Topic 8- Market Mechanism, Market Failure And Government Intervention In Markets

Question 1

What is the price mechanism

Answer 1

When governments leave markets to themselves and don’t interfere

Question 2

What are the functions of price and how do they work

Answer 2

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

Question 3

What are some advantages of the price mechanism

Answer 3

.Achieves allocative efficiently
. Creates consumer sovereignty
. Governments don’t have to spend money regulating markets

Question 4

What are some disadvantages of the price mechanism

Answer 4

. 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

Question 5

What is Market failure

Answer 5

Misallocation of resources

Question 6

What is the difference between complete and partial market failure

Answer 6

Complete- when their is a missing market
Partial- goods are being produced but at a wrong price or wrong quality

Question 7

What are the characteristics of a public good

Answer 7

Non-rival, non- reject-able, non- excludable

Question 8

What are the characteristics of a private good

Answer 8

Rival, rejectable , excludable

Question 9

Examples of public goods

Answer 9

National defence, police, street lights, roads

Question 10

Examples of private goods

Answer 10

Meals at a restaurant, tickets to an event, exclusive clubs

Question 11

What is a Quasi-public good

Answer 11

A good that has characteristics of both public and private goods

Question 12

What is the free-rider problem

Answer 12

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

Question 13

What is the tragedy of commons

Answer 13

How individuals prioritise personal game over the well-being of society

Question 14

What is an externality

Answer 14

Third-party effect caused by one party that affects another

Question 15

What are some examples of negative externalities in production

Answer 15

Smoking, air pollution

Question 16

Examples of positive externalities in production

Answer 16

New airport being built, new technological development

Question 17

Examples of negative externalities in production

Answer 17

Pollution from factories and vehicles

Question 18

Examples of positive externalities in production

Answer 18

Making new buildings

Question 19

What is deadweight loss

Answer 19

Loss of money when not producing at equilibrium

Question 20

What are merit goods

Answer 20

Goods with positive externalities in consumption

Question 21

What are de-merit goods

Answer 21

Goods with negative externalities in consumption

Question 22

What is the problem with merit goods

Answer 22

They are underproduced and under-consumed

Question 23

How may the existence of a monopoly lead to market failure

Answer 23

Due to their being no competition monopolies can limit the supply of goods an services and increase price, causing market failure

Question 24

How may immobility of the factors of production lead to market failure

Answer 24

Labour- bad immobility of workers cause market failure

Question 25

What are arguments for and against privatisation or state-owned

Answer 25

. 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

Question 26

What is regulation of market and what are the advantages

Answer 26

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

Question 27

What is deregulation and the disadvantages of government regulation

Answer 27

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

Question 28

What is policy myopia

Answer 28

When governments focus on short run over long run