The market mechanism, market failure and government intervention Flashcards
What are the main functions of price in a competitive market?
Rationing function
Incentive function
Signalling function
What does a misallocation of resources lead to?
Market failure
When does complete market failure occur?
When no market for a good exists
When does partial market failure occur?
When there is a market for a good but resources are not allocated in a way to maximise social welfare
What causes market failure?
Public goods Positive/negative externalities in consumption and production Merit/demerit goods Monopoly Income and wealth gap Immobility of factors of production Imperfect information
What is a private good?
A good where consumption is only available for one person
Name the two key features of public goods
Non-rival
Non-excludable
What is the free rider problem?
The problem of people enjoying the benefit of a public good without paying for it
What is an externality?
The effect of an economic decision on other people/organisations
Give an example of a positive externality in consumption
Vaccinations - less chance of an epidemic
Give an example of a negative externality in consumption
Cigarette smoke - causing discomfort/illness for non-smokers
Give an example of a positive externality in production
Training - more skilled workers
Give an example of a negative externality in production
Noise pollution from factories
What is a merit good?
A good which is underprovided by the market mechanism
What is a demerit good?
A good which is overprovided by the market mechanism
Why do merit and demerit goods arise?
Consumers do not take externalities into account, and consumers may be unaware of the long-term consequences of consumption
What is symmetric information?
When both the seller and buyer of a product are well informed of the product and the prices in the market
What is asymmetric information?
When either the seller or buyer of a product has more information than the other
What does the degree of monopoly power depend on?
Degree of market concentration
PED
Barriers to entry
Brand loyalty/product differentiation
Name and describe the two forms of immobility
Geographical - when the resources can not move from one place to another
Occupational - when the resources can not change their job
What is income?
A flow of money received over a period of time
What is wealth?
A stock of assets accumulated over a period of time
What are the main methods of government intervention?
State provision of a good/service Indirect taxation (VAT) Subsidies Price controls Regulations Public expenditure/direct taxation (Income tax)
List the main reasons for government failure
Inadequate information
Conflicting objectives
Administrative costs
