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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
Define positive externalities in production (MPC>MSC) ?
Benefits to 3rd parties as a result of the actions of producers
26
What is the example of a positive externalities in production
R&D , In work training
27
Define a merit good
A merit good is when goods are more beneficial to consumers than they realise
28
Are merit goods underconsumed or overconsumed ?
Underconsumed
29
Define a demerit good
A demerit good are goods that are deemed more harmful than they realise
30
What is an example of a demerit good
cigarettes and alchol
31
What is the main reason for market failure for demerit and merit goods ?
Imperfect Information
32
Define symetric information
Systemic information means that consumers and producers have a perfect information ----> efficient allocation of resources
33
Define asymetric information
Asymetric information is when there id a unequal knowledge between consumers are producers
34
What is an example of asymetric information ?
A car dealer might know about a fault with the car that consumer is unaware of.
35
What is the meaning of principle-agent problem ?
When an agent makes decisions for the principal , but the agent is inclined to act in their own interest , rather than principal
36
Define geographical immobility
Geographical immobility is the obstacles which prevent the factors of production moving between areas
37
Who enacts competition policy?
Competition And Market Authority (CMA)
38
What are the aims of competition policy ?
- Prevent excessive pricing - Promote competition - Ensure quality, standards and choice - Promote technological innovation
39
Why will the competition policy intervene ?
- Anti-trust and cartel agreement - Investigate Mergers - Liberalise concentrated market
40
Define nationalisation ?
Nationalisation is the process of taking an industry into public ownership
41
What are the pros of nationalisation ?
- Greater EOS - More focus on state provision - Public sector can be vehicle of macro-economic control
42
What is the cons of nationalisation ?
- Diseconomies of scale - Lack of incentive min costs - Lack of supernormal profit (dynamic ineffiency) - X-ineffiency
43
Define privatisation
Privatisation is the sale of state owned companies to the private sector , normally through stock market listing
44
What is the pros of privatisation ?
- 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
What is the cons of privatisation ?
- Shares are brought large institutions - Some activites is better run by the state - Gov may be at lose with dividends
46
Define regulation
Regulation is the rule or law enacted by the government that muse be followed by economic agents to encourage change in behaviour
47
What are the pros of regulation ?
- Incentive to change behaviour at socially optimal - Command & Control market - Allocative Efficency and Welfare Gain
48
What are the cons of regulation ?
- Costs : Admin costs (enforcement costs) - Equity - Black Market & Unintended consequence
49
What is the problem of regulation ?
Regulation can be paternalistic
50
Define deregulation
Deregulation is when the government reduces the legal barriers to entry incentivising firms to enter markets and promote competition
51
What is the advantages of deregulation ?
- Firms will increase consumer choice - Productively and X-efficency - Dynamic Efficiency
52
What is the disadvantages of deregulation?
- Loss of natural monopoly - Formation of oligopolies an local monopolies

AQA MicroEconomics (5 decks)

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