Market imperfections: Externalities, public goods and asymmetric information Flashcards

1
Q

What do taxes generate for governments?

A

Revenue, which can then be spent in line with their budgets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What are externalities?

A

When an action affects third parties/ consequences without being reflected in a competitive price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are positive externalities?

A

A benefit received or transferred to a party as an indirect effect of the transactions of another party.

Positive externalities arise when one party, such as a business, makes another party better off but does not receive any compensation for doing so
e.g choosing to walk to work rather than drive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are negative externalities

A

The imposition of a cost on a party as an indirect effect of the actions of another party

Negative externalities arise when one party, such as a business, makes another party worse off, yet does not bear the costs from doing so
e.g smoking, driving under the influence

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are welfare impacts?

A

Externalities cause DWL as competitive equilibrium deviates from socially optimal levels

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are solutions to market failures?

A
  1. Government control (Bans)
  2. Pigouvian approach (tax per unit)
  3. Coasian approach (negotiations)
  4. Cap and trade (Quanity caps)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are Government controls?

A

Direct regulations
e.g quotas, standards, bans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is the Pigouvian approach for externalities?

A

Tax per unit. Tax/ subsides to alin with private incentives with social costs/ benefits
e.g carbon tax reduces emissions but increase prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is a negative of the Pigouvian approach?

A

Hard to measure and regulate
Unintended consequences as can ham industries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What are the positives of the Pigouvian approach?

A

Flexible
Revenue generating for gov

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What is the coasian approach?

A

Negotiations. Assigns property rights for externalities and allows negotiations/ trade
e.g factory emissions for those arround, either locals pay for company to reduce or compensation from factory
e.g water, land

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Positives of the Coasian approach?

A

Avoids gov intervention
Cheaper and more accepted ( no top down change)
Specific to situation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Negatives of the Coasian approach?

A

Hard when large parties are involved e.g climate change
Unequal information access

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What is the Cap and trade approach?

A

Quantity, caps usage. Sets pollution quotas and permits trading to achieve efficient allocations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Advantages of the cap and trade approach

A

Flexible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Disadvantage of the cap and trade approach

A

Equity concerns as firms can buy their way out of permits

17
Q

What are public goods?

A

Non-rival goods (consumed by many) and non-excludable (can’t prevent access)

18
Q

What are the 3 types of public goods?

A
  1. pure public goods
  2. club goods
  3. commons
19
Q

What are pure public goods?

A

Non rival and non excludable
e.g national defence, public radio and air quality

20
Q

What are club goods?

A

Non - rival but excludable
e.g cable tv, private golf course, streaming services

21
Q

What are commons?

A

Non excludable but rival when congested (Fisheries, forests, public parks)

22
Q

Challenges that public goods can face

A
  1. Under-provision due to free riding
  2. Overuse of congestible goods
23
Q

What is free-riding?

A

somone whos wants others to pay for public good but intended on using themselves
Non-excludable
Underprovisional risk
e.g public parks, vaccines

24
Q

Solutions for public goods?

A

Government provisions via tax
Access regulations (Pigouvarian fees for congestible resources)

25
What is Asymmetric information?
When 1 party has more info than others in a transaction
26
Problems of asymmetric information?
Adverse selection Moral hazard
27
What is adverse selection?
Hidden attributes that lead to market ineficenices or failures e.g Insurance markets
28
What is moral hazard
Hidden actions post - contract e.g car innsurance - those with comprehensive may drive less cautious as will be paid for Unemployment benefits - less likely to get a job
29
Solutions to Asymmetric information
Screening (questions) Signalling Warranties Incentives, compatible mechanisms to encourage truth telling and efficient behaviour