section 8 Flashcards
market failure
occurs when consumer welfare is not maximised
when the market fails to allocate recourses efficiently
complete market failure
market fails to function at all and there is a ‘missing market’
partial market failure
the market delivers the ‘wrong’ quantity of good, and service and a misallocation of recourses occurs
types of market failure
monopoly
factor immobility
imperfect information
public goods
consumption externalities
demerit and merit goods
production externalities
absence of property rights
inequality
monopoly power
the monopoly is able to raise the price causing an under-production of the product = partial market failure
immobility of factors
factors of production (cell) cant be moved easily in the short run
demand rises, if supply cannot expand to match then disequilibrium occurs = partial market failure
(example; labour market with occupational and geographic immobility)
imperfect information
occurs when, due to a lack of information, people make decisions that do not maximise their consumer welfare
asymetric information
when one party has more information than another - normally the supplier
examples of imperfect information
fast food, sugar, sunbeds = overconsumed
fruits, vegtables, excersise = underconsumed
example of asymmetric information
akerlofs market for lemons/2nd hand car market
public goods
goods that are non-excludable and non-rival
non-excludable
people cannot be stopped from consuming and benefiting from the good
non-rival
one persons consumption of a public good does not decrease the benefit (utility) gained by another consumer of the public good
examples of public goods
armed forces
lighthouses
streetlights
flood defence
firework displays
tv and radio broadcasts (debatable)
private goods
goods that are excludable and rival
quasi-public goods
goods that have one characteristic of a public good and one of a private good
either non-excludable and rival or non-rival and excludable
free rider problem
occurs because public goods can be consumed without paying for them
leading to no incentive to produce, providing less than what is socially optimal
how do public goods lead to market failure
free-riders problem (underproduction due to no profit incentive)
complete market failure
government has to provide public goods
marginal private cost
additional cost to the firm of producing one more unit
the supply curve
marginal private benefit
additional benefit/utility to the individual of consuming one more unit
the demand curve
marginal social cost
additional cost to society of producing one more unit
exists only when production externalities occur in a market (because no externalities = sc = pc)
marginal social benefit
additional benefit to society of consuming one more unit
exists only when consumption externalities occur in a market (because no externalities = sb = pb)
externalities
the spill over effects on third parties as a result of economic activity
third parties
not producer or consumer
negative consumption externalities on graph
difference between sb and pb (pb > sb) = social and free market equilibrium dont match = partial market failure
over-consumption (social q < private q)
examples of negative consumption externalities
alcohol
cigarettes
fast food
examples of positive consumption externalities
education
healthcare
public transport
cultural activities (museums/galleries)
positive consumption externalities on a graph
difference between pb and sb (sb > pb) = social and free market equilibirum dont match
will be consumed (social q > private q)
merit good
when merit goods are consumed they have a greater benefit than the consumer realises due to positive consumption externalities and imperfection information
examples of merit goods
education
health/vaccines
public transport
cultural activities
wifi
sporting activities
seatbelts
in a pure free market economy, what happens to merit goods
will be under-consumed and priced too high
demerit goods
when they are consumed they have a greater cost than consumer realises due to negative consumption externalities and imperfect information
demerit good examples
cigarettes
alcohol
fast food
sugar
gambling
recreational drugs
car journeys
in a pure free market economy what happens to demerit goods
will be overconsumed and priced too low
negative production externalities examples
air transport
energy production from fossil fuels
livestock farming (methane)
mining for rare earth materials (battery production)
use of pesticides
negative production externalities on a graph
difference between pc and sc (sc < pc) = social and free market equilibrium dont match
over-production (social q < private q)
environmental market failure
negative externalities arising from the over-exploitation of environmental recourses
property rights
the legal rights of ownership or use of an economic recourse
absence of property rights
no one owns and controls a particular recourse (leads to over-exploitation)
examples of environmental market failure
overfishing (endangering fish species)
deforestation
overgrazing common land until it can no longer support livestock
over polluting earths atmosphere
tragedy of the commons
over-exploitation of land, it becomes degraded and unusable
positive production externalities examples
farming
positive production externalities on a graph
difference between pc and sc (pc < sc) = social and free market equilibrium dont match
underproduction (social q > private q)
income
a flow (inwards) can be wages or salaries, profit, dividends, interest and rent
wealth
a stock and a measure of all assets owned
equality
when income and wealth are the same for everyone
inequality
when income are not the same for everyone
causes of income inequality
different education, qualifications or skills
causes of wealth inequality
inheritance or winnings
equity
fair distribution of income and wealth
what graph to draw for equity
merit good (has macro goods of lower unemployment and higher growth)
arguments against/for decreasing inequalities in income and wealth
for; large inequality will create and ‘underclass’ that lacks opportunity + leads to market failure (equity = merit good)
against; would decrease the incentive to working hard if government redistributes equally - also leads to market failure
methods to decreasing inequality
increasing progessive taxation
decreasing regressive taxation
increasing wealth taxation
transfer payments/benefits
raising minimum wage
increase spending on education and training
indirect tax
(e.g. vat)
a tax on expenditure, usually a percentage tax- higher on demerit goods
increases cost of production and therefore decreases supply/increases price to decrease qd
benefits of indirect taxation
correcting market failure
tax revenue for the governmnet
market-based intervention
problems with indirect taxation
demerit goods are often necessity, addictive or lack close substitutes
indirect taxes are regressive
size of tax may be too small
difficult to estimate size of the externality
regulation
involves the imposition of rules, control and constraints which restrict freedom of economic action in the market place
examples of regulation
smoking ban
driving laws (seatbelts)
advertising bans + making firms advertise neg con ext.
