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Economics > Theme 1 - introduction to markets and market failure > Flashcards

Theme 1 - introduction to markets and market failure Flashcards

1
Q

Why are models used ?

A

Used to explain how the economy works

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2
Q

What is the main difference between theories and models ?

A

Theories can be explained using words, whereas models can be explained using mathematical terms

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2
Q

How is a model created ?

A

Model put forward, evidence gathered, model accepted/changed/disregarded

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3
Q

Why are assumptions made ?

A

Too many variables within a model which can change

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4
Q

What does ‘ceteris parabus’ mean ?

A

All other things remaining equal

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5
Q

How can a theory/model become a law ?

A

By gaining universal acceptance

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6
Q

What is an implication of economics being a social science ?

A

Hard to set up hypotheses

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7
Q

Why might economists have different conclusions for the same set of data ?

A

Variables are always changing, may/may not support the hypothesis

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8
Q

What is a positive statement ?

A

An objective statement which can be tested; e.g. raising taxes will lead to an increase in revenue

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9
Q

What is a normative statement ?

A

A subjective statement based on opinion which cannot be proven/disproven; e.g. the free market is the best way to allocate resources

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10
Q

What is a value judgement ?

A

A subjective evaluative statement on how good/bad someone thinks an action/idea is; e.g. whether or not to regulate the finance industry

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11
Q

How do value judgements influence government economic policies ?

A

Value judgements differ by individuals, resulting in debate between political parties

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12
Q

What is the basic economic problem ?

A

Scarcity - infinite wants vs finite and limited resources

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13
Q

How do economies try to solve the basic economic problem ?

A

By working out what to produce, how to produce it, and for whom production should take place

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14
Q

What is a renewable resource ?

A

A resource of economic value which can be replenished/replaced on a level equal to consumption (e.g. oxygen)

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15
Q

What is a non-renewable resource ?

A

Resource of economic value which cannot be readily replaced by natural means on a level equal to consumption (e.g fossil fuels)

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16
Q

What is the concept of opportunity cost ?

A

The cost of one thing in terms of the next best alternative which has been given up

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17
Q

What is opportunity cost caused by ?

A

The same resources being unable to produce different goods at the same time

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18
Q

What do consumers make decisions based on ?

A

What gives them greatest satisfaction

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19
Q

What are producer’s decisions based on ?

A

Profit

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20
Q

What are government’s decisions based on ?

A

What will maximise social welfare

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21
Q

What good has no opportunity goods ?

A

Free goods (e.g. air/sunlight)

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22
Q

What are the four factors of production ?

A

Land (natural resources used in production, rent received)
Labour (productive human capital, wages received)
Capital (man-made resources used in production, interest received)
Entrepreneurship (willingness and ability to take risks in combining factors of production to make a good/service, profit received)

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23
Q

What does a PPF show ?

A

A PPF (production possibility frontier) shows the maximum possible combinations of capital and consumer goods which the economy can produce with its current resources and technology

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24
Q

Why is a PPF drawn as a curve ?

A

The first resources switched from producing capital goods to consumer will be more productive in making consumer goods, and vice versa

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25
Q

What doesn’t a PPF show ?

A

Which point is best for the economy to operate at

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26
Q

How is economic growth shown on a PPF ?

A

Outwards shift, the economy can produce more (increased quality/quantity of output)

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27
Q

How is economic decline shown on a PPF ?

A

Inwards shift, can produce less (e.g. due to natural disasters, natural resources running out, war, migration, less education, quality/quantity of labour)

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28
Q

What is a movement on the curve of a PPF ?

A

A change in the combination of goods produced

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29
Q

What is a shift of the PPF curve ?

A

A change in the productive capacity of the economy

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30
Q

What are consumer goods ?

A

Goods demanded and bought by households/individuals

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31
Q

What are capital goods ?

A

Produced to aid the production of consumer goods in the future

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32
Q

What is specialisation ?

A

Production of a limited range of goods by a country/individual/company to be more efficient

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33
Q

What is the division of labour ?

A

Labour becomes specialised in a particular part of the production process

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34
Q

How can a country maximise goods and services ?

A

Ensuring that all factors of production (including labour) undertake tasks which they are best at

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35
Q

Who developed the concept of specialisation and the division of labour ?

A

Adam Smith - pin factory (5000/worker with this concept, < dozen/worker without this concept)

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36
Q

What are the advantages of a company specialising and dividing labour ?

