Microeconomics- The Market Mechanism, Market Failure And Government Intervention Flashcards
What is the signalling function?
When prices provide information to buyers and sellers, allowing then to plan their economic activity
What is the incentive function?
When prices creates incentive for producers and consumers to change their utility
e.g. if there is a rise in price then consumers have incentive to reduce demand
What is the rationing function?
Rising prices ration demand
If there is excess demand, prices rise, some consumers can’t afford this increase and so demand falls
What is the allocative function?
Resources are directed away from markets with excess supply towards those where there is excess demand
What is market failure?
When a market mechanism leads to a misallocation of resources in the economy
What’s the difference between complete and partial market failure?
Complete- when the market is not provided at all
Partial- when the market exists but the wrong amount of the good is produced
What does ‘Misallocation of resources’ mean?
Resources are allocated in a way that does not maximise utility
What are the two characteristics of private goods?
Excludability- you can prevent others from using or consuming a good.
Rivalry- when one person consumes a good, it reduces the amount others can use it
What are two characteristics of public goods?
Non- excludable: you can’t prevent people from consuming the good
Non- rivalrous: one person consuming the good doesn’t reduce the amount available to others
What is the free rider problem?
You can’t charge people for public goods as they won’t pay for something they can get for free
What are Quasi-public goods?
Non-pure public goods: the good is not fully non-rivalrous and/or non-excludable
This prevents free riders from using the product.
An example of a Quasi-public good is a toll road
What is an externality?
A benefit or cost that is placed by those who produced it onto third parties.
They cause market failure if the price doesn’t take into account the true cost or benefit to society.
What are positive externalities?
The consumption or production of a (merit) good benefits a third party.
Social benefits= private benefit + external benefit
What are negative externalities?
Consumption or production of a (demerit) good causes costs to a third party.
Social cost= private cost + external cost
How do externalities result in market failure?
If the price of a product does not take into account the external cost/benefit the allocative function has broken down.
Merit goods are overpriced and under consumed
Demerit goods are underpriced and over consumed
