Micro L19 - 23 Flashcards
Perfect information:
When a buyer AND/OR seller has a complete understanding of the quality and nature of a good/service
Symmetric information:
When buyers AND sellers have equal amounts of knowledge about a good/service
Imperfect information:
When a buyer AND/OR seller lacks a complete understanding of the quality and nature of a good/service
Asymmetric information:
When a buyer OR seller has more information about a good/service than the other party
Information gap:
When either the buyer OR seller does not have access to the info needed for them to make a fully-informed decision
Check costs and benefit diagram to show external costs and benefits
Maximum price, why it is set, w/ an example) :
- Price set below market equilibrium price by gov
- To ensure people don’t exploit the system eg. max price on CEO pay
Advantages of maximum prices:
Prices are lowered for consumers
Disadvantages of a maximum price:
- Shortages created –> unfair distribution of goods on first-come, first-serve basis
- Black market may emerge
- Opportunity cost of enforcement
- Difficult to set price at right level (possible info gap)
- Decline in quality of housing stock in rental market due to lower producer surplus so less money to invest and maintain property
Minimum price, why it is set, w/ an example) :
- Price set below market equilibrium price by gov
- To disincentivise purchase of products eg. Cigarettes
- To ensure low pay workers get enough money to get by eg. farmer’s wages
Advantage of minimum prices:
- Food stability is increased in agricultural markets
- Producer incomes are protected in agricultural markets
- Can reduce consumption of demerit goods eg. alcohol
Disadvantages of minimum prices:
- Excess supply created –> potential for losses + waste of resources
- Higher prices for consumers
Guaranteed minimum pricing scheme:
Scheme where surplus output created is purchased by gov agency at a minimum price
Advantages of minimum pricing schemes:
- Producer’s income increases
- Greater food security
- Surplus can be stockpiled/used as aid
Disadvantages of a minimum pricing scheme:
- Surpluses may be sold overseas at low prices –> damaging for farmers in developing countries
- Opportunity cost of gov finances eg. cutting gov spending in other areas
- Difficult to set price at right level
- Cost of storage and security for stockpiles
What problem does a minimum price create in agricultural markets and how is this solved?
- Market prices can be artificially inflated above market equilibrium
- Interferes with the rationing function
- Causes excess supply
- Solved by gov buying excess supply
How does an Emissions Trade Scheme work?
- Limit is set on total amount of pollution firms are allowed to emit over a period
- Gov allocates tradable pollution permits either for free or at a cost
- Gov monitors emissions of firms, fining those who exceed the limit
For those who pollute below the level set, what can be done with their pollution permits?
They can be sold to earn an income
Advantages of an Emissions Trade Scheme:
- Market is created for buying and selling pollution permits
- Incentive given to invest in pollution reducing technology (cleaner firms rewarded, whereas others punished)
- Further incentive by ability to trade permits (revenue can be raised)
7 disadvantages of an Emissions Trading Scheme:
Due to info gap:
- Too many permits issued –> No incentive to reduce emissions
- Too few permits issued –> international competitiveness reduced
- Producers may try to pass added cost to consumers
- Volatile price permits cause uncertainty for businesses
- Missed opportunity to raise gov revenue if permits given for free
- Cost to operate and monitor scheme
- Other countries’ relative competitiveness increases if they do not have this scheme
Regulation:
- Rule/Law enacted by gov that must be followed by economic agents
- Used to encourage change in behaviour
What are the 2 types of regulation?
- Command
- Control
Types of command regulations:
- Ban
- Limit
- Cap
- Compulsory actions
What is the difference between a cap and a limit?
A cap is a limit for emissions
Types of control regulations:
- Enforcement (laws)
- Punishment
How does regulation aim to correct market failure?
- Provides an incentive to change behaviour towards socially optimal level of output
- Leads to removal of welfare loss
Disadvantages of regulation:
- Cost of administration and enforcement
- Setting right level of regulation can be difficult
- Unintended consequences may arise eg. black market
Gov failure:
Gov intervention designed to correct a market failure has resulted in a less efficient allocation of resources
Causes of gov failure:
1) Unintended consequences
2) Distortion of price mechanism
3) Excessive administrative cost
4) Info gaps
Give one example of unintended consequences as a cause of gov failure:
High taxes on cigs can result in black market
How does distortion of the price mechanism cause gov failure?
- Max prices can cause shortages
- Min prices can cause excess supply
- Subsidies may lead to lower prices + greater consumption of goods w/ external costs
How can excessive administrative costs cause gov failure?
The costs may outweigh the benefits
