Preliminary Exam Topic 6 Flashcards
No market is perfect - but what are market economies generally good at?
Deciding:
What goods and services to produce
What quantities to produce
How to organise production
Define ‘LAISSEZ-FAIRE SYSTEM’
Laissez-faire system: Economic approach characterised by minimal government intervention in the affairs of individuals and businesses, allowing the free market to dictate prices and production.
Effects of Laissez-faire system
Unsafe goods and services
Environmental damage
Community wants and needs may not be provided
Unstable and inefficient markets
Define market failure
when the price mechanism takes into account private economic interests but don’t account for indirect costs and social interests (e.g environmental damage, negative externalities)
Market failure can arise in the provision of G&S and income distribution, leading to:
Negative externalities
The abuse of market power
Economic instability.
The government intervenes in markets to address market failures, with the goal of achieving:
Better allocation of resources
More equitable distribution of income
Greater economic stability.
Define the ‘PUBLIC SECTOR’
The part of a country’s economy which is controlled or supported financially by the government.
When a good or service isn’t being provided by the private sector - the public sector may provide.
Define the ‘PRIVATE SECTOR’
The part of the economy owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government.
Public goods are an area of market failure - Define ‘PUBLIC GOOD’
is any product or service that is available to all residents of a society (national defence, police and fire services, clean air, and drinking water)
What are the two characteristics a public good must be?
- Non-rivalrous
- Non-excludable
Define ‘NON-RIVALROUS’
Non-rivalrous: consumption of a good by one person does not reduce the amount available for others.
Define ‘NON-EXCLUDABLE’
Non-excludable: means that it is costly or impossible for one user to exclude others from using a good.
Define ‘MERIT GOOD’
Merit Goods: a commodity or service, such as education, that is regarded by society or government as deserving public finance - benefits go beyond the individual who enjoys them directly
Once again they are usually undersupplied by the private sector - Governments play a role in providing merit goods, either directly (operating or funding most hospitals) or indirectly (financial support for arts groups).
Define ‘DEMERIT GOOD’
Demerit Goods: a G/S whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves.
How might the government change the production and sale of demerit goods?
- with examples
RESTRICTED: A licence to sell alcohol, and fines for supplying alcohol to people under 18 years of ages
HEAVILY TAXED: (as with tobacco) or completely prohibited
PROHIBITED: (such as dangerous illicit drugs).
Define ‘COLLECTIVE GOOD’
Collective Goods - Non-rivalrous but not always non-excludable
Governments provide a range of collective G&S that benefit the whole community, education, health services, roads, railways, national parks and historic monuments.
Government sometimes provide goods by operating as a natural monopoly.
Define ‘NATURAL MONOPOLY’
Natural Monopoly: A natural monopoly is a type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing.
- occurs when competition would create inefficiency
E.g rail networks, because of the huge investment in buying land and laying rail track
One of the governments main regulatory roles is redistributing income across the economy - it is the largest expense of the australian budget - what would happen if governments didn’t intervene?
Left to operate without any government intervention, free markets tend to produce substantial inequality in the distribution of income.
This inequality will widen over time, because wealth tends to generate more wealth.
Particular groups within Australia that are susceptible to inequality and poverty.
Who are they (5)
Those with low education levels
Migrants from non-English-speaking backgrounds
Indigenous Australians
People with a disability
Single-parent families.
What is the most common form of poverty in australia?
Relative poverty
What are the two types of poverty?
Relative poverty and absolute poverty
Define ‘RELATIVE POVERTY’
refers to those whose standard of living is substantially lower than the average for the economy - is often defined as below 30 percent of average earnings.
Define ‘ABSOLUTE POVERTY’
occurs where individuals have only just enough income to enable them to survive
Governments must act constructively to end the cycle of poverty - they can’t remove all the factors contributing to inequality, they can improve opportunities for people in disadvantaged groups.
These measures can improve social mobility (that is, help people who are born into a particular socio-economic class increase their wealth and socio-economic status).
Give examples
E.G Universal access to free education until the completion of high school
E.G Special educational assistance programs and scholarships
E.G Measures to help mature-age people enter higher education are all ways in which governments can help address the effects of income inequality.
What does it mean that Australia has a welfare state?
Australia has a “welfare state” – a system of welfare benefits (age pension, unemployment benefits, free access to health care, and subsidised access to housing).
Define ‘EXTERNALITY’ (Postive/Negative)
- Give Example
External costs and benefits that private agents in a market do not consider in their decision-making process.
Contribution to increased carbon dioxide and global warming caused by the burning of fossil fuels, such as from coal-fired power stations and motor vehicles
Why are externalities a form of market failure?
Externalities are a form of market failure because they occur where the price mechanism fails to represent the true social costs or benefits of production.
Define ‘COPORATISATION’
the process of transforming a government agency or public sector organisation into a corporation with a focus on efficiency, profit generation, and market-driven practices.
Define ‘PRIVATISATION’
the process of transferring ownership and management of a public sector enterprise or service to private individuals or organisations (goal of increasing efficiency + reducing gov involvement)
Define ‘COMPETITION’
:rivalry among individuals or organisations to achieve a larger share of a market, resources, or customers, often driving innovation, improving quality, and influencing pricing.
Define ‘CONSOLIDATION’ in terms of being a firm in a market
Because of the costs involved in producing, distributing and marketing goods and services in some markets, only a minority of firms survive beyond their first few years of operation.
Over time, industries often experience a process of consolidation in which fewer firms take a larger market share.
For example, a monopolist will often restrict its production in order to charge a higher price and maximise its profits.
Oligopolists find that engaging in price competition is futile, since their competitors are likely to match any price cuts. What do they do instead?
Instead of reducing prices, they will compete with advertising, brand packaging and product differentiation – activities that hold little real benefit for consumers.
