Topic 6 - Government and the Economy Flashcards
Define what the ‘price mechanism’ in a free market is.
3 Factors
Price mechanism involves the decisions made on what goods to produce, the quantity and the price it is set at.
Explain what market failure is.
Also, state what it accounts for and doesn’t account for. (B&C)
The inefficient distribution of goods and services in the free market.
- Accounts for private benefit & cost of production, but does not account for social benefits or costs.
Explain what Private Costs and Private Benefits are in the free market.
(Relates to G&S, consumers, production)
Private costs: The expenditure to produce G&S, and the costs incurred on consumers when purchasing these G&S.
Private benefits: The profits made when selling G&S, as well as the satisfaction gained by consumers from purchasing/consuming these G&S.
Explain what Social Costs and Social Benefits are in the free market.
State an example for each of these.
Social costs: The external costs imposed on society.
E.g.: Pollution caused by private industrial output.
Social Benefits: Positive spillover effects of private production on the community.
E.g.: Shopping Centre car parks - Used internally and externally of SC.
Define externality within the ‘free market’
Why are negative externalities a market failure? State an example for this.
Externality involves the indirect costs and benefits provided to society.
A form of market failure due to not being captured in ‘market transactions’
E.g.: Tax = Negative externality as no extra benefit comes from paying extra money.
Explain what Negative Externality is and its effect.
State an example of this.
The adverse ‘spill-over’ effect on the environment and society from economic activity.
E.g.: Unintentional air and noise pollution from planes.
Explain what Positive Externality is.
State an example of this.
The beneficial ‘spill-over’ effect from economic activity, helping society indirectly.
E.g.: Education directly benefits students and indirectly creates more informed & productive citizens long-term.
Do Negative Externalities affect the supply or demand of the market?
List the 2 costs associated with this curve.
Affects the market SUPPLY:
1) Social Cost
2) Private Cost
Do Positive Externalities affect the supply or demand of the market?
List the 2 benefits associated with this curve.
Affects the market DEMAND:
1) Social Benefit
2) Private Benefit
Explain the difference between excludable and non-excludable goods.
State 2 common examples for both.
Excludable: Possible to prevent someone from enjoying its benefits.
E.g.: Theme Parks, Concerts.
Non-Excludable: Impossible/Extremely-costly to prevent someone from benefiting from it.
E.g.: Fish in the ocean, specific-TV channel.
Explain the difference between rival and non-rival goods.
State 2 common examples for both.
Rival: Can only be used by one person at a time and its overall quantity decreases.
E.g.: Food/Drink, Cars
Non-Rival: If a person uses it, its overall quantity does not decrease.
E.g.: Police-service, Television-Channel.
Explain what a private good is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A private good is both RIVAL and EXCLUDABLE. Only used once at a time and decreases each time.
E.g.: Drink/Food.
Explain what a public good is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A public good is both NON-RIVAL and NON-EXCLUDABLE. Does not decrease in quantity and can be shared by everyone.
E.g.: National defence.
Explain what a common resource is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A common resource is RIVAL and NON-EXCLUDABLE since it can only be used once, but is not restrictive.
E.g.: Ocean fish.
Explain what a natural monopoly good is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A natural monopoly is NON-RIVAL and EXCLUDABLE since it can be used by many people, but is restrictive due to price or quantity.
E.g.: Paid movies.
