MARKET MECHANISM, FAILURE + GOV INTERVENTION- MICROECONOMICS Flashcards
Signalling function
Provide information to buyers and sellers
Allocative function
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets with excess demand
Incentive function
Provide reasons to alter economic behaviour, high prices provides a reason for firms to supply more
Rationing function
Rising prices ration demand for a product, fewer goods demanded at every price
Market failure
When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide the quantity or the good in general
Missing market
Situation where there is no market because the functions of prices has broken down
Private good
A good that is excludable, rivalrous and rejectable
Car, House, luxury items
Public good
Non-excludable, non-rivalrous, non-rejectable
Roads, NHS
Free riders
Those who benefit from resources, public goods and common pool resources do not pay for them
Quasi-public good
A good that is semi-non rivalrous and excludable
Public transportation, parks, libraries
Externality
Cost or benefit experienced by an uninvolved 3rd party
Positive externality
An external benefit, occuring when the consumption or production of a good causes a benefit to a 3rd party, where social benefit is greater than private
Electric car = less pollution
Negative externality
An external cost, occuring when consumption or production of a good causes a cost to a 3rd party, where social cost is greater than private cost
Smoking= = second hand smoke, strain on healthcare services
Production externality
An externality resulting form the production of a good or service
Consumption externality
An externality resulting from the from the consumption of a good or service
Social benefit
The total benefit of an activity expressed as:
Social benefit= Private benefit + External benefit
Merit good
Goods or services that are considered to be beneficial to individuals and society as a whole, (where the social benefits of consumption exceed private) but are often under-consumed in a free market economy
Demerit goods
A good or service whose consumption is considered harmful to the consumer and society, (where the social costs of consumption exceed the private costs) value judgements are involved leading to an over consumption, however imperfect information leads to long term consequences
Subsidy
-A payment made by the state or authority to producers for each unit of subsidised good
-Consumers subsidised, bus passes for child to get to school
Social cost
The total cost of an activity expressed as:
Social cost = private costs + external cost
Information problem
Occurs when people don’t possess or ignore the relevant information, due to myopic decision making or asymmetric information
