MARKET MECHANISM, FAILURE + GOV INTERVENTION

Question 1

What are the 4 functions of prices

Answer 1

Signalling
Incentive
Rationing
Allocative

Question 2

What is the signalling function

Example

Answer 2

Prices provide info to buyers and sellers

Rise and fall to reflect scarcities and surpluses

Question 3

What is the incentive function

Example

Answer 3

Prices provide incentives for people to alter their behaviour

Higher price incentivices supply

Question 4

What is the rationing function

Another word for equilibrium point?

Answer 4

Where they ration demand for a product

Market clearing price

Question 5

What is the allocative function

Type of efficiency?

Answer 5

Changing relative prices to allocate resources away from markets exhibiting excess supply

Allocative efficiency

Question 6

Advantages of the price mechanism

Answer 6

Promotes consumer sovereignty (consumer desire controls output)
-> Alllocative Efficiency
Leads to productive efficient outcomes (no need to produce more)

Question 7

Disadvantages of the price mechanism

Answer 7

Asymmetric information distorts market
-> Firms dictate output in monopolistic conditions, higher price
‘Value neutral,’ no regard for equality
->Market Failures

Question 8

Define market failure

Answer 8

When the market mechanism leads to a misallocation of resources in the economy, providing the wrong quantity or failing to provide alltogether

Question 9

Types of ‘market’ failure

Answer 9

Complete-> missing market
Partial

Question 10

Define a private good

Answer 10

A good of excludable and rivalrous nature

Over consumed, produced

Question 11

Define public goods

Issues

Answer 11

A good that is non-excudable and non-rivalrous
->Optimal consumption level when they are free of charge

Underconsumed, Free-rider problem

Question 12

What is a positive externality

Examples

Answer 12

An external benefit that occurs when the consumption or production to an uninvolved third party, where MPB<MSB

Electric cars, Bee keeping (wildlife conservation)

Question 13

What is a negative externality

Examples

Answer 13

An external cost to uninvolved third parties through the production or consumption of goods, where MPC<MSC

Water pollution, air pollution

Question 14

Define the free-rider problem

Answer 14

Someone who benefits without paying due to the non excludable nature of public goods

Question 15

Examples of production externalities

Answer 15

-VE (goods too cheap)
Oil drilling
Hzardous waste

+VE (prices too high)
Train stations
Roads

Question 16

Examples of consumption externalities

Answer 16

-VE
Second hand smoking
Noise pollution

+VE
Driving an electric car
University degrees

Question 17

Draw a positive externality graph

Question 18

Draw a negative externality graph

Question 19

What are Merit goods

Evaluation

Answer 19

Goods for where the social benefits of consumption exceed the private benefits, MPB<MSB

Value judgements dictate if its externalities are ‘good’
Typically under

Question 20

Social benefit equation

Answer 20

SB= PB + EB

Question 21

Define demerit goods

Answer 21

Goods where the social costs of consumption exceed the private costs, MPC<MSC

Question 22

Social cost equation

Answer 22

SC= PC + EC

Question 23

Define moral hazard

Answer 23

The tendancy for individuals and firms , once insured against contingency, to take on more risk

Question 24

What is the immobility of labour

Answer 24

The inability of labour to move from one job to another either for occupational (training) or geographical reasons

Question 25

How does the immobility of labour cause market failure

Example

Answer 25

The inability to relocate labour internationally due to geographical or occupational (Training) reasons

Governments not recognising foreign qualifications to protect domestic w

Question 26

Define competition policy

Who implements it?

Answer 26

Part of the governments micro policy that aims to make markets more competitive

Competition and Markets Authority (CMA)

Question 27

How does competition policy improve imperfect markets

Answer 27

Market liberalisation
->Merger control, <40% market share
Antitrust and cartles
->Remove price fixing

Question 28

Define public ownership

Examples?

Answer 28

State ownership of industries, firms and other assets (nationalisation)

Iron + Steel (1949)
Coal (1947)
railways (1948)

Question 29

Cases for privatisation

Answer 29

Revenue raising
Reduction in Gov spending
->Improved fiscal deficit
Promotes competition
promotion of efficiency

Question 30

Cases against privatisation

Answer 30

Monopoly abuse
Valuable assets sold to simply reduce deficit or too cheaply