Micro 3.1.5 Market failure, Market mechanism and government intervention Flashcards
define market failure
occurs when freely-functioning market leads to a misallocation of resources in an economy
difference between private and public good
- private - a product is rival and excludable
- public - a product that is non-rival and non-excludable
public = national defence
private = private gym, exclusive clubs
define free rider
an individual is able to consume a product without paying for it
street lamp
difference between merit and demerit good
- merit good - product that society judges to be worthwhile and likely to be underconsumed becuase benefits are not always fully appreciated
- demerit good - product that scoiety judges to be undesirable and likely overconsumed becuase costs are not always fully recognised
merit good = positive externalities - fuit and veg
demerit good = negative externalities - sweets and chocolate, alcohol, tobacco
reasons for market failure
PIMMFACED
- Public goods -not provided in a free market
- Income inequality - free market provides no socila security net for those unemployed or low income
- Monopoly - power in a unchecked free market, monopolies can easily develop so high prices set to exploit consumer
- Merit goods - underprovided becuase people underestimate the benefits of going to school
- Factor immobility - structural and frictional unemployment due to lack of skills
- Agriculture - prone to market failure as weather can harm crops
- Cyclical instability - economic reccesions and booms
- Externalities - overconsumptions of goods like tobacco is negative externalitities
- Demerit goods - Overconsumption of goods like alcohol where people overestimate the personal benefits
define externalities
the effects that producing and or consuming a product has on third parties
define negative consumption and production
- negative consumption - when the private benefit is greater than the social benefit of consumption
- negative production - when the social cost is greater than the private cost of production
negative externalities in production and consumption diagram
define positive consumption and production
- positive consumption - when the social benefit of consumption is greater than the private benefit
- positive production - social cost of production is less than the private cost
positive externalities of consumption and production diagram
government intervention will occur if there is?
- merit goods - people underestimate the benefits
- positive externalities - consumption of health service has benefits to the rest of society
government intervention will occur if they can benefit from?
- economies of scale - providing national service, providing universal service leads to greater equality of distribution
- minimum service standards - important for public health services such as health
define government failure
when the costs of intervention outweigh the benefits of intervention
reasons for government failure
- information failure - valuing externalities, right level of policy required
- admin & enforcement costs are high - regulation, subsidies, price control, stake provision
- regulatory capture - when regulating monopoly power
- unintended consequences - black market, impact of poor/firm, unemployemnt
define indirect and direct tax
- indirect - expenditure tax that increases cost of production for firms but can be transfered to consumers via higher prices
- direct - tax on income that cant be transferred
reasons for indrect taxes
- raise government revenue
- solve market failures
what are the 2 types of indirect tax
- specific - tax per unit
- AD Valorem - tax as a % of price
indirect tax diagram
define subsidies
the government paying part of the cost to the firm to encourage more consumption, therefore supply shifts to the right
pros and cons of subsidies
Pros:
* promote economic growth
* create jobs
* support important industries
* increase affordability of merit goods
Cons:
* expensive
* lazy prodcuers dont need to be as efficient
* oppotunity cost to subsidies
* elasticity of demand determines how effective subsidy is
* may be lower standards than the alternative