health and safety laws
maximum emissions
benefits of regulation
corrects market failure
regulation makes certain behaviour by firms or consumers illegal
problems with regulation
legislation and enforcement expensive and not always effective
popularity
subsidy and effect
a government grant given to producers/firms to decrease costs of production (shifting s to the right, decreasing p and increasing q)
benefits of subsidies
correct market failure
market-based intervention
problems with subsidies
‘good’ products are often a necessity, so subsidies won’t increase quantity enough to solve market failure
subsidies have to be funded from tax revenue
size of subsidy
subsidy may lead to a loss of productivity
difficult to estimate the size of the externality
government provision
government provided service as part of the public sector, financed by tax revenue and service is normally provided free at the point of consumption
government provision examples
armed forces
police
fire services
the nhs
state education
roads
benefits of government provision
correcting market failure (of public goods)
equity
positive externalities
problems with government provision
has to be funded by tax revnue
gov spending leads to crowding out (increasing demand for factors of production so price increases)
lack of competition and profit motive
if service is free at point of consumption, can be overconsumed
estimating the size of the positive externality
nationalisation
when the gov takes over production of a service from a private firm
minimum price
sets a price floor that makes it illegal for a firm to trade below this price
minimum price examples
minimum price on alcohol per unit in scotland
effect of minimum price
increases price of product so demand contracts and quantity consumed decreases
benefits of minimum price
correcting market failure (neg externalities)
problems of using minimum price
leads to excess supply
hard to enforce
inelastic demand and poverty
popularity
maximum price
sets a price ceiling that makes it illegal for a firm to trade above this price
maximum price examples
energy price gap
rail fares
water rates
tuition fees for university
effect of maximum price
decreases price which increases demand which decreases quantity demanded
benefits of maximum price
correcting market failure (merit goods underconsumption)
decrease in inequality and poverty
regulating monopoly power
problems with maximum price
possibility of shortages
the lower price decreases incentive for firms due to less profit incentive
legislation and enforcement
popularity
information provision
involves the introduction of a promotional campaign by the government to influence the behaviour of consumers
examples of information provision
drinking responsibility
dont drink and drive campgain
seatbelts
smoking
five a day campaigns
benefits of information provision
correcting market failure (demerit/merit goods) by removing information failure
problems with information provision
high cost of producing advertising
information may not be enough to change behaviour
price (merit goods still to spenny and vice versa for demerit goods)
pollution permits
the right to use or exploit an economic resource to a specific degree
pollution permits are a form of property rights
benefits of pollution permits
correcting market failure (enviromental market failure + neg prod ext.)
encourage firms to be more enviromentally friendly
problems of using pollution permits
inequity + inequality
monopoly power
amount of permits
expensive to enforce
government failure
occurs when government intervention in a market reduces overall economic welfare
(gov enters a market to correct market failure but makes a worse allocation of recources than the price mechanism)
law of unintended consequences
whenever the government intervenes in the market economy, effects will be unleashed which the policy-maker had not foreseen or intended
examples of gov failure
unintended consequences (hidden economies)
market distortions
inadequate information (over/under intervention)
administration costs
