Micro L19 - 23

Question 1

Perfect information:

Answer 1

When a buyer AND/OR seller has a complete understanding of the quality and nature of a good/service

Question 2

Symmetric information:

Answer 2

When buyers AND sellers have equal amounts of knowledge about a good/service

Question 3

Imperfect information:

Answer 3

When a buyer AND/OR seller lacks a complete understanding of the quality and nature of a good/service

Question 4

Asymmetric information:

Answer 4

When a buyer OR seller has more information about a good/service than the other party

Question 5

Information gap:

Answer 5

When either the buyer OR seller does not have access to the info needed for them to make a fully-informed decision

Question 6

Check costs and benefit diagram to show external costs and benefits

Question 7

Maximum price, why it is set, w/ an example) :

Answer 7

• Price set below market equilibrium price by gov
• To ensure people don’t exploit the system eg. max price on CEO pay

Question 8

Advantages of maximum prices:

Answer 8

Prices are lowered for consumers

Question 9

Disadvantages of a maximum price:

Answer 9

• 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

Question 10

Minimum price, why it is set, w/ an example) :

Answer 10

• 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

Question 11

Advantage of minimum prices:

Answer 11

• Food stability is increased in agricultural markets
• Producer incomes are protected in agricultural markets
• Can reduce consumption of demerit goods eg. alcohol

Question 12

Disadvantages of minimum prices:

Answer 12

• Excess supply created –> potential for losses + waste of resources
• Higher prices for consumers

Question 13

Guaranteed minimum pricing scheme:

Answer 13

Scheme where surplus output created is purchased by gov agency at a minimum price

Question 14

Advantages of minimum pricing schemes:

Answer 14

• Producer’s income increases
• Greater food security
• Surplus can be stockpiled/used as aid

Question 15

Disadvantages of a minimum pricing scheme:

Answer 15

• 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

Question 16

What problem does a minimum price create in agricultural markets and how is this solved?

Answer 16

• Market prices can be artificially inflated above market equilibrium
• Interferes with the rationing function
• Causes excess supply
• Solved by gov buying excess supply

Question 17

How does an Emissions Trade Scheme work?

Answer 17

• 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

Question 18

For those who pollute below the level set, what can be done with their pollution permits?

Answer 18

They can be sold to earn an income

Question 19

Advantages of an Emissions Trade Scheme:

Answer 19

• 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)

Question 20

7 disadvantages of an Emissions Trading Scheme:

Answer 20

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

Question 21

Regulation:

Answer 21

• Rule/Law enacted by gov that must be followed by economic agents
• Used to encourage change in behaviour

Question 22

What are the 2 types of regulation?

Answer 22

• Command
• Control

Question 23

Types of command regulations:

Answer 23

• Ban
• Limit
• Cap
• Compulsory actions

Question 24

What is the difference between a cap and a limit?

Answer 24

A cap is a limit for emissions

Question 25

Types of control regulations:

Answer 25

• Enforcement (laws)
• Punishment

Question 26

How does regulation aim to correct market failure?

Answer 26

• Provides an incentive to change behaviour towards socially optimal level of output
• Leads to removal of welfare loss

Question 27

Disadvantages of regulation:

Answer 27

• Cost of administration and enforcement
• Setting right level of regulation can be difficult
• Unintended consequences may arise eg. black market

Question 28

Gov failure:

Answer 28

Gov intervention designed to correct a market failure has resulted in a less efficient allocation of resources

Question 29

Causes of gov failure:

Answer 29

1) Unintended consequences
2) Distortion of price mechanism
3) Excessive administrative cost
4) Info gaps

Question 30

Give one example of unintended consequences as a cause of gov failure:

Answer 30

High taxes on cigs can result in black market

Question 31

How does distortion of the price mechanism cause gov failure?

Answer 31

• Max prices can cause shortages
• Min prices can cause excess supply
• Subsidies may lead to lower prices + greater consumption of goods w/ external costs

Question 32

How can excessive administrative costs cause gov failure?

Answer 32

The costs may outweigh the benefits