Microeconomics LS17-23 Flashcards
What is market failure?
Where too much or too little of a good is produced and/or consumed compared with the social optimum level of output.
What is an external cost?
Cost to the 3rd party that is not involved in the making, buying/ selling and consumption of a specific good/ service.
What is an external benefit?
A benefit to the 3rd party that is not involved in the making, buying/ selling and consumption of a specific good/ service
What is a public good?
A good that is both non-rivalrous and non-excludable, provide for free use by public
What is a private good?
A good that is sold by companies to satisfy consumer needs and wants.
What is non-rivalrous?
Consumption of a product that doesn’t prevent another person from consuming that product.
What is non-excludable?
Once a good is provided, it is impossible to stop people from using it.
What is a private cost?
Any cost that a person or firm pays in order to buy or produce goods and services.
What is a private benefit?
Benefits derived by an individual or firm directly involved in a transaction either as buyer or seller.
What is the free-rider problem?
Type of market failure that occurs because everybody is able to benefit from them.
Problem because while not paying for the good, they may continue to access it.
Thus, the good is likely to be under provided or not provided at all.
What does the free-rider problem lead to?
Leads to market failure as no revenue is earned.
Using it but not paying for it.
This is why there is no public good in the private sector, within a free market firms have a profit motive.
What does social benefits mean?
Social benefits= private benefits + external benefits
What is social costs?
Social costs= Private costs + external costs
What is a positive externality?
When social benefits doesn’t equal private benefits, since external benefits are present.
If external benefits are present, there will be an underconsumption/ underproduction in a free market.
What is a negative externality?
When socials costs doesn’t equal private costs, since external costs are present.
If external costs are present, there will be an overconsumption/ overproduction of it in a free market.
What is social optimum level?
Occurs where all external benefits and external costs are accounted for.
Why will externalities cause market failure?
If the price mechanism doesn’t take account of social costs and benefits of production and consumption.
What is social welfare cost?
A loss as a result of too much or too little production and consumption of a good or service.
What is the maximum price?
Price set below the market equilibrium price by the government.
What is the minimum price?
Price set above the market equilibrium price by the government.
What is the guaranteed minimum pricing scheme?
A scheme which excess supply from a minimum price is purchased by the government.
The purpose is to protect producer incomes.
What is a tradable pollution permit?
A limit (cap) set on the total amount of pollution firms are allowed to emit over a period of time.
Permits can be traded- tradable pollution permits.
If firms pollute below the levels set, they can be sold.
If firms breaks the pollution limit, they will face fines unless they purchase pollution permits.
Advantages of maximum prices.
Prices are lowered for consumers
Advantages of minimum prices.
1) In agricultural markets, food stability is increased
2) Can reduce consumption of demerit goods (e.g. alcohol)
3) Producer incomes protected in agricultural markets
Advantages of emission trade schemes.
1) Incentive given to invest in pollution reducing technology
2) Cleaner firms rewarded and less environmentally firms punished
3) Unused permits can be sold or banked, further incentive to reduce carbon emissions
4) Revenue can be raised by selling permits, rather than giving away for free, funds can be used to invest in green technology
What is regulation?
A rule or law enacted by the government that must be followed by economic agents.
Disadvantages of maximum prices
1) Shortage created (distributed on first come first serve which is deemed unfair)
2) Black market may emerge
3) Costs of enforcement (opportunity cost)
4) Difficult to set prices at right level. May be an info gap which leads to price being too low or too high
5) In rental market, producer surplus decreases. Less money to invest and maintain property, long term decline in quality of housing stock.
Types of government intervention.
Taxes, subsides, minimum and maximum prices and regulations
Disadvantages of minimum prices.
Excess supply created
Higher prices for consumers. Lower consumer surplus.
Disadvantages of emission trading schemes
1) Information gap whereby too many (no incentives to reduce pollution) or too little reduce international competitiveness) permits given out
2) Cost of operating and monitoring trading schemes
3) producers may pass on added costs to consumers (for inelastic goods, they become more expensive)
4) If permits given for free, missed opportunity cost to raise government revenue
5) Competitor firms (US and China) not currently subjective to emissions trading schemes, increases their relative competitiveness
6) volatile prices, causes uncertainty for businesses
How regulation aims to correct market failure. (Advantages)
1- Provides an incentive to change behaviour towards the socially optimum level of output
2- If correctly implemented, this leads to the removal of a welfare cost (or welfare gain for positive externalities)
Disadvantages of regulation.
1) Cost : administration and enforcement
2) Setting the right level of regulation can be difficult (info gap)
3) May encourage black market activity
4) Unintended consequences may arise (e.g. firms decide to move to other countries with less strict regulation)
What is a guaranteed minimum pricing scheme?
Where the surplus output created is purchased by a government agency at the minimum price.
Advantages of minimum pricing schemes.
1) Producers incomes increase or stabilise. Greater investment and employment
2) Greater security for food supply
3) Surplus can be stockpiled and used as aid
Disadvantages of minimum pricing schemes.
1) Surpluses may be sold overseas at lower prices. This could be damaging to farmers in developing countries that are likely to struggle to compete.
2) Opportunity cost of government finances (may have to raise taxes or cut gov spending in other areas)
3) Difficult to set prices at right level (info gap)
4) Storage and security costs for stockpiles
Examples of a command
1) Bans
2) Limits
3) Caps
4) Compulsory actions
Examples of control
1) Enforcement
2) Punishment
What is government failure?
When government intervention designed to correct a market failure results in a less efficient allocation of resources.
How is government failure caused?
1) Unintended consequences (e.g. prohibition, high taxes on cigarettes)
2) Distortion of price signals
3) excessive administration costs
4) information gaps
