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economics Y1 > Market mechanism, market failure and government intervention in markets > Flashcards

Market mechanism, market failure and government intervention in markets Flashcards

1
Q

How do markets allocate resources?

A

Rationing function
Signalling function
Incentive function
Allocative function

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2
Q

What is meant by the “Rationing function”

A

The rationing function- increasing prices rations demand to those most able to afford it

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3
Q

What is meant by the “Signalling function”

A

The signalling function- Prices provide important information to suppliers

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4
Q

What is meant by the incentive function

A

Prices create incentives for market participants to change their actions

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5
Q

What is meant by the Allocative function

A

The function of prices that acts to divert resources to where returns can be maximised

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6
Q

What is meant by the term “Market failure”

A

Market failure occurs when the free market fails to alllocate resources in the economy

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7
Q

What is meant by the term Complete market failure

A

When a free market fails to create a market for a good/service

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8
Q

What is meant by a partial market failure?

A

When a market for a good/ service exists but it is produced/consumed in a way that doesn’t maximise economic welfare

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9
Q

What are the main examples of partial market failure

A

Merit goods
Demerit goods
Negative externalities

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10
Q

What are the main examples of complete market failure

A

The free rider problem

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11
Q

What is meant by the free rider problem?

A

When people benefit from the production of a good without paying for it resulting in an underproduction or no production at all of a good

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12
Q

How can monopolies result in market failure?

A
  1. Monopolies have high market power so can restrict output to charge higher prices
  2. Leads to allocative inefficiency
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13
Q

How can public goods result in a market failure

A
  1. Public goods are non rival and non excludable
  2. The free rider problem means that private sector wont supply them
  3. Government supplies using tax revenue
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14
Q

How can negative externalities result in market failure? (Explain using an example of a factory.)

A

The factory only considers the private cost
they ignore costs to the environment- external cost
since they don’t need to manage all costs, they overproduce
resulting in market failure

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15
Q

How can positive externalities result in market failure? (explain in terms of a university degree)

A

They benefit personally,
society also benefits- lower unemployment and more productivity
since others benefit, student isn’t paid for wider impact so fewer people pursue education leading to underconsumption

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16
Q

How do merit goods result in market failure?

A

People undervalue merit goods as they may not have information
so the market underprovides merit goods
leading to market failure

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17
Q

How do demerit goods result in market failure?

A

People overconsume as they ignore the long term harmful effects,
resulting in negative externalites and allocative inefficiency

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18
Q

what is meant by a public good?

A

A public good is a good that is non rival and non excludable in consumption

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19
Q

What is meant by the term non excludable?

A

When it is not possible to prevent non paying customers from consuming a good

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20
Q

What is meant by the term non rival?

A

When one persons enjoyment of the good does not diminish another persons enjoyment of the good

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21
Q

What is a private good?

A

A private good is a good that is rival and excludable in consumption

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22
Q

What is meant by a quasi-public good?

A

A good that exhibits some of the characteristics of a public good (Partially nonexcludable/ partially non-rival)

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23
Q

Why might a public good become a quasi public good?

A
  1. Conjestion (Becomes rival when overused)
  2. Technological advances
  3. Privatisation
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24
Q

Why might technological advances create quasi public goods

A

People can put password on internet/ public wifi

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25
How does privatisation cause public goods to become quasi-public goods?
When places like beaches which was initially free start charging for tickets
26
What is meant by the term externalities?
An externality is a knock on effect of an economic transaction upon third parties
27
What is a positive externality?
A positive knock on effect of an economic transaction upon third parties also known as an external benefitgb
28
Explain how you can tell on a graph if there is a positive externality in production?
When PMC>SMC
29
What is meant by the term "social cost"?
A social cost is the total of private and external costs of an economic transaction
30
What is a social benefit
The total amount of private benefit plus external benefit of an economic transaction
31
What is meant by the term private benefit?
The private benefit is the benefit to the consumer/individual involved in a market transaction
32
What is meant by the term private cost?
A private cost is a cost that is paid directly from a producer or consumer during an economic transaction
33
What is a negative externality?
A negative externality is a negative knock on effect of an economic transaction upon third parties
34
How can we tell using a graph when there is a negative externality in consumption?
This occurs when PMB>SMB
35
How can positive externalities result in underconsumption?
1. consumers focus on private benefit rather than social benefit. 2. This leads to consumers underestimating the value of consumption for society as a whole 3. so they may underconsume as they arent considering the other external benefits
36
Why might negative externalities result in overconsumption?
1. consumers / producers only focus on their private costs 2. They do not count the external cost 3. no incentive to reduce consumption or production
37
What is a merit good?
A merit good is a good that is underconsumed in the free market
38
What is a demerit good?
A demerit good is a good that is overconsumed in the free market.
39
What is the classification of a merit or demerit good dependent on?
A value judgement
40
Why is the classification of a merit or demerit good based off of a value judgement?
It is someone's opinion about what is good and bad to consume/produce
41
Why are merit goods subject to positive externalities in consumption
when a merit good is consumed, it generates private benefits for the consumer but also generates social benefits as it has a knock on effect to the third parties
42
Why might demerit goods be subject to negative externalities in consumption?
When a demerit good is consumed, it only generates a private benefit and an external cost, This external cost negatively impacts third parties, so it is considered a negative externality.
43
How might information failure lead to the underprovision of merit goods?
When there is information failure, merit goods are underconsumed resulting in lower demand for the good, disincentivising suppliers to produce the same good at that quantity resulting in an underprovision of the good in the market
44
How might information failure lead to the overprovision of demerit goods in the market?
When there is informaion failure, demerit goods are overconsumed in the market resulting in an increase in demand for demerit goods, this incentivises suppliers to produce more resulting in an overprovision of the good in the market
45
Why might merit goods be underconsumed
1. people ignore the social benefits 2. may be costly 3. lack of awareness
46
Why might merit goods be overconsumed in a free market?
1. Lack of awareness 2. low cost 3. ignoring social costs
47
What is meant by the term asymmetric information?
Asymetric information is a source of information when one economic agent knows more than other economic agents, resulting in them having more power in a market transactions
48
What is meant by imperfect information
When economic agents do not know everything they need to know to make an informed decision
49
How can the existance of monopolies cause market failure?
1. Allocative inneficiency 2. productive inneficincy
50
How can factor immobility cause market failure?
prevents efficient allocation, increases unemployment, creates reigonal inequalities
51
what is meant by the term "occupational immobility"
occuptional immobility is when workers find it hard to move between jobs due to lack of desired skills
52
What is meant by the term Geographical immobility
Geographical immobility is when workers find it hard to move between jobs due to location or lack of housing
53
What is meant by the term "Equity"
Equity refers to the notion of fairness in a society
54
What is meant by the current spending of the government?
Current spending refers to the daily spending e.g maintaining public services
55
What is a subsidy?
A subsidy is a payment made to suppliers to incentivise them to boost production
56
What happens if production of a merrit good is subsidised?
Subsidies on merit goods can boost their consumption, bringing the equilibrium closer to the social optimum
57
Advantages of subsidies (consumption)
Boosts consumption of merit goods Lower prices for consumers
58
How do subsidies boost the consumption of merit goods?
Reduces the price making it a more attractive product
59
What is the advantage of a subsidy in increasing the consumption of a merit good?
Corrects underconsumption
60
Disadvantages of using subsidies
1. Firms may become dependent on them 2. Creates an opportunity cost 3. Subsidies on inelastic goods may lower the price, but not increase demand as much 4. Subsidies for UK firms may be viewed as a form of trade protection, causing foreign firms to retaliate
61
What is meant by the term minimum price?
A floor placed above the free market equilibrium price
62
Advantages of a minimum price
1. They give producers a guaranteed income and price 2. Encourages the production of essential products 3. Excess supply may be bought up and stored in the case of a recession
63
Disadvantages of a minimum price
1. May lead to excess production 2. Consumers have to pay a price higher than the market level 3. May reduce international competitiveness if prices are above foreign firms
64
What are the dangers of setting a minimum price on demerit goods?
Consumers may start to look for alternatives that may be more harmful
65
Why might overproduction be a disadvantage after setting a minimum price?
Excess stock needs to be stored, resulting in an increased cost
66
What is meant by the term maximum price?
A price ceiling that prices cannot exceed
67
Advantages of maximum prices
1. People on lower incomes can afford the product 2. Monopolies cannot exploit consumers
68
Disadvantages of maximum prices
1. Some people who want the good will not be able to obtain it 2. May cause excess demand 3. Can lead to creation of black markets
69
What is meant by the term "direct provision"?
Direct provision occurs when the government provides a good/service at a low cost rather than relying on private firms to produce it
70
What is meant by the term "Regulation"
Regulation is when rules are put in place to restrict the actions of economic agents to reduce market failure
71
What ways are there to correct market information failure?
Labelling goods- Traffic light method Strong health warnings on cigarettes
72
What is meant by the term "Government failure"
When government intervention in a market reduces overall economic welfare
73
Reasons for government failure
Imperfect information Unintended consequences Market distortions Administrative costs Regulatory capture
74
What is meant by the term "Market distortions"
Attempts to correct market failure may lead to shortages or surpluses
75
What is meant by administrative costs
The costs of researching may outweigh the actual benefit of it
76
What is meant by regulatory capture?
When a government regulator ends up being influenced by the industry its supposed to regulate

economics Y1 (16 decks)

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