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Economics > Micro- Market failure > Flashcards

Micro- Market failure Flashcards

1
Q

what is complete market failure?

A

happens where, unless the good or service is provided outside the mechanism, there wouldn’t be a market for it

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2
Q

what is partial market failure?

A

happens when the private sector may partially provide it but at the wrong price or quantity

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3
Q

social benefit=?

A

external benefits+private benefits

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4
Q

what is a market failure?

A

when the price mechanism leads to a misallocation of resources

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5
Q

what is an external cost?

A

a cost put on a third party due to a negative externality

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6
Q

what is a private cost?

A

the cost to an individual in a market

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7
Q

what is a social cost?

A

the cost to society due to a negative externality. Social cost= private cost+ external cost

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8
Q

what is a merit good?

A

a good with positive consumption externalities eg. education

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9
Q

what are demerit goods?

A

goods that have negative consumption externalities eg. petrol cars

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10
Q

what is a positive externality?

A

when the consumption or production of a good causes benefit to a third party

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11
Q

what is a negative externality?

A

when production or consumption imposes an external cost on a third party outside of the market

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12
Q

what is the term given for the loss in utility due to externalities?

A

deadweight welfare loss

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13
Q

what is a public good?

A

a good that is both non-excludable and non-rivalrous in consumption. Someone not paying for it doesn’t affect their ability to consume it. If one person consumes a good this doesn’t stop another person from consuming it.

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14
Q

what is a quasi public good?

A

a quasi public good is a near public good. It has some characteristics of a public good especially when it becomes rival in consumption at times of peak

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15
Q

what is the free-rider problem?

A

when some individuals consume more than their fair share or benefit without paying. This results in an underprovision of those goods or services

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16
Q

what is asymmetric information?

A

when both parties have unequal information

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17
Q

how does imperfect information affect demerit goods?

A
  • consumers only realise the private gain

- if they had perfect info, they might realise the negative effects consumption of the good might bring

18
Q

what are the types of market failure?

A
  • public goods
  • info failure
  • positive externalities in consumption
  • negative externalities in production
19
Q

how can imperfect info affect merit goods?

A
  • consumers only take into account the private benefit

- if they had perfect info they might realise the additional benefits merit goods can bring eg. education

20
Q

what are the reasons for government intervention?

A
  • meeting basic needs
  • over consuming demerit goods
  • underconsuming merit goods
  • irrationality
21
Q

how are indirect taxes used as a government intervention?

A

they raise the cost of production shifting the supply curve towards a more socially optimum level

22
Q

how are subsidies used as a govt intervention?

A
  • govt pay producers subsidies to help keep prices low

- can correct market failure by encouraging consumption and production of goods with positive externalities

23
Q

what are the advantages of subsidies?

A
  • consumers preferences may change as a result of a subsidy

- improve long-run efficiency and competitiveness abroad

24
Q

what are the disadvantages of subsidies?

A
  • may encourage laziness from producers because they do not need to be as efficient
  • opp cost
  • elasticity of demand determines how effective subsidy is
  • subsidies goods may be of a lower standard to alternatives they’re trying to replace
25
Q

how is a maximum price used as a govt intervention?

A
  • used to increase consumption of a good
  • has to be below equilibrium= more demand but shortage of supply (excess)
  • people can afford now but supply restricted
  • could lead to black market for good
26
Q

how is a minimum price used as a govt intervention?

A
  • has to be above equilibrium= less demand but increased supply (excess)
  • removes monopolies
27
Q

what are the pros of a max price?

A
  • protects consumers from exploitation

- makes firms more efficient as they pay attention to costs

28
Q

what are the cons of a max price?

A
  • could deter firms from entering the market
  • limit investment into the industry as the amount of profit is limited
  • firms could cut costs too aggressively in an attempt to boost profits leading to lower quality goods
29
Q

what are the pros of a min price?

A
  • suppliers can get a reasonable price for their goods
30
Q

what are the cons of a min price?

A
  • consumers will be paying more for their goods
  • resources wasted when excess goods are destroyed
  • resources are allocated inefficiently - could’ve been used elsewhere
  • opp cost
31
Q

what are permits?

A
  • pollution permits that are tradable to limit pollution of firms
32
Q

what are the disadvantages of pollution permits?

A
  • cost to implementing the scheme
  • deciding on the level of pollution is difficult
  • market for permits subject to failure also
33
Q

what are the advantages of pollution permits?

A
  • caps level of pollution
  • lower the pollution of a firm the more they can benefit (incentivised)
  • governments make revenue
34
Q

what is regulation?

A

setting rules that firms must comply with

35
Q

costs of regulation?

A
  • hard to know which industries to regulate
  • expensive to monitor firms to enforce regulation- opp cost
  • expensive for firms to follow regulations so may close down
36
Q

benefits of regulation?

A
  • correct market failures
  • control monopolies
  • used to protect environment
37
Q

advantages of state provision?

A
  • reduce inequality

- without it some services might not exist as they are not profitable

38
Q

disadvantages of state provision?

A
  • opp cost
  • with asymmetric info there is risk of govt failure
  • without drive for profit there is less incentive to make it efficient as possible
39
Q

what are the causes of govt failure?

A
  • imperfect info
  • administrative costs
  • misallocation of resources
40
Q

what is govt failure?

A

unintended worsening of a market failure or creating a whole new problem

41
Q

what are the consequences of govt failure

A
  • conflicting policy objectives

- market distortions

Economics (6 decks)

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