Market Mechanism, Market Failure and Government Intervention in Markets

Question 1

administrative costs

Answer 1

costs that are not directly related to a business operation e.g., paper work

Question 2

asymmetric informaiton

Answer 2

when one party knows more or has better information than the other party in a transaction e.g., a patient and a doctor

Question 3

complete market failure

Answer 3

occurs where the market is missing/non-producing

Question 4

consumption externality

Answer 4

an externality either positive or negative, generated through consumption of a good or service.

Question 5

demerit good

Answer 5

goods where the social costs in consumption exceed the private costs in consumption

Question 6

distribution of income and wealth

Answer 6

the way in which total income and wealth are divided among the population of an economy

Question 7

economic welfare

Answer 7

quality and satisfaction of the life of the population

Question 8

equity

Answer 8

fairness, justness. involves value judgements

Question 9

externality

Answer 9

external effects imposed on society derived from the production or consumption of a good or service

Question 10

free rider problem

Answer 10

once a public good is produced, there is no way to control who benefits from it

Question 11

geographical mobility of labour

Answer 11

occurs where workers find it difficult to relocate to places where jobs exist, e.g., housing costs

Question 12

government failure

Answer 12

when government intervention leads to a lessening of economic welfare and a misallocation of resources

Question 13

government intervention

Answer 13

when a government actively intervenes and affects market operation

Question 14

immobility of factors of production

Answer 14

when it is hard for factors of production to move across different areas within the economy

Question 15

immobility of labour

Answer 15

the inability of labour to move from one occupation to another. there are two main types, geographical and occupational

Question 16

imperfect information

Answer 16

when an economic agent doesn’t hold all the necessary information to make and informed decision about a product

Question 17

incentive

Answer 17

something that motivates an agent in the ecoomy

Question 18

income inequality

Answer 18

differenced in size of earnings between households/individuals

Question 19

inequity

Answer 19

unfairness, unjustness. involves value judgements

Question 20

market distortions

Answer 20

where interference in a market affects behaviour and prices/output

Question 21

market economy

Answer 21

where output and prices are determined by the workings of supply and demand

Question 22

market failure

Answer 22

occurs when the market mechanism leads to a misallocation of resources

Question 23

merit good

Answer 23

goods where the government feels are under consumed, and provide benefits to society. they will often be subsidised.

Question 24

missing market

Answer 24

a situation where there is no market due to the breakdown of the price mechanism

Question 25

negative externality

Answer 25

negative external effects imposed on third parties derived from the consumption or production of a good or service

Question 26

non-excludable

Answer 26

a good or service where you are unable to prevent non-paying consumers from benefiting or using the good

Question 27

non-rival

Answer 27

where one persons consumption of a good or service does not decrease the amount available for consumption by another consumer

Question 28

occupational mobility of labour

Answer 28

occurs where workers find it difficult to transfer between different occupations due to a lack of transferrable skills

Question 29

partial market failure

Answer 29

this is where a market exists but contributes to resource misallocation

Question 30

positive externality

Answer 30

positive external effects imposed on society derived from the production or consumption of a good or service

Question 31

price ceiling

Answer 31

a price above which trade is illegal

Question 32

price controls

Answer 32

government controls on prices e.g., maximum or minimum prices

Question 33

price floor

Answer 33

a price below which trade is illegal

Question 34

price mechanism

Answer 34

the way in which prices are determined through forces of supply and demand

Question 35

private benefit

Answer 35

benefits incurred to the individual through consumption or production

Question 36

private cost

Answer 36

costs incurred to the individual through production or consumption

Question 37

private good

Answer 37

an excludable, rival good