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A Level (A2) AQA Economics > Microeconomics part 6- Revisiting Market Failure and Government Intervention in Markets > Flashcards

Microeconomics part 6- Revisiting Market Failure and Government Intervention in Markets Flashcards

1
Q

Windfall tax definition:

A

Tax on a firm if it suddenly males a large, unexpected profit as a one off

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2
Q

What type of costs do windfall taxes increase?

A
  • Average costs but not marginal costs

- It is a fixed cost

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3
Q

What type of costs do specific taxes increase?

A
  • Average and marginal costs

- It is a variable cost

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4
Q

Who pays windfall taxes?

A

Particular firms

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5
Q

Who pays specific taxes?

A

All firms in an industry

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6
Q

Competition policy definition:

A

The part of the government’s microeconomic policy and industrial policy which aims to make product markets more competitive. It comprises policy towards monopoly, mergers and restrictive trading practices.

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7
Q

What does competition policy involve?

A

-End abuse of monopoly power
-Lower costs of production (MES)
-Improve all types of efficiency
-Reduce supernormal profit
-Lower prices
-Lower barriers to entry
These would all happen if barriers to entry were lowered

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8
Q

What does the CMA (competition and markets authority) do?

A

Attempts to identify and rectify cases of abuse of monopoly power

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9
Q

Why is it hard for the CMA to identify abuses of monopoly power?

A
  • It just looks like good business sense

- Firms would try and hide it

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10
Q

How does the CMA identify abuses of monopoly power?

A
  • Concentration ratio
  • Consumer and trade complaints
  • Compare prices
  • Market structure
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11
Q

What are the problems with the CMA?

A
  • Regulatory capture

- Difficult to identify abuses of monopoly power

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12
Q

Benefits of the CMA:

A
  • Threat
  • Bad press
  • Fine
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13
Q

What can the European commision intervene with?

A

Mergers

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14
Q

What can the CMA do with large firms?

A

Break them up

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15
Q

Restrictive trading practices (collusion):

A
  • Price discrimination (acts as a barrier to entry as existing firms are able to charge lower prices)
  • Refusal to supply a particular retailer
  • Full-line forcing
  • Cartel
  • Price fixing
  • Market sharing
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16
Q

What are the costs of competition policy?

A
  • Costly to investigate
  • Opportunity cost
  • Government failure- policy myopia (short- term view), political self-interest
  • Regulatory capture
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17
Q

Benefits of competition policy:

A
  • Should increase competition
  • Should lower prices
  • Should lower barriers to entry
  • Should increase choice
  • Should increase quality
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18
Q

Public ownership definition:

A

Owned by the government

19
Q

Arguments for public ownership:

A
  • Government not driven by profit alone
  • Allocative efficiency
  • Can earn revenues
  • Economies of scale
20
Q

Arguments against public ownership/ nationalisation:

A
  • Costly to buy back
  • Lack of profit motive
  • X-inefficiency- government known for excess bureaucracy (red tape)
  • Any argument against natural monopoly
21
Q

Advantages of privatisation:

A
  • Revenue raising
  • Reduces public spending and could earn tax revenue
  • Profit motive
  • Productive efficiency
  • Allocative efficiency- quality should increase to get people to buy it
  • Dynamic efficiency
22
Q

Disadvantages of privatisation:

A
  • Once it’s gone it’s gone
  • No guarantee it would increase competition. Could lead to monopoly abuse
  • Short-term profit maximisers. Loss of long-term investment
  • Price could rise- loss of consumer welfare
  • No incentive for private sector to internalise externalities
  • May need regulation
  • Some argue they’re sold too cheaply
23
Q

Regulation definition:

A

The imposition of rules an other constraints which restrict freedom of economic action

24
Q

What regulatory bodies do:

A
  • Decide output
  • Set limits on price rises
  • Check standards
  • Monitor and enforce
  • Decide % of supernormal profits that should be spent on innovation
  • Decide which improvements need to be made
25
Q

External regulation definition:

A

An external agency lays down and enforces rules and restraints (CMA)

26
Q

Self regulation definition:

A

A group of individuals or firms regulating themselves

27
Q

Advantages of regulation:

A
  • Reduces monopoly power
  • Can impose government objectives
  • Can limit supernormal profits
  • Incentivises innovation
28
Q

Disadvantages of regulation:

A
  • Costly
  • Regulatory capture
  • Can raise costs of production to firm
  • Disincentivises innovation
29
Q

Deregulation definition:

A

The removal of previously enforced regulation

30
Q

How does deregulation increase contestability?

A

Lowers the barriers to entry

31
Q

Economic liberalisation definition:

A

Opening up markets to private ownership and competition, and reducing government intervention in the economy

32
Q

Types of economic liberalisation:

A
  • Contractulisation: Services which were previously owned by the public sector e.g. road cleaning are put to private sector tender and then provided by private sector firms
  • Marketisation: The provision of goods and services is shifted from the non-market sector into the market sector of an economy
33
Q

Public-private partnership definition:

A

Partnership between the private and public sectors to provide public services

34
Q

Private- finance initiative definition:

A

The government seeks tenders from the private sector for designing, building, financing and running infrastructure projects

35
Q

Types of market failure:

A
  • Public good
  • Positive and negative externalities
  • Merit and demerit goods
  • Monopoly
  • Inequalities
  • Imperfect information
  • Market immobility
36
Q

Tragedy of the commons definition:

A

Occurs when there are no property rights assigned to a resource. Individuals maximise their own utility with no regard for its sustainability

37
Q

Property rights definition:

A

The exclusive authority to determine how a resource is used

38
Q

Problems with extending property rights:

A
  • Pollution of the environment crosses borders
  • Difficult to assess the value of these rights
  • Difficult to divide, allocate property
  • Difficult to police, monitor
39
Q

Free rider problem definition:

A

Those who benefit from resources, goods, or services do not pay for them

40
Q

What does the free rider problem lead to?

A

-Missing markets
-State provision
-Over consumption
Tragedy of the commons

41
Q

How the government can intervene to correct environmental market failure:

A
  • Taxes
  • Subsidies
  • Pollution permits (cap and trade)
  • Closing the information gap
  • Fines
  • Regulation
  • Privatisation/nationalisation
42
Q

Advantages of pollution permits:

A
  • Should reduce pollution/ carbon emissions
  • Rewards efficiency
  • Profit motive
  • Should result in innovation
43
Q

Disadvantages of pollution permits:

A
  • Over-allocation of carbon quotas and freedom to allocate
  • Uncertainty of future of the scheme makes it less likely that businesses will invest in greener technologies
  • Imperfect information
  • Regulatory capture

A Level (A2) AQA Economics (10 decks)

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