Market mechanism, market failure, and government intervention Flashcards
STUDY
How does the price mechanism allocate resources?
- Rationing - prices increase where there is scarce resources and excess demand, so as it ration resources and decrease demand.
- Signalling - prices signal where resources are scarce or needed.
- Incentives - prices encourage changes in behaviour of producers or consumers.
What is market failure?
Market failure occurs when there is a misallocation of resources - resources are not allocated to best interests, meaning economic and social welfare is not maximised.
What are the different types of market failure?
- Externalities.
- Under-provision of public goods.
- Information gaps.
- Monopolies.
- Inequalities in distribution of income and wealth.
What is complete market failure?
When there is a ‘missing market’. Products are not supplied.
What is partial market failure?
When the wrong quantity of products is supplied, meaning misallocation of resources.
What is an externality?
A cost or benefit to a third party created by economic activity.
Income vs wealth
Income is a flow of money, wealth is a stock of assets.
What is a public good?
A good that is both non-excludable and non-rival. Public goods are underprovided in the private sector due to the free-rider problem, and so are generally provided by governments.
What is non-excludability?
When one person consumes a good, others are not prevented from consuming the good.
What is non-rivalry?
When more people consume the good, the benefit other people get does not diminish.
What is a private good?
Goods that are both rival and excludable.
What is a Quasi-public good?
A quasi-public good, or non-pure public good, is a good which is partially provided by the free market and is not fully non-rival and non-excludable.
What are private costs and benefits?
Private costs are the costs of production producers must pay.
Private benefits are the benefits derived from consumption of a good.
What are external costs and benefits?
External costs and benefits are the costs and benefits that occur during production and consumption - they are the externalities. These are ignored by market equilibrium, meaning external costs are overproduced and over provided, and external benefits are underproduced and under provided.
What are social costs and benefits?
Social costs and benefits are the private costs/benefits + the social costs/benefits.
What are demerit goods?
Goods that cause negative externalities. They are associated with information failure, and so are often overprovided and overconsumed.
What are merit goods?
Goods that cause positive externalities. They are associated with information failure, and so are often underprovided and underconsumed.
The extent of market failure involves value judgement, so it is hard to determine the monetary value of an externality - different people will put different values on it.
Not all products resulting in positive or negative externalities in consumption are merit or demerit goods
The extent of market failure involves value judgement, so it is hard to determine the monetary value of an externality - different people will put different values on it.
Not all products resulting in positive or negative externalities in consumption are merit or demerit goods
What is symettric information?
Symettric information means that producers and consumers have perfect market information to make decisions, leading to an efficient allocation of resources.
What is asymettric information?
Asymettric information leads to market failure, due to unequal knowledge between producers and consumers, which can create a misallocation of resources.
What is the mobility of labour?
The mobility of labour is the ability of labour to move between jobs.
What is geographical immobility?
The immobility of factors of production due to obstacles preventing movement between areas.
What is occupational immobility?
The immobility of factors of production due to obstacles preventing factors of production finding new use.
How can inequitable distribution of income and wealth be reduced?
Government intervention, included progressive taxes and government spending.
What is government intervention?
When governments intervene to help correct market failure.
What are examples of government intervention?
- Indirect taxes - Ad Valorem or specific taxes.
- Subsidies.
- Maximum and minimum prices.
- Tradeable pollution permits, or taxes on pollution
- State provision of public and merit goods
- Provision of information
- Regulation
