Section D Flashcards
Productive efficiency=
Occurs when firms have chosen appropriate combinations of FOP’s and produce the maximum output possible from them, thus producing at minimum long run average cost
Allocative efficiency
Achieved when society is producing an appropriate bundle of goods relative to consumer prefernces
Market failure
A situation in which the free market mechanism does not lead to an optimal allocation of resources e.g divergence between msb and msc
Asymmetric information
A situation in which some participants in a market have better information about market conditions than others e.g dentists or second hand cars
Reasons for info failure
*where consumers base there info on wrong/limited info and so make potentially wrong choices
- misleading info (ads)
- incomplete info (lack of knowledge)
- complex info
- addiction
Info Failure COR
- Imperfect info
- Computation problems
- OC
- Misallocation of FOP’s
- MF
Merit good
A good that brings unanticipated benefits to consumers (if left to free market with no information from govt would be under-consumed)
Demerit good
Consumption is more harmful than is actually reaslised
Solutions to info failure for merit goods
- subsidies
- Govt provides for free
- info provision
Solutions to info failure for demerit goods
- regulations
- taxes
- info provisions
- subsidise better substitute
Externality
A cost or benefit that is external to the market transaction and is thus not reflected in market prices
Internalising an externality
An attempt to deal with an externality by bringing an external cost or benefit into the price system
Key steps from negative externalities to market failure (positive externalities are just the opposite)
1) air pollution is a harmful side effect for 3rd parties who are not included in consumption or production
2) in market system, external costs not taken into account
3) welfare loss
4) misallocation of resources
5) OC
6) MF
Examples of Positive externalities
- young sporting programmes
- health care
- inoculation of a disease