A
  • increased labour productivity
  • higher quality of goods/services
  • cost effective specialist tools can be developed
  • lower training costs
  • saves times for workers moving between tasks
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37
Q

What are the disadvantages of a company specialising and dividing labour ?

A
  • poor quality of work if workers are bored (firms can take measures to reduce this, e.g. playing music)
  • reduction of craftsmanship (standardised product)
  • structural unemployment
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38
Q

What does the degree to which specialisation/division of labour is possible depend on ?

A

The nature of the task and the size of the firm

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39
Q

What are the advantages of a country specialising and dividing labour ?

A
  • comparative advantage, lowest opportunity cost can boost economy
  • greater global output
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40
Q

What are the disadvantages of a country specialising and dividing labour ?

A
  • may become overdependent on one export
  • may run out of renewable resources
  • high interdependence
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41
Q

What are the four functions of money ?

A
  • medium of exchange (acceptable and desired everywhere)
  • measure of value
  • store of value (won’t perish)
  • method for deferred payment (allows debts to be created, relies on money storing its value)
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42
Q

What are the characteristics of a free market economy ?

A
  • individuals make their own choices and own the factors of production
  • resources are allocated through the price mechanism (invisible hand), no government interference
  • consumers make decisions based on satisfaction, whereas producers make decisions based on profit
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43
Q

What did Adam Smith believe ?

A

He believed in the ‘invisible hand’ which allocated resources in the market for the greatest good for the greatest number, but believed the state needed to provide goods/services which the state wouldn’t (e.g. roads and laws)

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44
Q

What are the advantages of a free market ?

A
  • automatic system (invisible hand)
  • freedom of choice (consumer sovereignty)
  • high motivation
  • political freedom
  • productive efficiency
  • higher growth
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45
Q

What are the disadvantages of a free market ?

A
  • high levels of inequality
  • lack of merit goods (e.g. education), little control over demerit
  • resources may be wasted on unproductive expenses (e.g. advertising)
  • monopolies if competition disappears
  • externalities
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46
Q

What are characteristics of a command economy ?

A
  • all factors of production (excluding labour) are owned by the state, no private property
  • resource allocation is carried out by the government
  • some goods are purchased, some are allocated (e.g. houses)
  • all workers receive the same wage, products are standardised
  • fixed prices, excess demand and queuing
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47
Q

What did Karl Marx believe ?

A

Believed capitalism would collapse leading to communism; firms would fail resulting in workers uprising against property workers and seizing control of production factors leading to a democratic society

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48
Q

What are the advantages of a command economy ?

A
  • minimum living standard
  • less resource wastage
  • standardised products are cost effective
  • merit goods are encouraged and demerit goods are not produced
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49
Q

What are the disadvantages of a command economy ?

A
  • state may not make decisions correctly, can result in over/under supply
  • bribery and corruption can influence decisions
  • less motivation and efficiency
  • consumers lose freedom
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50
Q

What is a mixed economy ?

A

A compromise economy; both the free market mechanism and government planning processes allocate a significant amount of total resources in the economyW

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51
Q

What roles does the government have in a mixed economy ?

A
  • framework of rules (e.g. protecting consumers and health and safety standards)
  • can supplement and modify price systems (public/merit/demerit good production influenced)
  • ensures the consideration of externalities
  • redistributes income, decreases inequality
  • can stabilise the economy, prevents extremes of too much/little demand
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52
Q

What are the underlying assumptions of rational decision making ?

A
  • consumers aim to maximise utility (satisfaction)
  • firms aim to maximise profit
  • governments aim to maximise social welfare
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53
Q

What is the rational consumer called ?

A

Homo Economicius

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54
Q

What is demand ?

A

The ability and willingness to buy a particular good at a given price and at a given moment in time

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55
Q

What is a movement along the demand curve caused by ?

A

A change in price

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56
Q

What is a shift in the demand curve caused by ?

A

Change in the factors of production which affect demand

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57
Q

What are movements along the demand curve called ?

A

Contractions or extensions of demand

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58
Q
A
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59
Q

What is the division of labour ?

A

Labour becomes specialised in a particular part of the production process

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60
Q

How can a country maximise goods/services produced ?

A

By ensuring all factors of production (including labour) undertake the tasks which they are best at

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61
Q

Who came up with the concept of specialisation and the division of labour ?

A

Adam Smith, pin factory (5,000/worker using specialisation and dividing labour, > a dozen/worker without)

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62
Q

What are the advantages of a company specialising and dividing labour ?

