Micro- Market failure

Question 1

what is complete market failure?

Answer 1

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

Question 2

what is partial market failure?

Answer 2

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

Question 3

social benefit=?

Answer 3

external benefits+private benefits

Question 4

what is a market failure?

Answer 4

when the price mechanism leads to a misallocation of resources

Question 5

what is an external cost?

Answer 5

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

Question 6

what is a private cost?

Answer 6

the cost to an individual in a market

Question 7

what is a social cost?

Answer 7

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

Question 8

what is a merit good?

Answer 8

a good with positive consumption externalities eg. education

Question 9

what are demerit goods?

Answer 9

goods that have negative consumption externalities eg. petrol cars

Question 10

what is a positive externality?

Answer 10

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

Question 11

what is a negative externality?

Answer 11

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

Question 12

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

Answer 12

deadweight welfare loss

Question 13

what is a public good?

Answer 13

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.

Question 14

what is a quasi public good?

Answer 14

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

Question 15

what is the free-rider problem?

Answer 15

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

Question 16

what is asymmetric information?

Answer 16

when both parties have unequal information

Question 17

how does imperfect information affect demerit goods?

Answer 17

• consumers only realise the private gain

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

Question 18

what are the types of market failure?

Answer 18

• public goods
• info failure
• positive externalities in consumption
• negative externalities in production

Question 19

how can imperfect info affect merit goods?

Answer 19

• 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

Question 20

what are the reasons for government intervention?

Answer 20

• meeting basic needs
• over consuming demerit goods
• underconsuming merit goods
• irrationality

Question 21

how are indirect taxes used as a government intervention?

Answer 21

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

Question 22

how are subsidies used as a govt intervention?

Answer 22

• govt pay producers subsidies to help keep prices low

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

Question 23

what are the advantages of subsidies?

Answer 23

• consumers preferences may change as a result of a subsidy

- improve long-run efficiency and competitiveness abroad

Question 24

what are the disadvantages of subsidies?

Answer 24

• 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

Question 25

how is a maximum price used as a govt intervention?

Answer 25

- 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

Question 26

how is a minimum price used as a govt intervention?

Answer 26

- has to be above equilibrium= less demand but increased supply (excess) - removes monopolies

Question 27

what are the pros of a max price?

Answer 27

- protects consumers from exploitation | - makes firms more efficient as they pay attention to costs

Question 28

what are the cons of a max price?

Answer 28

- 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

Question 29

what are the pros of a min price?

Answer 29

- suppliers can get a reasonable price for their goods

Question 30

what are the cons of a min price?

Answer 30

- 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

Question 31

what are permits?

Answer 31

- pollution permits that are tradable to limit pollution of firms

Question 32

what are the disadvantages of pollution permits?

Answer 32

- cost to implementing the scheme - deciding on the level of pollution is difficult - market for permits subject to failure also

Question 33

what are the advantages of pollution permits?

Answer 33

- caps level of pollution - lower the pollution of a firm the more they can benefit (incentivised) - governments make revenue

Question 34

what is regulation?

Answer 34

setting rules that firms must comply with

Question 35

costs of regulation?

Answer 35

- 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

Question 36

benefits of regulation?

Answer 36

- correct market failures - control monopolies - used to protect environment

Question 37

advantages of state provision?

Answer 37

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

Question 38

disadvantages of state provision?

Answer 38

- 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

Question 39

what are the causes of govt failure?

Answer 39

- imperfect info - administrative costs - misallocation of resources

Question 40

what is govt failure?

Answer 40

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

Question 41

what are the consequences of govt failure

Answer 41

- conflicting policy objectives | - market distortions