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Micro economics > Market mechanism, Market failure and Government intervention > Flashcards

Market mechanism, Market failure and Government intervention Flashcards

1
Q

Price

A

the value in which a good or service is exchanged

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2
Q

Price mechanism

A

Changes in demand or supply of a good or service lead to changes in its quantity brought/sold

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3
Q

Name three functions of price mechanism

A

incentive,signal, ration scarce resources

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4
Q

Incentive

A

Higher prices encourage all firms to produce more goods

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5
Q

Signaling

A

changes in price show changes in demand or supply for producers and consumers

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6
Q

Rationing scarce resources

A

This means when there High demand and supply is limited prices will remain high but if theres low demand and high supply prices will be low

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7
Q

three advantages of price mechanism

A

Resources will be allocated efficiently to satisfy needs and wants

Consumers decide what is and isnt produced

Price mechanism can operate without the cost of employing people to regulate it

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8
Q

three Disadvantages of price mechanism

A

Inequality in income and wealth

Under provision of merit goods and over provision of demerit goods

Public goods wont be produced

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9
Q

What is market failure

A

A misallocation of resources

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10
Q

Types of Market failure

A

Complete and partial Market failure

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11
Q

Complete market failure

A

This is when there is a missing market and no market exists

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12
Q

Partial market failure

A

When the market functions but price or quantity is supplied wrong

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13
Q

Externalities

A

the effects that producing and consuming has on third parties who werent involved in the producing and consuming of a good or service

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14
Q

Positive externalities and example

A

external benefit for example improvement in technology

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15
Q

Negative externality and example

A

External cost for example littering

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16
Q

Private cost

A

The cost of doing something to ethier a consumer or firm

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17
Q

External cost and example

A

Caused by externalities for example littering cause council to pay to clean

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18
Q

Social cost

A

is the total cost bourne to society

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19
Q

Private benefit

A

the benefit gained by a producer or consumer

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20
Q

External benefit

A

caused by externalities for example increased equipment means lesser need for electricity

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21
Q

Social benefit

A

the full benefit recieved for a good or service

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22
Q

MPC

A

Marginal private cost and its the cost of producing the last unit of a good

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23
Q

MPB

A

Marginal private benefit the benefit of consuming the last unit of a good

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24
Q

Postive externality diagram

A

when MPB and MSB are parrallel

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25
Negative externality diagram
When mpc and msc are parallel
26
Equilibruim
when supply and demand are equal
27
Socially optimum point
When MSC equals MSB
28
Socailly optimum level
When output and price gives society maximum benefit of any positive externalities and covers negative externalities
29
Overproduction for negative externalities
When output is higher than socially optimum level leading to welfare loss
30
Underconsumption for positive externalities
ignoring potential welfare gain output below socially optimum level
31
Overconsumption for negative externalities
Ignore negative consumption externalities, consumption higher than socially optimum level causing welfare loss
32
Under production for positive externalities
ignoring positive positive production externalities resources wont be allocated to socially optimum level
33
Extended property rights
externalities are accounted for example a water company with property rights can charge people who pollute
34
Merit goods
Goods whose consumption brings great benefit to society for example education
35
Why are merit goods underconsumed
Postive externalities ignored Due to imperfect information consumers dont know full benefit
36
Demerit Goods
goods whose consumption is regarded as harmful to the people who consume it example is cigarettes
37
Demerit goods are overconsumed because
negative externalities are ignored Imperfect information means they arent aware
38
Value judgement
based on peoples opinions not on economic theory
39
Government intervention on merit goods
subsidies and taxes
40
Example of public good
flood defences and street lights
41
characteristics of public good
Non excludable and non rivalrous
42
Non excludable
People cannot be stopped from consuming the good even though they havent paid for it
43
Non rival
a person benefiting from a good doesnt stop others
44
Private goods
they are exludable and rivalrous an example of this is biscuit
45
Quasi public goods
Goods that exbhit the characteristics of a public good but not really
46
example of quasi Public goods
roads because they are non excludable which means they are free to use and non rival which means one use doesnt deny someone elses but they can be excludable due to tolls and rival due to congestion
47
free rider problem and example
once a public good is provided its impossible to stop someone from benefiting for example providing street cleaning cannot stop a free rider who refuses to pay for street cleaning
48
tragedy of the commons
the idea that people acting in their best interest will overuse a common resource without considering that it will lead to the depletion and degradation of the resource
49
Income
The amount of money recieved over a set period of time
50
Wealth
the value of assets held
51
Causes of inequality
wage differientials,discrimination, regressive tax
52
impact of inequality
lack of education, lack of access to vital resources, market failure due to an unequal distribution of income
53
Government intervention on inequality
value judgements through political decisions benefits to redistribute income state provision like health and education progressive tax to higher incomes economic growth bringing more jobs and higher wages national minimum wage to reduce poverty for lower incomes
54
pure monopoly
this is when there is only one supplier in the market
55
Monopoly power
The ability to influence the price of a good
56
How is market failure caused by a monopoly
if theres one firm in the market it could misallocate resources restricting supply and price
57
Example of state provision
NHS, education, fire, police services
58
How does state provision solve market failure
Increases consumption for merit goods help to reduce inequalities help redistribute income
59
Disadvantages of state provision
Less incentive to operate efficiently fail to respond to consumer demands opportunity cost compared to producing other goods
60
Regulation
rules inforced by authority
61
Legislation
Legal action taken by anyone who breaks the rules
62
Regulation solving market failure
reduced demerit goods through banning reduced monopoly power through price caps
63
disadvantages of regulation
level of regulation difficult to assess Regulation is expensive forcing firms to to move country
64
Government failure
An unintended consequence to correct market failure by leading resources to be misallocated and welfare loss
65
Red tape
The government having lots of rules and regulations
66
Government interventions creating market distortions
Income tax is a disincentive to work hard subsidies dont encourage firms to be efficient Government price fixing like minimum and maximum pricing can disort price signals
67
Government Conflicting objectives causing market failure
Government effort to achieve a certian objective has a negative impact on the other for example the policy of tighter emission control help to achieve enviromental objectives but will increase costs and output reducing economic growth
68
How can administrative costs cause government failure
regulation and policies result in higher costs due to large resources policing could be expensive
69
Competition Policy
To protect the interest of consumers by promoting competition and encouraging markets to function efficient
70
CMA
Competition markets authority to look out for unfair monopolistic behaviour
71
what issues does the CMA need to monitor-Mergers
monitor mergers and takeovers so they prevent those that arent beneficial to the effiency of the market to consumer
72
what issues does the CMA need to monitor-Agreements between firms
agreements involve price fixing, spliting markets or limiting production which is anti competitive
73
what issues does the CMA need to monitor-financial support
if a government in one EU country gives financial support to firms in the market
74
How can the Government bring intervention to bring more competition
Privatisation and Regulation
75
How can privatisation bring competition-advantages and disadvantages
Privitisation can introduce competition by removing public monopoly Privatisation could turn a public monopoly to private monopoly Privatisation could increase prices and reduce output
76
How can regulation bring competition
Can control monopoly power through price caps regulation to improve quality standards windfall taxes to reduce monopoly power
77
absence of property of rights
causes production and consumption externalities, market failure also a missuse of scarce resources an example is a factory emiting into a nearby river wouldnt be accounted for
78
disadvantages for extending property rights
externalities could affect more than one country- it will be hard to account for them could be difficult to extend property rights high cost of suing people who infringe property rights

Micro economics (8 decks)

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