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AQA MicroEconomics > Market Mechanism, Market Failure and Government Intervention > Flashcards

Market Mechanism, Market Failure and Government Intervention Flashcards

1
Q

What does the price mechanism determine ?

A

Market Prices

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2
Q

What are three main functions of the price mechanism?

A

Rationing, Incentive and Signalling

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3
Q

What are the pros of price mechanism ?

A
  • No risk of government failure
  • Consumer Soverignity
  • No regulation
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4
Q

What is the cons of the price mechanism ?

A
  • Can widen the inequality of income and wealth
  • Under-provision in public merit goods
  • Unemployment
  • Inflation
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5
Q

Define market failure

A

Market Failure is when a market leads to a misallocation of resources at the socially optimal level of output

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6
Q

What are the different causes of market failure ?

A

Externalites, The under-provision of public goods, information gaps, monopolies and income inequality

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7
Q

Define complete market failure

A

Complete market failure is when there is a missing market. The market does not supply the products

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8
Q

Define partial market failure

A

This is when the market produces a good but is the wrong quantity or the wrong price

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9
Q

What is an example of partial market failure ?

A

NHS vs Private Healthcare

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10
Q

What is the characteristic of a pure public goods ?

A
  • Non excludable
  • Non rival
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11
Q

Define non excludable

A

Non excludable is when no prices can be charged

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12
Q

Describe the free rider problem

A

The free rider problem is when the burden on a resources that is created by a overuse

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13
Q

Define being non rivalrous

A

The quantity of good doesn’t diminish upon consumption eg. street lights

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14
Q

What happens to the market when their is free rider problem ?

A

There will be complete market failure

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15
Q

What is quasi-public good ?

A

A quasi-public goods is when a good shows characteristics of public and private

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16
Q

What is an example of a quasi-public good ?

A
  • Roads eg excludable through toll booth and rival through peak hours
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17
Q

What is a private good ?

A

A private good is owned by a privately owned business to increase the utility of the buyer whereas public is available to anyone

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18
Q

Define the tragedy of commons

A

Tragedy of commons is when the self interest causes a depletion of resources

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19
Q

What is the negative externality in production (MSC>MPC) ?

A

These are costs to 3rd parties due to the actions of producers

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20
Q

What is the example of a negative externality ?

A

Air Pollution , Resources Depeletion

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21
Q

What is the negative externality in consumption ( MSB < MPB) ?

A

Costs to the 3rd parties as result of actions of consumers

22
Q

What is the example of a negative externalites in consumption ?

A

Smoking, Fast Foods etc

23
Q

Define positive externalities in consumption (MSB >MPB)

A

Benefits to 3rd parties as a result of the actions of consumers

24
Q

Examples of a positive externalities in consumption

A

Healthcare, Education and Healthy Eating

25
Q

Define positive externalities in production (MPC>MSC) ?

A

Benefits to 3rd parties as a result of the actions of producers

26
Q

What is the example of a positive externalities in production

A

R&D , In work training

27
Q

Define a merit good

A

A merit good is when goods are more beneficial to consumers than they realise

28
Q

Are merit goods underconsumed or overconsumed ?

A

Underconsumed

29
Q

Define a demerit good

A

A demerit good are goods that are deemed more harmful than they realise

30
Q

What is an example of a demerit good

A

cigarettes and alchol

31
Q

What is the main reason for market failure for demerit and merit goods ?

A

Imperfect Information

32
Q

Define symetric information

A

Systemic information means that consumers and producers have a perfect information —-> efficient allocation of resources

33
Q

Define asymetric information

A

Asymetric information is when there id a unequal knowledge between consumers are producers

34
Q

What is an example of asymetric information ?

A

A car dealer might know about a fault with the car that consumer is unaware of.

35
Q

What is the meaning of principle-agent problem ?

A

When an agent makes decisions for the principal , but the agent is inclined to act in their own interest , rather than principal

36
Q

Define geographical immobility

A

Geographical immobility is the obstacles which prevent the factors of production moving between areas

37
Q

Who enacts competition policy?

A

Competition And Market Authority (CMA)

38
Q

What are the aims of competition policy ?

A
  • Prevent excessive pricing
  • Promote competition
  • Ensure quality, standards and choice
  • Promote technological innovation
39
Q

Why will the competition policy intervene ?

A
  • Anti-trust and cartel agreement
  • Investigate Mergers
  • Liberalise concentrated market
40
Q

Define nationalisation ?

A

Nationalisation is the process of taking an industry into public ownership

41
Q

What are the pros of nationalisation ?

A
  • Greater EOS
  • More focus on state provision
  • Public sector can be vehicle of macro-economic control
42
Q

What is the cons of nationalisation ?

A
  • Diseconomies of scale
  • Lack of incentive min costs
  • Lack of supernormal profit (dynamic ineffiency)
  • X-ineffiency
43
Q

Define privatisation

A

Privatisation is the sale of state owned companies to the private sector , normally through stock market listing

44
Q

What is the pros of privatisation ?

A
  • Incentive for companies to reduce costs and be more productively efficent by raising productivity.
  • Shared ownership
  • Firms are likely to be dynamic efficiency and increase investment spending
45
Q

What is the cons of privatisation ?

A
  • Shares are brought large institutions
  • Some activites is better run by the state
  • Gov may be at lose with dividends
46
Q

Define regulation

A

Regulation is the rule or law enacted by the government that muse be followed by economic agents to encourage change in behaviour

47
Q

What are the pros of regulation ?

A
  • Incentive to change behaviour at socially optimal
  • Command & Control market
  • Allocative Efficency and Welfare Gain
48
Q

What are the cons of regulation ?

A
  • Costs : Admin costs (enforcement costs)
  • Equity
  • Black Market & Unintended consequence
49
Q

What is the problem of regulation ?

A

Regulation can be paternalistic

50
Q

Define deregulation

A

Deregulation is when the government reduces the legal barriers to entry incentivising firms to enter markets and promote competition

51
Q

What is the advantages of deregulation ?

A
  • Firms will increase consumer choice
  • Productively and X-efficency
  • Dynamic Efficiency
52
Q

What is the disadvantages of deregulation?

A
  • Loss of natural monopoly
  • Formation of oligopolies an local monopolies

AQA MicroEconomics (5 decks)

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