The Market Mechanism, Market Failure And Government Intervention In Markets

Question 1

Signaling function of prices

Answer 1

Prices provide information to buster and sellers

Question 2

Incentive function of price

Answer 2

Prices create incentives for people to alter their economic behaviour

Question 3

Rationing function of prices

Answer 3

Rising prices ration demand for a product

Question 4

Allocative function of prices

Answer 4

Changing relative prices to allocate scarce resources away from markets exhibiting excess supply and into markets where there is excess demand

Question 5

Market failure

Answer 5

When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity

Question 6

Missing market

Answer 6

A situation in which there is no market because the functions of prices have broken down

Question 7

Private good

Answer 7

A good that is excludable and rival

Question 8

Public good

Answer 8

A good that is non-excludable and non-rival

Question 9

Quasi public good

Answer 9

A good which is not fully non-rival and/or where it is possible to exclude people from consuming the product.

Question 10

Externality

Answer 10

A public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is ‘dumped’ on third parties outside the market

Question 11

Positive externality

Answer 11

The same as an external benefit, occurs when the consumption or production of a good cause a a benefit to a third party, where the social benefit is greater than the private benefit

Question 12

Negative externality

Answer 12

The same as an external cost,, occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost

Question 13

Production externality

Answer 13

An externality (either negative or positive) generates in the course of producing a good or service

Question 14

Consumption externality

Answer 14

An externality (either negative or positive) generates in the course of consuming a good or service

Question 15

Social benefit

Answer 15

The total benefit of an activity, including the external benefit as well as the private benefit. Expressed as an equation: Social benefit = private benefit + external benefit

Question 16

Merit good

Answer 16

A good, such as health care, for which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding whether a good is a merit good

Question 17

Subsidy

Answer 17

A payment made by the government or another authority, usually to producers, for each unit of the subsidised good that they produce. Consumers can also be subsidised: e.g. free bus passes for children

Question 18

Demerit good

Answer 18

A good, such as tobacco, for which the social costs of consumption exceed the private costs. Value judgements are involved in deciding that a good is a demerit good

Question 19

Social Cost

Answer 19

The total cost of an activity, including the external cost as well as the private cost: social cost = private cost + external cost

Question 20

Information problem

Answer 20

Occurs when people make wrong decisions because they don’t possess or they ignore relevant information. Very often they are myopic

Question 21

Myopic

Answer 21

Short sighted about the future

Question 22

Immobility of labour

Answer 22

The inability of labour to move from one job to another, either for occupational reasons (training) or for geographical reasons (cost of moving)

Question 23

Geographical immobility of labour

Answer 23

Occurs when workers find it difficult or impossible to move to jobs in different parts of a country or in another country for reasons such as higher housing costs

Question 24

Occupational immobility

Answer 24

Occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develops the skills required for the new jobs

Question 25

Equity

Answer 25

Fairness or justness

Question 26

Inequity

Answer 26

Unfairness or unjustness

Question 27

Distribution of income and wealth

Answer 27

The way in which income and wealth are divided among the population

Question 28

Tax

Answer 28

A compulsory levy imposed by governments to pay for its activities. Taxes can also be used to achieve other objectives, such as reduced consumption of demerit goods

Question 29

Price ceiling

Answer 29

A price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets by creating excess demand

Question 30

Price floor

Answer 30

A price below which is illegal to trade. Price floors, or minimum legal prices, can distort markets by creating excess supply

Question 31

Government failure

Answer 31

Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome