The Market Mechanism, Market Failure And Government Intervention In Markets Flashcards
Signaling function of prices
Prices provide information to buster and sellers
Incentive function of price
Prices create incentives for people to alter their economic behaviour
Rationing function of prices
Rising prices ration demand for a product
Allocative function of prices
Changing relative prices to allocate scarce resources away from markets exhibiting excess supply and into markets where there is excess demand
Market failure
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
Missing market
A situation in which there is no market because the functions of prices have broken down
Private good
A good that is excludable and rival
Public good
A good that is non-excludable and non-rival
Quasi public good
A good which is not fully non-rival and/or where it is possible to exclude people from consuming the product.
Externality
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
Positive externality
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
Negative externality
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
Production externality
An externality (either negative or positive) generates in the course of producing a good or service
Consumption externality
An externality (either negative or positive) generates in the course of consuming a good or service
Social benefit
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
Merit good
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
Subsidy
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
Demerit good
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
Social Cost
The total cost of an activity, including the external cost as well as the private cost: social cost = private cost + external cost
Information problem
Occurs when people make wrong decisions because they don’t possess or they ignore relevant information. Very often they are myopic
Myopic
Short sighted about the future
Immobility of labour
The inability of labour to move from one job to another, either for occupational reasons (training) or for geographical reasons (cost of moving)
Geographical immobility of labour
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
Occupational immobility
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
Equity
Fairness or justness
Inequity
Unfairness or unjustness
Distribution of income and wealth
The way in which income and wealth are divided among the population
Tax
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
Price ceiling
A price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets by creating excess demand
Price floor
A price below which is illegal to trade. Price floors, or minimum legal prices, can distort markets by creating excess supply
Government failure
Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome
