Non-optimal Markets

Question 1

Government intervention?

Answer 1

The Government intervenes to improve economic growth, correct market failure and improve distribution of income and growth. Preventing market failure. Achieving sustainable economic growth.

Question 2

What are externalities? (Pos and Neg)

Answer 2

Costs and benefits of goods and services that occur but are not considered by buyers and sellers in the original price. Also not considered in the production of goods and services

Positive: Benefits spill over. Social benefit is higher then private benefit. Non-exclusive and non-rivalry
Eg. Child vaccination, education, hospitals

Negative: The costs spill over. Harmful effects to consumers. Eg. Noise, pollution, traffic, addiction, air, land, river

Question 3

What is tragedy of the commons?

Answer 3

If consumers have access to a resource, they will consume it until it is depleted, over consumed or degraded in the matter of self interest.

Question 4

What are merit goods?

Answer 4

Goods and services that are underproduced without government intervention. Individuals do not value them and/or private firms won’t produce
Eg) Hospital, schools, sewage, art galleries

Question 5

Correcting negative externalities?

Answer 5

Taxes on goods and services, market based policies, bans, intervention from the Government

Question 6

Encouraging positive externalities?

Answer 6

Subsidies can be paid to reduce the cost of production of goods and services

Question 7

What is missing markets?

Answer 7

Certian goods would never be produced without intervention from the government. Non-rivalry, non-excludable
Eg. Traffic lights

Question 8

What is the free rider problem?

Answer 8

Benefits without paying, social benefit outweighs the cost

Question 9

What are private goods?

Answer 9

Purchased by consumers and is privately owned, must be purchased to be consumed
Eg. Clothing

Question 10

What are common access goods?

Answer 10

Natural resources that can be accessed by anyone
Eg. Fisheries, national park, forest.
Leads to overconsumption, degradation and depletion
Links in with tradgey of the commons

Question 11

What are public goods?

Answer 11

Can be consumed without reducing it’s availability, no one is deprived

Question 12

What is asymmetric knowledge?

Answer 12

Lack of knowledge between the buyer and the seller.
Leads to a misallocation of resources.
1. Supplier has superior knowledge to the buyer.
2. The buyer has superior knowledge to the buyer, leading the seller to sell a product for less then they should.

Question 13

Preventative measures for asymmetric knowledge?

Answer 13

Inspection, laws, regulation, consumer protection, government intervention

Question 14

What is market power?

Answer 14

Dominated by oligopolies and monopolies, setting a price that the market will bear to maximise their profits

Question 15

What is effective competition?

Answer 15

Market with inequality in competioton can lead to power abuse. Market fails to deliver efficiently and consumer sovereignty, leasing to reduction in community welfare

Question 16

What is market instability?

Answer 16

Level of economic activity in markets (refer to the business cycle)

Question 17

What are unstable prices?

Answer 17

Through the business cycle or through the year some goods and services have unstable prices. Often natural products. Goods produced in the agricultural industry heavily rely on external factors like climate, weather, season. Supply changes, impacting prices, unstable prices. Income instability, unemployment

Question 18

What is factor mobility?

Answer 18

Required to be economic efficient. Specialization, utilization of skills, greater volume of production.
Factor immobility occurs when skills, discrimination and lack of information. Leads to high unemployment.

Question 19

What is market failure?

Answer 19

When the forces of demand and supply (price mechanism) leads to an efficient allocation of resources and a dead weight loss of economic welfare.

Question 20

What are demerit goods?

Answer 20

Have a negatvie impact on the consumer.

Question 21

What is the exclusion principle?

Answer 21

When a private owner of a good can stop a consumer from using it until they pay. People unable or unwilling to pay are excluded.