Market Mechanism, Market Failure And Government Intervention In Markets Part 1

Question 1

Draw the graph of external costs of production?

How else is this graph known as?

Answer 1

Picture of graph

Ignoring negative production externalities leads to overproduction

Question 2

Explain the graph of external costs of production?

Answer 2

The external costs occurs when the good is being produced or consumed (eg pollution)
External costs are shown by the vertical distance between MSC and MPC
The market equilibrium ignores these negative externalities. This leads to over production and under pricing
????? With negative externalities, MSC>MPC of supply. At the free market equilibrium, therefore, there are an excess of social costs over benefits at the output between Q1 and Qe???????
When social cost > private benefits you get an area of deadweight welfare loss

This shows that the market fails to account for negative externalities that occur from the consumption of some goods, which could reduce welfare to society if it is left to the free market

Question 3

Draw the graph of external benefits of production?

Answer 3

Question 4

Explain the graph of external benefits of production?

Answer 4

An example may be lives saved from vaccines
Because of imperfect information they are under provided and under consumed in the free market, where MSB>MPB, leading to market failure
The triangle shows the excess of social benefits over costs

Question 5

What does the abstances of property rights lead to in a market?

Why is this?

Answer 5

Inefficiency

The free rider problem occurs as people have unlimited access (eg river) which a lot of time leads to pollution and exploitation.
Firms believe that it will become someone else problem but the problem may never be solved by anyone if everyone thinks that

Question 6

FC on e MERIT AND DEMERIT GOODS

Question 7

What does symmetric information mean?

Answer 7

This means that consumers and producers have the same market information when making their decisions

Question 8

What can asymmetric information be linked to?

Answer 8

Market failure

Principle agent problem

Question 9

What is imperfect information?

What results from this?

Answer 9

When info is missing so people can’t make informed decisions

Misallocation of resources and wrong prices and quantities produced

Question 10

What is the principle agent problem?

Answer 10

When the agent makes decisions for the principle, but the agent is inlined to act in their own interests and ends up Satisficing the principles objectives

Question 11

How can we try to get perfect information?

Answer 11

Informative advertising

Question 12

What is the mobility of labour?

Answer 12

Labour’s ability to change between jobs

Question 13

What can act as evidence that the labour market is inefficient?

Answer 13

Unemployment

Question 14

When may frictional unemployment exist?

Answer 14

Whilst people are moving between jobs

Question 15

When does structural occur?

Answer 15

When there is a decline in the industry

Question 16

Why may structural unemployment occur?

Answer 16

Potential employees skills don’t match what is required to do the job

Question 17

What does the geographical mobility of labour mean?

Answer 17

A term used to express belief that it is hard/easy for people to move houses/ area to find work

Ideally (you want high geographical mobility)

Question 18

What does occupational mobility mean?

And in terms of labour?

Answer 18

It refers to the obstacles that prevent the factors of production changing their use

In terms of labour - it may be hard for the labour force to adapt their existing skills to do a new job