Market Imperfections Flashcards
What does factor immobility lead to?
- resources being underused and causing Pareto inefficient outcome (operating inside PPF)
- causes economic ineffeciency
- cause of market failure
What is factor immobility?
it is difficult for factors of production to move between differant industries or geographical areas in the economy
What are the two types of factor immobility?
- occupational immobility (moving from one work type to another)
- geographical immobility (moving from one place to another)
What is occupational immobility a cause of?
market failure
When does occupational immobility occur?
when there are barriers to the mobility of factors of production between differant industries leading to these factors remaining unemployed or being used inefficiently
What is structural unemployment?
there is significant changes in the pattern of employment in an economy
Causes of structural unemployment?
- decline in manufacturing
- rising incomes causing shift towards services
- automatic (robots replacing jobs)
Why is labour market immobility a concern for economists?
- cuase of structural unemployment
- cause persistant relative poverty
- loss of economic efficiency and social welfare
What are causes of youth unemployment?
- skills gaps (lack skills)
- reluctant employers (want experiance)
- falling retirement rates
- weak macro fundamentals (low gdp growth)
Why does geographical immobility exist?
- family and social ties (older people reluctant to move)
- financical costs in moving house
- change in pricing
- high cost of renting
- differance in cost of living
- migration control
What three policies could the government implement to improve labour mobility and work incentives?
- reducing occupational mobility
- improving geographical mobility
- stimulate stronger work incentives
explain reducing occupational mobility?
- better funding for anf more effective workplace training (national skills fund)
- teaching new skills
- expansion of apprenticeships/ internships
Explain improving geographical mobility?
- rise in housebuilding will keep property prices lower and encourage afforable rent
- active regional policy
How does stimulaing stronger work incentives improve labour mobility?
- higher minimum wage
- reduction in income tax
When does information failure occur?
when people have inaccurate or incomplete data so make potentially wrong choices
What is assumed in a competitive market?
there is perfect information (consumers and producers have full knowledge about price benefits and costs
What are the four causes of market failure?
- long term consequences (info gaps about long term benefits of cots)
- complexity (information failure when a product is highly complex)
- unbalanced knowledge (buyer knows more/ less then seller)
- price information (consumer cannot quickly find info)
What are some examples of information failures?
- risk from tanning salons
- gaining entry to elite degree courses
What can information failure lead to?
over or under consumption of a good or service
What is asymetric information?
there is an imbalance in information between buyer and seller which can distort choices
What is essential for markets to work?
symetric information (consumer + producer has same level of knowledge)
Examples of asymmetric information?
- landlords know more then potential tenants
- a borrower knows more about ability to repay a loan
What is a moral hazard?
those taking the risks do not pay the downside if it goes wrong
- occur when insured consumers are likely to take greater risks, knowing that a clain will be paid for by their cover
What is adverse selection?
- refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality
How can people fight adverse selection?
insurance companies reduce exposure to large claims by limiting coverage or raising premiums
What is the downside of adverse selection?
risks pricing healthy consumers out of the market, meaning that only high risk individuals gain insurance
What are some government intervention methods to close the information gap?
- compulsory labelling on cigarette packages
- improved nutritional information on foods
What is a pure monopolist?
a single seller in a market.
What is a working monopoly?
any firm with greater than 25% of total sales
What is an oligopoly?
charactertised by the existence of a few dominant firms, each has market power and which seeks to protect and improves its position over time
What is a duopoly?
firms take the majority of demand
What can monopoly power come from?
the successful organic (internal) growth of a business or through mergers and acquisitions
What is horizontal integration?
where two firms join at the same stage of production in one industry
What is vertical integration?
this is where a firm integrates with differant stages of production
What is forward vertical intergration?
- occurs when a business merges with another business further forward in the supply chain
What is backward vertical intergration?
occurs when a firm merges with another business at a previous stage of the supply chain
What are barriers to entry?
designed to block vival businesses from entering a market profitably. If successful they protect the power of existing firms and maintain high profits and increase producer surplus.
How can a monopoly lead to market failure?
- monopoly can make higher profits at the expense of a loss of allocative efficiency
- monopolist will charge higher profit, leading to good being under consumed causing a loss of consumer surplus and welfare
What are the four benefits from monopoly power?
- research and development - profits used to fund innovation
- economies of scale - may lead to lower average costs
- regulation (monoply may have price regulation so profits are limited)
What is a natural monopoly?
- occurs when the most efficient number of firms in the industry is one
