Pack 4: Market failure and government intervention

Question 1

What is market failure?

Answer 1

Price mechanism failing to deliver efficiency, results in misallocation of resources

Question 2

What are the types of market failure?

Answer 2

~Externalities
~Under-provision of public goods
~Geographical/occupational immobility of labour
~Monopoly power
~Unstable commodity markets
~Inequality

Question 3

What are private costs?

Answer 3

Direct cost to producer/consumer. Cost internal to exchange, taken into account by price mechanism

Question 4

What are private benefits?

Answer 4

Direct benefit to producer/consumer. Internal to exchange, taken into account by price mechanism

Question 5

What is a negative externality?

Answer 5

Negative third party effects. External to exchange, ignored by price mechanism

Question 6

What are positive externalities?

Answer 6

Positive third party effects. External to exchange, ignored by price mechanism

Question 7

What are social costs?

Answer 7

Private costs + external costs

Question 8

What are social benefits?

Answer 8

Private benefits + external benefits

Question 9

When is government intervention necessary?

Answer 9

When there is over-production and under-consumption to solve market failure

Question 10

What are public goods?

Answer 10

Good which has both non-rivalry and non-excludability characteristics, e.g. street lights

Question 11

What are private goods?

Answer 11

Good which has both rival and excludable characteristics, e.g. an apple

Question 12

What is the free rider problem?

Answer 12

Once public good provided, impossible to prevent those who haven’t paid for it consuming it

Question 13

What is imperfect information?

Answer 13

When economic agents lack all information to make informed choices

Question 14

What is symmetric information?

Answer 14

Situation where all parties have the same amount of information

Question 15

What is asymmetric information?

Answer 15

Situation where one party has more information than another

Question 16

What can governments do to provide information to allow consumers and producers to make informed choices?

Answer 16

~Health campaigns
~information at point of sale, e.g. calories on food
~provision of consumer advice

Question 17

What are the information gaps in healthcare?

Answer 17

~patient exploitation
~Medical conditions not diagnosed
~External benefits ignored

Question 18

What are the information gaps in insurance?

Answer 18

~Lack of care by those insured
~Under-provision

Question 19

What are the information gaps in education?

Answer 19

~Under-consumption
~Problems of choosing correct schooling

Question 20

What are the information gaps with pensions?

Answer 20

~Underinvestment into pension funds

Question 21

What are the information gaps with tobacco and alcohol?

Answer 21

~Over-consumption, external costs ignored

Question 22

What is indirect taxation?

Answer 22

Charge levied on goods/services by government, increases producers costs, reducing supply

Question 23

What are the limitations of indirect taxation?

Answer 23

~Hard to set right tax level
~Less effective when demand price inelastic
~impact on low income consumers
~Negative business impact
~Cost of collection
~Secondary markets

Question 24

What is a subsidy?

Answer 24

Sum of money paid by governments to producer to encourage production and reduce price by reducing production costs

Question 25

What are the limitations of subsidies?

Answer 25

~Difficult to set at right level
~Cost of subsidy
~Impact of efficiency
~Change of behaviour?

Question 26

What is provision of information?

Answer 26

Information provided to uniformed party to allow better decisions

Question 27

What is regulation?

Answer 27

Rules, laws and restrictions put in place by government

Question 28

What is state provision?

Answer 28

When government provides goods/services funded via taxation/borrowing

Question 29

What are tradable permit schemes?

Answer 29

Scheme where limit placed on carbon emissions through issue of permits. Can be bought, sold, fines imposed if limit exceeded without buying permits