The Limits of Markets Flashcards
When does market failure occur?
When the price mechanism takes into account the private benefits and costs of production to consumers and producers but it fails to take into account indirect costs such as damage to the environment
What are the outcomes of free market operation? (x3)
- Community wants are not always satisfied
- Inequalities in income
- Fluctuating cycles
What does government intervention in markets lead to? (x3)
- Better allocation of resources
- More equitable levels of income
- Greater economic stability
Name the areas of market failure (x5)
- Failure to account for negative externalities and failure to reduce negative externalities
- Instability of the markets and the economy
- Failure to have perfect competition leading to abuse of market power
- Failure to provide some goods or services
- Failure to produce an equitable distribution of income
What is a natural monopoly?
A market structure where goods can effectively be provided by only one supplier, usually because of the enormous investment in infrastructure required to supply that good
What are externalities?
External costs and benefits that private agents in a market do not consider in their decision-making process
What is a positive externality?
An unintended positive outcome of an economic activity whose VALUE is not reflected in the operation of the price mechanism
What is the price mechanism?
The process where the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced
What is a negative externality?
An unintended negative outcome of the negative outcome of an economic activity whose COST is not reflected in the operation of the price mechanism
Name the ways which firms abuse their market power (x4)
- Monopolisation
- Price discrimination
- Exclusive dealing
- Collusion and market sharing
When does monopolisation occur?
When a firm uses its dominant market position to eliminate existing competition or prevent new firms from entering the market through behaviour such as price cuts which eliminate competition
What is price discrimination?
When a firm sells the same type of good or service in different markets at different prices.
When do firms price discriminate?
A firm will attempt to charge higher prices to consumers that it believes have a higher willingness and capacity to pay. The greater degree of market power the firm has, the greater ability for the firm to engage in this practice
What is exclusive dealing?
When a firm sets conditions for supply that exclude retailers from dealing with other competitors
When does collusion and market sharing occur?
When firms get together and agree on a pricing and market share arrangement (cartel) that reduces effective competition between them, and tends to inhibit the entry of new competition in the market