A
  • increased labour productivity
  • higher quality of goods/services
  • lower training costs
  • save time moving between tasks
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63
Q

What are the disadvantages of a company specialising and dividing labour ?

A
  • poor quality of work as workers may become bored (firms can help, e.g. playing music)
  • reduction of craftsmanship (standardised product)
  • parts of production are dependent on each other for the operation to run smoothly
  • structural unemployment
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64
Q

What affects the degree to which specialisation and the division of labour is possible ?

A

The nature of the task and the size of the firm

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65
Q

What are the advantages of a country specialising and dividing labour ?

A
  • comparative advantage, lower opportunity cost can boost the economy
  • greater global output
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66
Q

What are the disadvantages of a country specialising and dividing labour ?

A
  • may become overdependent on one export
  • may run out of renewable resources
  • high independence
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67
Q

What are the four functions of money ?

A
  • medium of exchange (acceptable everywhere)
  • measure of value
  • store of value (won’t spoil/perish)
  • method for deferred payments (allows debt to be created as it retains its value)
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68
Q

What are the characteristics of a free market economy ?

A
  • individuals make their own choices and own factors of production
  • resources are allocated through the price mechanism (invisible hand), no government intervention
  • consumers make decisions based on satisfaction, whereas producers make decisions based on profits
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69
Q

What did Adam Smith believe in ?

A

The ‘invisible hand’ present in the free market which allocates resources for the greatest good for the greatest number; however, he also believed the state needed to provide goods/services which free markets wouldn’t

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70
Q

What did Friedrich Hayek believe ?

A

Free market countries were better off as they had more freedom; believed individuals know what they need in their own situations

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71
Q

What are the advantages of a free market ?

A
  • automatic system (invisible hand)
  • freedom of choice (consumer sovereignty)
  • political freedom
  • high motivation
  • productive efficiency
  • higher growth
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72
Q

What are the disadvantages of a free market ?

A
  • high levels of inequality
  • lack of merit goods (e.g. education), little control over demerit goods
  • resources wasted on unproductive expenses (e.g. advertising)
  • monopolies if competition disappeares
  • externalities
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73
Q

What are the characteristics of a command economy ?

A
  • all factors of production (excluding labour) are owned by the state, no private property
  • resource allocation is carried out by the government
  • some goods are purchased, some are allocated (e.g. houses)
  • all workers receive the same wage and products are standardised
  • fixed prices, excess demand and queuing
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74
Q

What did Karl Marx believe ?

A

Capitalism would collapse leading to communism, more firms would fail resulting in workers uprising against property owners and seize control of factors of production resulting in a democratic society

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75
Q

What are the advantages of a command economy ?

A
  • minimum living standard
  • less resource wastage
  • standardised products are cost effective
  • merit goods are encouraged whereas demerit aren’t produced
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76
Q

What are the disadvantages of a command economy ?

A
  • state may not make correct decisions resulting in over/undersupply
  • bribery and corruption may influence government decisions
  • less motivation and efficiency
  • consumers lose freedom
77
Q

What is a mixed economy ?

A

Compromise economy; both the free market mechanism and government planning processes allocate a significant amount of total resources in the country

78
Q

What roles do the government have in a mixed economy ?

A
  • framework of rules (e.g. consumer protection and health and safety)
  • can supplement and modify price systems (production of public/merit/demerit goods)
  • ensures the consideration of externalities
  • can stabilise the economy, prevents extremes of too much/little demand
79
Q

What are 3 underlying assumptions of rational decision making ?

A
  • consumers aim to maximise utility (satisfaction)
  • firms aim to maximise profit
  • governments aim to maximise social welfare
80
Q

What is the rational consumer called ?

A

Homo Economicus

81
Q

What is demand ?

A

The ability and willingness to buy a particular good at a given price and at a given moment in time

82
Q

What is a shift along the demand curve caused by ?

A

A change in price

83
Q

What is a shift in the demand curve caused by ?

A

Change in the factors which affect demand

84
Q

What is a movement along the demand curve called ?

A

Extensions/contractions of demand

85
Q

What is a shift in the demand curve called ?

A

An increase/decrease in demand

86
Q

What are the conditions of demand ?

A

PIRATES:
- Population
- Income (YED)
- Related goods (XED)
- Advertising
- Taste/fashion
- Expectations
- Seasons
- can also be influenced by government legislation

87
Q

What is diminishing marginal utility ?

A

Satisfaction derived from the consumption of an additional unit of a good will decrease as more of the good is consumed

88
Q

Why does the demand curve slope downwards ?

A

Diminishing marginal utility - consumers are less willing to pay higher prices at high quantities as less satisfaction is gained

89
Q

What is the elasticity of demand ?

A

It measures the responsiveness of quantity demanded to changed in other variables

90
Q

What does it mean when a good is inelastic ?

A

Relatively unresponsive to a change in price

90
Q

What does it mean when a good is elastic ?

A

Relatively responsive to a change in price

91
Q

What does price elasticity of demand (PED) measure ?

A

Responsiveness of demand to a change in the price of a good

92
Q

What is the formula for PED ?

A

% change in quantity demanded / % change in price

93
Q

What does it mean when the PED = 1 ?

A

Unitary elastic - change is equal

94
Q

What does it mean when the PED > 1 ?

A

Price is relatively elastic

95
Q

What does it mean when the PED < 1 ?

A

Price is relatively inelastic

96
Q

What does it mean when the PED = infinity ?

A

Price is perfectly elastic (horizontal line)

97
Q

What does it mean when the PED = 0 ?

A

Price is perfectly inelastic (vertical line)

98
Q

What factors influence PED ?

A
  • availability of substitutes
  • time (more elastic over time)
  • necessity
  • how large of a % of total expenditure (smaller, inelastic)
  • addictive
99
Q

What is the significance of PED ?

A
  • determines the effect of indirect taxes and subsidies
  • more elastic, lower incidence of tax on the consumer
  • more elastic, lower fall in price (subsidy)
  • subsidies of goods with inelastic demand are inefficient at increasing output (but cheaper for government to implement)
100
Q

What is income elasticity of demand (YED) ?

A

The responsiveness of demand to a change in income

101
Q

What is the formula for YED ?

A

% change in quantity demanded / % change in price

102
Q

What does it mean when the YED < 0 ?

A

Inferior good (e.g. Tesco value)

103
Q

What does it mean when the YED > 0 ?

A

Normal good (inelastic)

104
Q

What does it mean when the YED > 1 ?

A

Luxury good (elastic)

105
Q

What is the significance of YED ?

A
  • businesses need to know how sales will be affected by changes in the population’s income
  • can have an impact on the type of goods firms produce (e.g. inferior during a recession and luxury during a boom)
106
Q

What is cross elasticity of demand (XED) ?

A

The responsiveness of demand for product A to a change in price of product B

107
Q

What is the formula for XED ?

A

% change in quantity of demanded of A / % change of price of B

108
Q

What does it mean when XED > 0 ?

A

Goods are substitutes

109
Q

What does it mean when XED < 0 ?

A

Goods are complements

110
Q

What does it mean when XED = 0 ?

A

The goods are unrelated

111
Q

How is the strength of the relationship between two goods determined ?

A

By the size of the integer in their XED

112
Q

What is the significance of XED ?

A

Firms need to know how price changes by other firms will affect them so they can take appropriate action

113
Q

What is supply ?

A

The ability and willingness to provide a good/service at a particular price at a given moment in time

114
Q

What is a movement along the supply curve caused by ?

A

Change in price of the good

115
Q

What is a shift in the supply curve caused by ?

A

Change in any of the factors affecting supply

116
Q

What are movements along the supply curve called ?

A

Contractions or extensions in supply

117
Q

What are shifts of the supply curve called ?

A

Decrease/increase in supply

118
Q

What are the conditions of supply ?

A
  • cost of production
  • price of other goods (joint supply, e.g. beef and milk)
  • weather
  • technology
  • goals of the supplier (e.g. helping society)
  • government legislation
  • taxes and subsidies
  • producer cartels (reducing supply)
119
Q

Why is the supply curve upwards sloping ?

A

The increasing marginal cost of production

120
Q

What is the price elasticity of supply (PES) ?

A

The responsiveness of supply to a change in price of the good

121
Q

What is the formula for PES ?

A

% change in the quantity supplied / % change in price

122
Q

What does it mean when PES = 1

A

Unitary elastic

123
Q

What does it mean when PES > 1 ?

A

Supply is relatively elastic

124
Q

What does it mean when PES < 1 ?

A

Supply is relatively inelastic

125
Q

What does it mean when PES = infinity ?

A

Supply is perfectly elastic (horizontal)

126
Q

What does it mean when PES = 0 ?

A

Supply is perfectly inelastic (vertical)

127
Q

What are factors affecting PES ?

A
  • time (more elastic over time)
  • stocks (more elastic if goods are stockpiled)
  • working below full capacity
  • availability of factors of production
  • ease of entry into the market
  • availability of substitutes
128
Q

Where is the price equilibrium ?

A

Where supply is equal to demand, also known as the market clearing price

129
Q

What happens when the price is set below market equilibrium ?

A

Excess demand, prices are raised to restore the market back to equilibrium

130
Q

What happens when the price is set above market equilibrium ?

A

Excess supply, sales/discounts are offered to restore the market back to equilibrium

131
Q

How does the price mechanism determine price ?

A

Through interactions between supply and demand

132
Q

What are the three functions of the price mechanism ?

A
  • rationing (rations resources to those who value/can afford them)
  • signalling (signals where resources should be used)
  • incentive (incentive to work hard)
133
Q

What is a local example of the price mechanism ?

A

Food prices are high due to covid limiting supply whilst demand remains high, rationing

134
Q

What is a national example of the price mechanism ?

A

House prices are higher in London as supply is lower whilst demand is higher, rationing

135
Q

What is a global example of the price mechanism ?

A

1973 - oil embargo proclaimed, oil was expensive as demand was high whilst supply was low (rationing)

136
Q

What is a consumer surplus ?

A

The difference between the price the consumer is willing to pay and the price they actually pay

137
Q

What is a producer surplus ?

A

The difference between the price the producer is willing to produce at and the price they actually produce at

138
Q

When is there a higher consumer/producer surplus ?

A

When demand/supply is more inelastic

139
Q

What is a community surplus ?

A

Consumer surplus + producer surplus

140
Q

What is an indirect tax ?

A

A tax on expenditure

141
Q

What are the two types of indirect tax ?

A
  • ad valorem (% of the cost, VAT)
  • specific (amount added on, e.g. 10p/litre of petrol)
142
Q

What does a specific tax look like on a graph ?

A

Parallel inward shift of supply

143
Q

What does an ad valorem tax look like on a graph ?

A

Difference between S1 and S2 increases

144
Q

What does the incidence of tax mean ?

A

The tax burden

145
Q

What is the total tax revenue (on a graph) ?

A

Consumer incidence + producer incidence

146
Q

What is a subsidy ?

A

A grant given by the government to encourage production/consumption

147
Q

What is the total government spending on a subsidy (from a graph) ?

A

Producer gain + consumer gain

148
Q

What are 3 reasons why consumers may not behave rationally ?

A
  • influences of other people (e.g. social norms/pressure/bias)
  • influence of habitual behaviour (e.g. alcohol/drugs)
  • consumer weakness at computation (may not make comparisons/consider long term)
149
Q

When does market failure occur ?

A

When the market fails to allocate scarce resources efficiently, resulting in social welfare loss

150
Q

What are the 3 types of market failure ?

A
  • externalities (cost/benefit a third party received from an economic transaction outside of the market mechanism)
  • under-provision of public goods
  • information gaps (results in economic agents making irrational decisions)
151
Q

What are private costs/benefits ?

A

Costs/benefits to the individual participating in the economic activity

152
Q

What are social costs/benefits ?

A

Costs/benefits of the activity to society as a whole

153
Q

What are external costs/benefits ?

A

Costs/benefits to a third party not involved in the activity (difference between private and social)

154
Q

What is a merit good ?

A

Good with external benefits, benefits to society is greater then the individual - usually under provided

155
Q

What is a demerit good ?

A

A good with external costs, cost to society is greater than the cost to the individual - usually over provided

156
Q

What is another issue linked to externalities and fixing them ?

A

Difficult to work out the size of the externality, also linked to information gaps

157
Q

What can the government do to ensure the market considers externalities ?

A
  • indirect taxes/subsidies (can internalise the externality)
  • tradable pollution permits
  • provision of the good (e.g. NHS)
  • provision of regulation
  • regulation
158
Q

What must a good be to be a public good ?

A

A good must be non-rivalrous (one person’s use won’t prevent another from using it) and non-excludable (someone cannot be preventing from accessing it and someone cannot choose not to access it), e.g. streetlights

159
Q

What is a quasi public good ?

A

A good which isn’t perfectly non-rivalrous and non-excludable but also isn’t perfectly rivalrous and excludable, e.g. roads

160
Q

What is the free rider problem ?

A

An individual cannot be charged a price for the provision of a non excludable good as someone else will gain the benefit without paying anything

161
Q

What is a free rider ?

A

Someone who receives the benefit of a public good without paying for it

162
Q

Why are public goods provided by the government ?

A

The private sector cannot be sure of making a profit therefore they do not produce them - so they have to be produced by the government in order to prevent the market failure of the under-provision of public goods

163
Q

How are public goods financed ?

A

Through taxation

164
Q

What is symmetric information ?

A

Buyers and sellers have potential access to the same information

165
Q

What is asymmetric information ?

A

Where one party has superior knowledge compared to another, this is usually taken advantage of

166
Q

What impact does technology have on information gaps ?

A

Information gaps decline as people can get more information

167
Q

What impact does advertising have on information gaps ?

A

Advertising can lead to information gaps as consumers are deceived to think the good is better than it is

168
Q

How can information gaps lead to a misallocation of resources ?

A

Economic agents cannot make rational decisions, so do not act in a rational way

169
Q

What are 7 examples of government intervention ?

A
  • indirect taxation
  • subsidies
  • maximum and minimum prices
  • trade pollution permits
  • state provision of public goods
  • provision of information
  • regulation
170
Q

What are the advantages of an indirect tax ?

A
  • internalises the externality, maximises social welfare
  • raises government revenue
171
Q

What are the disadvantages of an indirect tax ?

A
  • difficult to know the size of the externality and where to set the tax
  • conflict between raising revenue and solving externality
  • may lead to black markets
  • ineffective if the good is elastic
  • politically unpopular
  • taxes are regressive
172
Q

What are the advantages of a subsidy ?

A
  • society reaches the social optimum output, maximises welfare
  • can have other positive impacts (e.g. encouraging small businesses)
173
Q

What are the disadvantages of a subsidy ?

A
  • costs the government a lot, high opportunity cost
  • difficult to target, the size of the externality is unknown
  • can make producers inefficient
  • difficult to remove once in place
174
Q

Where must a maximum price be set ?

A

Below the current market equilibrium

175
Q

Where must a minimum price be set ?

A

Above the current market equilibrium

176
Q

What is a maximum price ?

A

A legally imposed price which suppliers cannot charge above, used on positive externalities and results in excess demand

177
Q

What is a minimum price ?

A

A legally imposed price which the price of the good cannot go below, results in excess supply

178
Q

What are the advantages of a maximum/minimum price ?

A
  • considers externalities, can improve social welfare
  • can reduce inequality and increase equity/inequality
179
Q

What are the disadvantages of a maximum/minimum price ?

A
  • distortion of price signals, excess supply/demand
  • difficult to know where to set prices
  • can lead to the creation of black markets
180
Q

What is a buffer stock scheme ?

A

Both maximum and minimum prices are implemented, EU Common Agriculture Policy, government buys extra stock so can sell when demand is high, producers produce as much as they can as they know it will sell

181
Q

What are the advantages of trade pollution permits ?

A
  • pollution will fall, increase social welfare
  • government can raise revenue through fines and selling permits
  • encourages companies to invest in green technology
182
Q

What are the disadvantages of trade pollution permits ?

A
  • expensive to monitor and police
  • raise costs for businesses, likely to be passed onto consumers
  • difficult to know how many permits the government should allow
183
Q

What are the advantages of the state provision of public goods ?

A
  • corrects market failure
  • can help bring about equality
  • benefits from the goods themselves
184
Q

What are the disadvantages of the state provision of public goods ?

A
  • expensive + a high opportunity cost for government
  • government may produce the wrong number of goods
  • government may be inefficient at production
  • government officials may suffer from corruption and conflicting objectives
185
Q

What are the advantages of provision of information ?

A
  • helps consumers act rationally
  • best if used alongside other policies
186
Q

What are the disadvantages of provision of information ?

A
  • expensive for the government to do
  • government may not have all the information
  • consumers may not listen to information provided (irrational behaviour)
187
Q

What are the advantages of government regulation ?

A
  • ensures consideration of externalities
  • prevents exploitation of consumers
  • keeps consumers fully informed
  • helps to overcome market failure and maximise social welfare
188
Q

What are the disadvantages of government regulation ?

A
  • laws may be expensive for the government to monitor
  • may not be the most efficient way of solving an externality (e.g. pollution and trade pollution permits)
  • may reduce competition
189
Q

What is government failure ?

A

When government intervention leads to net welfare loss and a misallocation of resources

190
Q

What are 4 causes of government failure ?

A
  • distortion of price signals
  • unintended consequences (e.g. NHS patient targets results in a poorer quality of care)
  • excessive administration costs
  • information gaps (forecast information may be wrong)

Economics (4 decks)

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