Pack 4: Market failure and government intervention Flashcards
What is market failure?
Price mechanism failing to deliver efficiency, results in misallocation of resources
What are the types of market failure?
~Externalities
~Under-provision of public goods
~Geographical/occupational immobility of labour
~Monopoly power
~Unstable commodity markets
~Inequality
What are private costs?
Direct cost to producer/consumer. Cost internal to exchange, taken into account by price mechanism
What are private benefits?
Direct benefit to producer/consumer. Internal to exchange, taken into account by price mechanism
What is a negative externality?
Negative third party effects. External to exchange, ignored by price mechanism
What are positive externalities?
Positive third party effects. External to exchange, ignored by price mechanism
What are social costs?
Private costs + external costs
What are social benefits?
Private benefits + external benefits
When is government intervention necessary?
When there is over-production and under-consumption to solve market failure
What are public goods?
Good which has both non-rivalry and non-excludability characteristics, e.g. street lights
What are private goods?
Good which has both rival and excludable characteristics, e.g. an apple
What is the free rider problem?
Once public good provided, impossible to prevent those who haven’t paid for it consuming it
What is imperfect information?
When economic agents lack all information to make informed choices
What is symmetric information?
Situation where all parties have the same amount of information
What is asymmetric information?
Situation where one party has more information than another
What can governments do to provide information to allow consumers and producers to make informed choices?
~Health campaigns
~information at point of sale, e.g. calories on food
~provision of consumer advice
What are the information gaps in healthcare?
~patient exploitation
~Medical conditions not diagnosed
~External benefits ignored
What are the information gaps in insurance?
~Lack of care by those insured
~Under-provision
What are the information gaps in education?
~Under-consumption
~Problems of choosing correct schooling
What are the information gaps with pensions?
~Underinvestment into pension funds
What are the information gaps with tobacco and alcohol?
~Over-consumption, external costs ignored
What is indirect taxation?
Charge levied on goods/services by government, increases producers costs, reducing supply
What are the limitations of indirect taxation?
~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
What is a subsidy?
Sum of money paid by governments to producer to encourage production and reduce price by reducing production costs
