prices and market failure

Question 1

what is a positive criticism?

Answer 1

it is a critism that can be tested and proven correct or incorrect. it is not based on a value judgement

Question 2

what is a normative critism?

Answer 2

a normative critism cannot be tested therefore not proven. it is based on a value judgement

Question 3

what is the issue of missing markets?

Answer 3

there are some markets that are missing for some goods and services which bring immense benefits to all the public but for which demand cannot be necessarily restricted to those who pay for them

Question 4

what are public goods?

Answer 4

goods that are non excludable and non rival. they are usually underprovided by the market due to the free rider effect

Question 5

what are examples of public goods?

Answer 5

the army, street lights, the bbc

Question 6

what are merit goods?

Answer 6

merit goods are goods which have a greater social benefit then private benefit. as a result, the market demands less then society needs so it does not reach the socially optimum output. under provided

Question 7

what are examples of merit goods?

Answer 7

an example of a merit good are hospitals, education, roads, police

Question 8

what is assymetric information?

Answer 8

assymettric information is where one agent in a transaction knows more than the other. an example may be the unscrupulous traders who sell snake oil as a magical cure

Question 9

what are excessive transactions costs?

Answer 9

they are transaction costs for which it is too costly to bring buyers and sellers togethet

Question 10

how might a monopoly cause market failure?

Answer 10

a monopoly producer can dictate the price of the product since it has no competition therefore the price mechanism does not sign relative scarcity and the real value of the product reflects the abuse of the monopoly power

Question 11

how does sophisticated technology cause market failure?

Answer 11

there may be assymetric information between the supplier and the consumer for example a doctor can abuse his power to sell overpriced medicine to a consumer who may not even need it. this is especially the case when there is no other supplier

Question 12

how many people die each year in road traffic injuries according to WHO in 2016?

Answer 12

1.25 million people die each year and 20-50 million injured or disabled

Question 13

what are the economic losses involved in road traffic injuries?

Answer 13

there is the cost of treatment, reduced productivity for those killed or disabled by their injuries and the family members who take time of work to care for the injured . the costs equal approx 3% of world GDP or up to 5% in low or mid income countries

Question 14

what are the social costs of private transport?

Answer 14

increased price of oil for others
depletion of natural resources
global warming
land purchase orders
environmental blight
funeral and hospital bills
time and incomes lost in accidents and traffic jams

Question 15

what are negative externalities?

Answer 15

Negative externalities exist where production and consumption of some good or services imposes costs on external parties

Question 16

what are examples of a negative externality?

Answer 16

the pollution caused in producing electricity, or in consuming a pizza and discarding the box in the street

Question 17

what are postive externalities?

Answer 17

Positive externalities occur when a market transaction between two parties brings benefits to others

Question 18

what are examples of postive externalities?

Answer 18

investing in a new iron and steelworks, for example, brings extra custom to suppliers and transport businesses and cheaper inputs for the car industry

Question 19

what is the issue with externalities?

Answer 19

The point is that the original market decision (to produce pizza or iron and steel) is taken by entrepreneurs who base their decision only on internal costs and revenues (and the associated profits)and fail to consider the external costs and benefits that fall to others

Question 20

what is an example case study of a positive externality?

Answer 20

early 1970s the korean government applied for a concessionary loan to build a steel mill. this application was rejected due to no comparative advantage (large economies of scale so long gestation period before they efficient, demand in country was low and supply in global was high and ROI on investment seemed low)
the government financed the investment themselves. they subsidised other sectors such as motor industry to boost demand for steel. the current market signals were ignored in a system called administrative guidance
POSCO won the worlds most efficient producer of steel some years later

Question 21

what is occupational mobility?

Answer 21

Occupational mobility refers to the ability of factors of production to switch occupations in order to meet the needs of industry.

Question 22

what is geographical mobility?

Answer 22

Geographical labor mobility refers to the level of flexibility and freedom that factors of production have to move from one region or locale to another in order to find gainful employment in their field.

Question 23

why might a small business not be as mobile as a large business?

Answer 23

it will not have the collateral to borrow more in order to expand

Question 24

why might people on low incomes not be as mobile?

Answer 24

they might not be able to afford a decent education or health services so as a result they will not have as many skills and therefore more occupational immobile

Question 25

what is a major normative critism about free markets with mobile resources?

Answer 25

free markets may work more or less efficiently for those resources which are mobile…but such markets produce inequitable social outcomes that many find unacceptable

Question 26

what is the fallacy of compostition?

Answer 26

the assumption that what works for the community in an individual market will work for all market places throughout an economy added together

Question 27

what do the savings to capitla markets depend on?

Answer 27

the saving to capital market does not depend on the rate of interest but instead the level of income.

Question 28

what is the demand for funds for investment dependent on?

Answer 28

the interest rate and the buissness expectatins of future profits

Question 29

what does the level of unemployment or inflation depend on?

Answer 29

the level of aggregate demand which is made up of all the decisions by producers and consumers in all markets in a country

Question 30

what occurs when the aggregate demand is too low?

Answer 30

there will be unemployment and recession

Question 31

what occurs when the aggregate demand is too high?

Answer 31

there will be inflation as prices rise

Question 32

what is the phillips curve

Answer 32

it is a curve that shows there is a negative correlation between unemployment and wage infalation

Question 33

what is the phillips trade off?

Answer 33

too much AD will give inflation and too little caused unemployment

Question 34

what position in the Phillips trade-off do governments usually take?

Answer 34

governments typically choose to reduce unemployment especially before elections due to it getting them votes, or at least until the arrival of thatcher

Question 35

what was the supply side revolution?

Answer 35

the creeping inflation of the 1960s gave way to double digit inflation of the 70s and early 80s. this was hypothesised to be due to high levels of government intervention. this led to the conclusion that managing a complex economy is too difficult for clumsy spendthrift government and its best to leave well alone. the new classical school of economists argued for the liberation of the supply side of the economy with deregulation, lower taxes and cuts in government spending. they believed this would cause inflation and unemployment to decrease and there was no trade off. this was enthusiastically picked up by reagan and thatcher

Question 36

what was the government failure of 2008?

Answer 36

there was insufficient monitoring and policing not too much

Question 37

what do free market systems produce?

Answer 37

any goods and services which can be restricted in sale to paying customers but not sufficient public goods and merit goods
positive and negative externalities
increasing inequality between rich and poor
instability- booms and slumps in private investment and incomes