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Market Mechanism And Market And Government Failure Flashcards

1
Q

What are the 4 functions of prices

A

Signalling
Rationing
Allocating
Incentive

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2
Q

Signalling function

A

Provides info to buyers and sellers to manage economic activity

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3
Q

After signalling what does the incentive function mean

A

Firms will alter price to achieve greater profit. May be excess supply or demand

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4
Q

What is the rationing function

A

Rising prices to ration the demand for a parody (contract/expand)

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5
Q

Allocative function

A

Directs resources between markets
Away from firms with excess supply and too high price
Towards markets with excess demand and too low price

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6
Q

When does market failure occur

A

When the price mechanism performs unsatisfactory or fails to work at all

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7
Q

Complete market failure

A

Market simply does not exist

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8
Q

Partial market failure

A

Market functions but produces the wrong quantity of a good or service

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9
Q

Market failure in monopoly

A

Good too expensive
Underproduction and underconsumption

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10
Q

Define a private good

A

Excludable and rival

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11
Q

Describe a public good

A

Non excludable and non rival

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12
Q

Examples of private goods

A

Chocolate
Phones

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13
Q

Examples of public good

A

Lighthouse
Radio
Street light

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14
Q

What is the free rider problem

A

Those that benefit without paying or contributing to an economic exchange

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15
Q

Quasi public goods example

A

Electronic pricing of road use

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16
Q

Example of quasi oublic good

A

London roads due to congestion charge

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17
Q

Positive externality

A

Benefit of production and consumption to third parties
Social benefit > private benefit

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18
Q

Negative externality

A

Impacts third party through production or consumption
Social cost > private costs

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19
Q

Negative externality examples

A

Smoking - passive smokers
Alcohol - drunk driving accidents

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20
Q

Positive externality examples

A

Education - productivity - income - tax - revenue - investment

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21
Q

Social cost equation

A

Private cost + external costs

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22
Q

What is a merit good

A

Social benefits of consumption exceed private benefits e.g healthcare

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23
Q

Are merit goods public or private

A

Private, though often provided by public sector

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24
Q

Value judgements

A

Decide if a good is merit or demerit

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25
What is a demerit good
Social costs of consumption exceed private costs
26
Example of demerit good
Tobcco
27
How do governments try reduce consumption of demerit goods
Taxation
28
Information problem
Occurs when people make wrong decissions because they do not have correct information
29
Why monopoly leads to market failure
They limit output and raise prices to max profits Prices too high and resources allocatively inefficient
30
How does immobility lead to market failure
Unemployment and waste of scarce resources
31
Two types of immobility of labour
Geographic Occupational
32
Reasons against government intervention
Pro free market economist Interventionist economists
33
Explain free market economists
Market mechanism achieves more optimal outcome through incentives by price signals
34
Explain interventionist economists view on govt intervention
Markets are uncompetitive and monopolistic so prone to market failure Govt can impose regulations
35
Two main government intervention
Regulation Taxation
36
Regulation
Influences the quantity of the externality a firm can generate
37
Taxation
Adgjusts the market price higher due to its externality
38
Example of taxation on negative externalities in production and consumption
Consumption - tax on tobacco to discourage demand Production - taxing pollution to incentivise factories to produce cleaner
39
Tax definition
A compulsory levy imposed by the government to pay for its activities
40
Example of global tax on negative externality
Tradable pollution permits
41
Negative of maximum prices
Can create excess demand
42
Negative if minimum prices
Distort markets creating excess supply
43
Where must minimum. Prices must be set
Above the free market price
44
Where must maximum prices be set
Below the free market price
45
Government failure
Occurs when govt intervention reduces economic welfare Leads to misallocation of resources
46
what is the classification of a merit/demerit good
value judgement
47
monopoly market failure
not enough of a good is produced the price of a good is too high does not maximise welfare for society
48
immobile factors of production = market failure
resources are underutilised inefficiency
49
govt int - subsidies
increase supply and increased profit revenue
50
why might min prices be set
to increase wages make demerit goods more expensive and less desirable e.g. alcohol
51
min price diagram analysis
will lead to a surplus of supply which the govt buys (subsidies)
52
issues of min price
costly for the govt to cover the subsidy a min price encourages famers to increase supply which will cost more than expected on the govt which occured in the EEC CAP
53
why might max prices be set
if suppliers have monopoly power the good is socially important to encourage consumption of merit goods demand is price elastic because the good is necessary for mainitining good living standards
54
max price diagram analysis
set below the equilibrium there will be a shortage and demand is greater than supply encourages black markets goods will be rationed
55
government failure
when the government intervening leads to a loss of economic welfare and misallocation of resources
56
examples of govt failure
distortion of prices/ free market mechanism e.g subsidising a failing industry unintended consequences excessive administrative costs - social benefits of a policy might not be worth the costs info gaps - policies require full CBA which is timely e.g. housing policies are long term and may fail
57
market mechanism and inequitable distribution of income
likely to lead to higher consumption of demerit goods with neg externalities from lack of govt intervention
58
govt intervention into inequitable incoem
progressive taxation govt spending on welfare spending
59
competition policy aims to ensure
technological innovation and dynamic efficiency effect price competition between suppliers
60
four key pillars of competition policy
antitrusts and cartels market liberalisation state aid control merger controls
61
antitrusts and cartels (comp policy)
elimination of agreements that restrict competition including price fixing and abuse by any firms who hold dominant market position
62
market liberalisation
introducing competition in previous monopoly industries such as energy supply, retail banking
63
state aid control (comp policy)
comp policy analyses state made measures such as subsidies to ensure that such measures do not distort the level of competition in the single market
64
merger control (comp policy)
investigation of mergers and take over between firms
65
main comp regulator in uk
competition and markets authority
66
examples of comp policy in action
privatisation- transferring ownership (Stockmarket floatation of Royal Mail) deregulation - preventing mergers/acquisitions that create monopoly, forced sales of assets e.g. BAA law enforcement - fines and penalties against price fixing reducing trade imports- encourages cheaper goods from abroad allowing new countries into EU single market increases contestibility
67

economics (33 decks)

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