Microeconomics Markets And Externalities Flashcards
Subsides.
Payments from the government to encourage production or consumption by lowering the cost per unit of production/ purchase.
Taxation as a method of internalising externalities
Hard to determine the size of the tax. Makes polluter pay. Refer to A 3 sheet.
What is a market?
Any situation which brings together buyers and sellers for the purpose of trading goods or services.
Price system
A method of allocating resources by the free movement of prices.
What is market failure?
Where the free market fails to achieve economic efficiency.
Allocative efficiency
Where scarce resources are used to produce g/s that consumers demand in the quantities they want, for the prices they desire. Maximum consumer welfare.
Allocative inefficiency (not the opposite)
Where resources are over/under allocated to the production of a g/s.
Show on a graph.
Positive externality/ external cost
What kind of good are they?
A benignity to a third party resulting from the actions of an unrelated group.
Social benefits > private benefits
Public goods.
Draw a graph.
Third party
Person/group of people not involved in production/decision making.
Private cost
The cost directly incurred by those undertaking a particular economic activity.
Private benefit
The benefits directly incurred by those undertaking a particular economic activity.
Social cost
Private cost + external cost
Social benefit
Private benefit + external benefit
Socially optimum output
The output quantity where full social cost = full social benefit
Information failure
Information incorrect for one party…
Asymmetric information
Info failure-not shared equally between two parties. One party has more knowledge than the other.
Merit good
A good whose consumption is better for consumers than they realise. Therefore is under consumed in a free market.
Show graph.
Demerit good
Good whose consumption is more harmful than consumers realise. Less private benefits to consumers than expected, so over consumed in free market.
Public good
Good that is non excludable and non rivalrous. Not provided in a fee market due to free rider problem
Free rider problem
Consumers can consume a good without being excluded so minimising the private benefit.
Non excludable
Where it is technically impossible or financially unviable to restrict someone from consuming a good or service.
Private good
Good both excludable and rivalrous in consumption.
Non rivalrous
Consumption by one person doesn’t diminish another persons consumption.
Quasi public good
Goods that are part public, part private. Have some but not all characteristics of a public good.
