Topic 8- Market Mechanism, Market Failure And Government Intervention In Markets Flashcards
What is the price mechanism
When governments leave markets to themselves and don’t interfere
What are the functions of price and how do they work
Signalling- prices provide information to buyers and sellers
Incentive- prices create incentives for people to change their economic behaviour
Rationing- rising price ration demand for a product
What are some advantages of the price mechanism
.Achieves allocative efficiently
. Creates consumer sovereignty
. Governments don’t have to spend money regulating markets
What are some disadvantages of the price mechanism
. Exploits consumers as the goods and services available for a consumer to buy are decided by the firms
. Imperfect competitive firms may still possess sufficient market power to manipulate consumers
What is Market failure
Misallocation of resources
What is the difference between complete and partial market failure
Complete- when their is a missing market
Partial- goods are being produced but at a wrong price or wrong quality
What are the characteristics of a public good
Non-rival, non- reject-able, non- excludable
What are the characteristics of a private good
Rival, rejectable , excludable
Examples of public goods
National defence, police, street lights, roads
Examples of private goods
Meals at a restaurant, tickets to an event, exclusive clubs
What is a Quasi-public good
A good that has characteristics of both public and private goods
What is the free-rider problem
Not enough customers choose to pay for a good, instead to free ride. This results in the incentive to provide the good through the market disappears and a missing market may result
What is the tragedy of commons
How individuals prioritise personal game over the well-being of society
What is an externality
Third-party effect caused by one party that affects another
What are some examples of negative externalities in production
Smoking, air pollution
Examples of positive externalities in production
New airport being built, new technological development
Examples of negative externalities in production
Pollution from factories and vehicles
Examples of positive externalities in production
Making new buildings
What is deadweight loss
Loss of money when not producing at equilibrium
What are merit goods
Goods with positive externalities in consumption
What are de-merit goods
Goods with negative externalities in consumption
What is the problem with merit goods
They are underproduced and under-consumed
How may the existence of a monopoly lead to market failure
Due to their being no competition monopolies can limit the supply of goods an services and increase price, causing market failure
How may immobility of the factors of production lead to market failure
Labour- bad immobility of workers cause market failure
What are arguments for and against privatisation or state-owned
. State owned means prices are better for consumers
. When state owned has no competition their is no drive for dynamic efficiencies
. Potential of higher costs
.Privatisation promoters competition
. Privatisation can lead to monopoly abuse
What is regulation of market and what are the advantages
Regulation is the imposition of rules and other constraints which restrict freedom of economic action
. Regulation protects consumers from : harmful products and maintains quality standards, workers from labour market exploitation, children and old people from exploitation and abuse
To summarise regulation is necessary to enable markets to perform well and to limit damage caused by market failure
What is deregulation and the disadvantages of government regulation
Deregulation is the removal of previously imposed regulations
Deregulation enables markets to function more efficiently and to incur lower costs. The justification of deregulation is based on the assumption that government intervention in a market economy must be kept to a minimum and that individuals know better than governments what is in their self interests
What is policy myopia
When governments focus on short run over long run
