opportunity cost
Allocative inefficiency

31
Q

Disadvantages of setting a minimum price

A

Lowers utility
High opportunity cost
Allocative inefficiency

32
Q

Merger

A

2 or more firms joining to form a new firm

33
Q

What is a cartel

A

An agreement between firms on price or output with the goal of maximising profit

34
Q

What is competition policy

A

Used to protect consumers and firms from being exploited by monopolies

35
Q

Advantages of competition policy

A

Cheap
The threat of enforcement is often enough to correct the market faliure

36
Q

Disadvantages of competition policy

A

The size of the fine may be unclear
The CMA may become too close to firms

37
Q

Buffer stock

A

A scheme intended to stabilise the price of a commodity by buying supply when it is cheap and selling when it is high

38
Q

Advantages of buffer stock

A

Market based solution
May be self funding

39
Q

Disadvantages of buffer stock

A

May be expensive if storage is required for too long
Only works with commodities that can be stored for a long time

40
Q

Why may a buffer stock be used instead of a subsidy

A

Buffer stocks are self-funding
Means that the market is not reliant on government intervention

41
Q

Why may a subsidy be better than a buffer stock

A

The initial cost of a buffer stock may be too high
In buy years the process of buying buffer stock increases the price for normal customers

42
Q

Legislation

A

Laws created by governmnet to enfoce regulations

43
Q

Prohibition

A

An attempt to prevent the consumption of a demerit good by making it illegal

44
Q

Advantages of regulation

A

Cheap because the infrastructure already exists for enforcing them and because the threat of enforcement is often enough

45
Q

Disadvantages of regulation

A

Difficult to set the correct strength
They increase firms costs
May require international agreement

46
Q

Why may regulation be used instead of taxation

A

If the goal is zero consumption taxation is pointless
Tax will not change behaviour where price is not a factor

47
Q

Why may taxation be used instead of regulation

A

Taxes raise revenue
The cost to society of regulations are harder to predict

48
Q

Information provision

A

When the government educates the public to help consumers make better choices

49
Q

What is a pollution permit system

A

A system for controlling pollution based on allowing firms to buy permits that allows them to pollute

50
Q

Advantages of using a pollution permit system

A

Creates incentives using a market based solution
The total level of pollution is limited as there can only be so many permits

51
Q

Disadvantages of a pollution permit system

A

Must be enforced
Can be complex to set up and run

52
Q

Why may a pollution permit system be better than taxation

A

Reduces the cost to society for reducing pollution
Firms know how to cut pollution better than government does

53
Q

Why may a tax be better than a pollution permit system

A

The correct number of permits may be difficult to measure

54
Q

Contracting out

A

A situation in which the public sector pays a private firm to fulfill their objectives

55
Q

Competitive tendering

A

A process by which the private sector bid for a contract to provide a public service

56
Q

public-private partnership

A

an arrangement by which a government service or private business is funded and operated by a combination of partnership between the public and private sector

57
Q

Private finance initiative

A

A funding arrangement by which the private sector runs a public asset in return for payment from government

58
Q

What is market failure

A

When the competitive outcome produced by the free market is not the best outcome for society

59
Q

What are the 4 types of externality

A

Positive/negative externality of production
Positive/negative externality of consumption

60
Q

What is allocative efficiency

A

Free market equilibrium

61
Q

What are the 4 types of information failure

A

Asymmetric information - when 1 party has more information than the other
Moral hazard - when a party acts in bad faith because they know someone else will bear the consequences
Merit goods
Demerit goods

62
Q

What are the 4 features of public goods

A

non-excludable
non-rivalrous
No marginal cost of production
non - rejectable

63
Q

What does non-excludable mean in relation to public goods

A

If one person consumes the good that makes it impossible to prevent other from consuming it

64
Q

What does non-rivalrous mean in relation to public goods

A

Consumption of the good by one person doesn’t reduce the amount available for others

65
Q

What is non-rejectability in relation to public goods

A

Once the good has been provided then you cannot avoid consuming it e.g. the military

66
Q

What is a quasi-public good

A

A good that has some of the traits of public goods but not others

67
Q

What is a free rider

A

Someone who benefits from a good/service but doesnt pay for it

68
Q

What are merit goods

A

Goods that are under consumed because people dont understand the benefits that come with them

69
Q

WHat are demerit goods

A

Goods that are overconsumed because people dont understand the dangers that come with consuming them

Econ the 3rd (12 decks)

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