Market Mechanism, Market Failure And Government Intervention In Markets Part 1 Flashcards
Draw the graph of external costs of production?
How else is this graph known as?
Picture of graph
Ignoring negative production externalities leads to overproduction
Explain the graph of external costs of production?
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
Draw the graph of external benefits of production?
Explain the graph of external benefits of production?
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
What does the abstances of property rights lead to in a market?
Why is this?
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
FC on e MERIT AND DEMERIT GOODS
What does symmetric information mean?
This means that consumers and producers have the same market information when making their decisions
What can asymmetric information be linked to?
Market failure
Principle agent problem
What is imperfect information?
What results from this?
When info is missing so people can’t make informed decisions
Misallocation of resources and wrong prices and quantities produced
What is the principle agent problem?
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
How can we try to get perfect information?
Informative advertising
What is the mobility of labour?
Labour’s ability to change between jobs
What can act as evidence that the labour market is inefficient?
Unemployment
When may frictional unemployment exist?
Whilst people are moving between jobs
When does structural occur?
When there is a decline in the industry