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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
Q

Negative externality diagram

A

When mpc and msc are parallel

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26
Q

Equilibruim

A

when supply and demand are equal

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27
Q

Socially optimum point

A

When MSC equals MSB

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28
Q

Socailly optimum level

A

When output and price gives society maximum benefit of any positive externalities and covers negative externalities

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29
Q

Overproduction for negative externalities

A

When output is higher than socially optimum level leading to welfare loss

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30
Q

Underconsumption for positive externalities

A

ignoring potential welfare gain output below socially optimum level

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31
Q

Overconsumption for negative externalities

A

Ignore negative consumption externalities, consumption higher than socially optimum level causing welfare loss

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32
Q

Under production for positive externalities

A

ignoring positive positive production externalities resources wont be allocated to socially optimum level

33
Q

Extended property rights

A

externalities are accounted for example a water company with property rights can charge people who pollute

34
Q

Merit goods

A

Goods whose consumption brings great benefit to society for example education

35
Q

Why are merit goods underconsumed

A

Postive externalities ignored

Due to imperfect information consumers dont know full benefit

36
Q

Demerit Goods

A

goods whose consumption is regarded as harmful to the people who consume it example is cigarettes

37
Q

Demerit goods are overconsumed because

A

negative externalities are ignored

Imperfect information means they arent aware

38
Q

Value judgement

A

based on peoples opinions not on economic theory

39
Q

Government intervention on merit goods

A

subsidies and taxes

40
Q

Example of public good

A

flood defences and street lights

41
Q

characteristics of public good

A

Non excludable and non rivalrous

42
Q

Non excludable

A

People cannot be stopped from consuming the good even though they havent paid for it

43
Q

Non rival

A

a person benefiting from a good doesnt stop others

44
Q

Private goods

A

they are exludable and rivalrous an example of this is biscuit

45
Q

Quasi public goods

A

Goods that exbhit the characteristics of a public good but not really

46
Q

example of quasi Public goods

A

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
Q

free rider problem and example

A

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
Q

tragedy of the commons

A

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
Q

Income

A

The amount of money recieved over a set period of time

50
Q

Wealth

A

the value of assets held

51
Q

Causes of inequality

A

wage differientials,discrimination, regressive tax

52
Q

impact of inequality

A

lack of education, lack of access to vital resources, market failure due to an unequal distribution of income

53
Q

Government intervention on inequality

A

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
Q

pure monopoly

A

this is when there is only one supplier in the market

55
Q

Monopoly power

A

The ability to influence the price of a good

56
Q

How is market failure caused by a monopoly

A

if theres one firm in the market it could misallocate resources restricting supply and price

57
Q

Example of state provision

A

NHS, education, fire, police services

58
Q

How does state provision solve market failure

A

Increases consumption for merit goods

help to reduce inequalities

help redistribute income

59
Q

Disadvantages of state provision

A

Less incentive to operate efficiently

fail to respond to consumer demands

opportunity cost compared to producing other goods

60
Q

Regulation

A

rules inforced by authority

61
Q

Legislation

A

Legal action taken by anyone who breaks the rules

62
Q

Regulation solving market failure

A

reduced demerit goods through banning

reduced monopoly power through price caps

63
Q

disadvantages of regulation

A

level of regulation difficult to assess

Regulation is expensive forcing firms to to move country

64
Q

Government failure

A

An unintended consequence to correct market failure by leading resources to be misallocated and welfare loss

65
Q

Red tape

A

The government having lots of rules and regulations

66
Q

Government interventions creating market distortions

A

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
Q

Government Conflicting objectives causing market failure

A

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
Q

How can administrative costs cause government failure

A

regulation and policies result in higher costs due to large resources

policing could be expensive

69
Q

Competition Policy

A

To protect the interest of consumers by promoting competition and encouraging markets to function efficient

70
Q

CMA

A

Competition markets authority to look out for unfair monopolistic behaviour

71
Q

what issues does the CMA need to monitor-Mergers

A

monitor mergers and takeovers so they prevent those that arent beneficial to the effiency of the market to consumer

72
Q

what issues does the CMA need to monitor-Agreements between firms

A

agreements involve price fixing, spliting markets or limiting production which is anti competitive

73
Q

what issues does the CMA need to monitor-financial support

A

if a government in one EU country gives financial support to firms in the market

74
Q

How can the Government bring intervention to bring more competition

A

Privatisation and Regulation

75
Q

How can privatisation bring competition-advantages and disadvantages

A

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
Q

How can regulation bring competition

A

Can control monopoly power through price caps

regulation to improve quality standards

windfall taxes to reduce monopoly power

77
Q

absence of property of rights

A

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
Q

disadvantages for extending property rights

A

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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