Market Mechanism, Market Failure and Government Intervention in Markets

Question 1

signalling function of price

Answer 1

prices provide information to buyers and sellers ( so they can plan and coordinate their economic activity)

Question 2

incentive function of price

Answer 2

prices create incentive to alter economic behaviour/activity e.g. high price firm incentivised to supply more

Question 3

rationing function of prices

Answer 3

rising prices ration demand for product

Question 4

allocative function of price

Answer 4

changing relative prices allocate scare resources away from markets which exhibit excess supply and into markets which there is excess demand

Question 5

market failure

Answer 5

when the market mechanism leads to a misallocation of resources in the economy either completely failing to provide a good or service or providing the wrong quantity

Question 6

complete market failure

Answer 6

a market fails to function at all and a ‘missing market’ results

Question 7

partial market failure

Answer 7

a market does function but it delivers the wrong quantity of a good/service which results in a misallocation of resources

Question 8

missing market

Answer 8

a situation in which there is no market because the function of prices have broke down.

Question 9

private good

Answer 9

a good which is excludable and rivalrous e.g. a orange

Question 10

excludable good

Answer 10

people who are unprepared to pay can be excluded from benefiting from the good

Question 11

rival good

Answer 11

if one consumes the quantity available for others diminishes.

Question 12

public good

Answer 12

a good that is non-rivalrous and non-excludable e.g. lighthouse, lighting.

Question 13

quasi public good

Answer 13

a good which has features of both a public and private good e.g. partial excludability, partial rivalry, e.g. toll roads

Question 14

externalities

Answer 14

a public good that is dumped on third parties outside the market

Question 15

positive externalities

Answer 15

an external benefit that occurs when consumption or production of a good causes benefit to a third party e.g. when social benefit is greater tan private benefit.

Question 16

negative externalities

Answer 16

an external cost that occurs when a good is produced or consumed causes cost to a third party e.g. where social cost is greater than private cost

Question 17

property rights

Answer 17

the exclusive authority to determine how a resource is used e.g. owners of a house letting family stay rent free

Question 18

free rider problem

Answer 18

a person who benefits without paying due to non-excludability. which therefore removes incentive to provide the good in the free market.

Question 19

production externality

Answer 19

an externality generated in the course of producing a good or service. (good airport benefits local businesses/bad pollution)

Question 20

consumption externality

Answer 20

an externality generated in the course of consuming a good or service. (bad, smoking, good, eating healthy reduces NHS cost)

Question 21

tragedy of the commons

Answer 21

highlights that the pursuit of self interest is not good for social efficiency due to no one owning resource everyone may use e.g. littering because ‘everyone does it’ leads to environmental damage long term.

Question 22

merit good

Answer 22

a good which the social benefit of consumption exceed the private benefits e.g. healthcare.

Question 23

merit good characteristics

Answer 23

positive externalities of consumption and information failure

Question 24

information failure

Answer 24

occurs when individuals make the wrong decision because they don’t posses or ignore relevant information. e.g. individuals are short sight about the future private costs and benefits

Question 25

social benefit

Answer 25

total benefit of an activity e.g. social benefit = private benefit + external benefit.

Question 26

subsidy

Answer 26

a payment made by government or authority to producers for each unt of the good they produce also consumers e.g. free bus fairs for children under 18 in London

Question 27

demerit good

Answer 27

social costs of consumption exceed the private costs e.g. smoking

Question 28

social costs

Answer 28

total costs of an activity. social costs= private cost + external cost

Question 29

moral hazard

Answer 29

the tendency of individuals and firms once ensured against a contingency to behave so as to make that contingency more likely e.g. banks.

Question 30

immobility of labour

Answer 30

the inability of labour to move from one job to another due to occupational reasons or geographical reasons

Question 31

competition policy

Answer 31

micro economic policy by the government which aims to make good market more competitive aimed at crack down on monopolies, mergers and restrictive trading practices

Question 32

competition and markets authority

Answer 32

government agency responsible for advising on and implementing UK competition policy

Question 33

public ownership

Answer 33

government or local government ownership of industries, firms, social housing etc. this is called nationalisation

Question 34

privatisation

Answer 34

the transfer of assets from the public sector to the private sector

Question 35

regulation

Answer 35

the imposition of rules and other constraints which restrict freedom of economic activity

Question 36

deregulation

Answer 36

removal of regulations

Question 37

regulatory capture

Answer 37

when regulatory agencies act in the interest of the regulated firms rather than on behalf of the consumer which they are meant to protect. e.g. taking bribes

Question 38

tax

Answer 38

a compulsory levy imposed by the government to pay for its activities. taxes can also be used to achieve other objectives e.g. reduce consumption/production of demerit good

Question 39

price ceiling

Answer 39

a price above which it is illegal to trade creating excess demand.

Question 40

price floor

Answer 40

a price below which it is illegal to trade creating excess supply

Question 41

government failure

Answer 41

occurs when governments intervention reduces economic welfare leading to a worse allocation of resources than the free market outcome