Price mechanism

Question 1

What is price mechanism?

Answer 1

The interaction between buyers and sellers in free markets that enables goods, services and resources to be allocated by prices.

Question 2

What are the 3 functions?

Answer 2

• Rationing function
• Signalling function
• Incentivizing function

Question 3

What is the rationing function?

Answer 3

Rations resources and demand increases supply and price driven up

Question 4

What is the signalling function?

Answer 4

Price changes send contrasting messages wether to enter or leave a market

Question 5

What is the incentivizing function?

Answer 5

Motivates a producer or consumer to follow a course of action

Question 6

Why might we not be rational (P1)

Answer 6

• Limited capacity to calculate benefit of decision
• Influenced by social networks
• Loss averse (safety over gains)
• Acting reciprocally over self intrest

Question 7

Why might we not be rational (P2)

Answer 7

• Lack of self control
• Cold and emotional states
• Satisfies rather than maximizes
• Default to status quo
• Fall back on simple rule of thumb

Question 8

What is a public good?

Answer 8

Providing for one, providing for everyone

Question 9

What is complete market failure?

Answer 9

Dosent supply products at all

Question 10

What is partial market failure?

Answer 10

Dose actually function but produces wrong quantity/price

Question 11

What is non-excludability?

Answer 11

The benefits derived from pure public goods can’t be confined solely to those who have paid for it.

Question 12

What is non-rival consumption?

Answer 12

Consumption by one consumer does not restrict consumption by other consumers.

Question 13

What is non-rejectable?

Answer 13

The collective supply of a public good for all means that it can’t be rejected by people.

Question 14

What is the free rider problem?

Answer 14

People benefiting from the provisions of a good/service without paying for it.

Question 15

Quasi-public goods

Answer 15

• Near public goods
• Semi-non-rival
• Semi-non-excludable

Question 16

How does market failure happen?

Answer 16

Price mechanism fails to allocate scarce resources efficiently leading to a net social welfare loss.

Question 17

Merit good

Answer 17

goods and services that the government feels that people will under consume

Question 18

principal agent relationship

Answer 18

arrangement in which one entity legally appoints another to act on its behalf occurs due to imperfect information

Question 19

asymmetric information

Answer 19

market failure exists when one individual or party has more information than another

Question 20

What’s a demerit good

Answer 20

• Negative externalities
• Opposite of merit goods
• Over-consumed if no intervention
• Imperfect information

Question 21

What can the government do to intervene demerit good

Answer 21

• Taxes
• Informing
• Limit where available
• Substitutes
• Legal ages / fines

Question 22

Asymmetric information

Answer 22

• 1 individual/party has more info that the other
• Leads to exploitation

Question 23

Government intervention aimed at closing the info gap

Answer 23

• Compulsory labeling
• Nutritional info
• Info campaigns
• Consumer protection laws

Question 24

Rewards for government provisions of public goods

Answer 24

• Non-rival nature of certain goods
• Many public goods are provided free at the point of use and then funded by tax
• Helps prevent under provision and consumption
• More efficiency
• Providing affordable essential goods

Question 25

Negatives for government provisions of public goods

Answer 25

• Government become monopoly lack of efficiency due to lack of competition
• Opportunity cost
• Non beneficiaries pay
• Ineffectiveness of government provision