Market Mechanism and Failure Flashcards
Rationing Function
Excess demand will lead to a rise in price as the product is more scarce
Incentive Function
Higher prices act as a motivator for producers to increase supply
Signalling Function
Increase in price gives an indication to producers that they should increase supply
And indicate to consumers that they should reduce demand
Market Failure
Occurs when the allocation of goods and services are inefficient
Complete Market Failure
There is no market whatsoever
‘Missing market’
Partial Market Failure
Market exists but there is a misallocation of resources
Examples Of Market Failure
Public goods Externalities Merit and demerit goods Monopoly power Inequalities in distribution of income and wealth
Public Goods
It’s use by an individual doesn’t stop others from using it
Non-rival where consumption doesn’t stop consumption for others
Non-excludable where it is impossible to stop other individuals from using it
Free Rider
Someone who benefits from a good or service without paying for it
Example of market failure
Private Goods
It’s use by an individual stops others from using it
Rival where consumption reduces consumption available for others
Excludable where it is possible to stop others from using them
Quasi-Public Goods
Some private goods take on some of the characteristics of public goods
Positive Externalities
Benefits to a third party
Exist where social benefits are greater than private benefits
Positive Externalities Examples
Educated society
Medical breakthroughs
Attractive environment
Negative Externalities
Costs to a third party
Exist when social costs are greater than private costs
Negative Externalities Examples
Pollution
Road congestion
Environmental damage
Negative Production Externalities
Activities of producers lead to costs to a third party
Positive Production Externalities
Activities of producers lead to benefits for a third party
Negative Consumption Externalities
Activities of consumers lead to a loss of benefit to a third party
Positive Consumption Externalities
Activities of consumers lead to benefits to a third party
Merit Goods
Goods deemed to be beneficial for society
Under provided by the market
Demerit Goods
Goods that are deemed to be bad for society
Over provided by the market
Information Failure
Type of market failure
Asymmetric information
One party has more information of the product than the other
Factor Inmobility
Difficult for factors of production to be put to alternative uses
Misallocation if resources
Labour Immobility
Geographical-Difficult for workers to move from one region to another
Occupational-Workers not equipped for different types of work
Capital Immobility
Rapid technological change-Machinery obsolete
Structural change in the economy-Changing type of industry
Land Immobility
Inability to change the use of land-Climate/Can’t move land
Income Inequality
Disparity in the flow of earnings of individuals or households
Wealth Inequality
Disparity in the stock of financial assets
Government Intervention To Reduce Market Failure
Indirect taxation Subsidies Price controls State provision Regulation
Government Intervention To Reduce Inequalities
Redistribute income with progressive tax
Welfare benefits
Increase human capital-Training or higher educational qualifications
Government Intervention Of Allocation Of Resources
Public expenditure
Taxation or subsidies
Regulation
Subsidy
Financial incentive to produce or consume a given product
Minimum Price
Leads to excess supply
Firms wish to supply more at a higher price
Maximum Price
Leads to excess demand
Consumers wish to demand more at a lower price
Prevent consumer to be exploited
State Provision
Government intervenes in the market to supply a good or service
Regulation
Occurs where government seeks to provide effective competition within markets
Leads to greater choice and lower prices
Government Failure
Government Intervention in markets leads to a net welfare loss in comparison to the free market working alone
Government Failure Examples
Law of unintended consequences
Inadequate information
Conflicting objectives
Administrative costs
