Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics > topic8: market mechanism, market failure and government intervention in markets > Flashcards

topic8: market mechanism, market failure and government intervention in markets Flashcards

1
Q

what does the price mechanism determine

A

price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

3 main functions to allocate resources the price mechanism uses

A

rationing- when there are scarce resources price increases due to the excess of demand and discourages demand
incentive- encourages change in behavior of a consumer or producer
signaling- price acts as a signal to consumers and new firms entering the market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

advantages of price mechanism

A
  • allocativley efficient
  • no time cost ( no one needs to be paid to monitor it)
  • process is efficient bcs prices are as low as possible
  • consumers have control over what producers make
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

disadvantages of price mechanism

A
  • may be inequality in income and wealth
  • will be missing markets for goods
  • some goods objectively should not be produced through it
  • no moral overlay or beliefs before government intervention
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

when does market failure occur

A

misallocation of resources

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

types of market failure

A
  • externalities
  • the under privison of public goods
  • information gaps
  • monopolies
  • inequalities in distribution if income and wealth
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

when does complete market failure occur?

A

when there is a missing market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

when does partial market failure occur

A

when a market produces a good but it is the wrong quantity or the wrong price (misallocation of resources)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what are public goods

A
  • missing from the free market
  • non excludable (leads to free rider problem)
  • under provided
  • provided by the government
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what are private goods

A
  • rival
  • excludable
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what are quasi public goods (non pure)

A
  • have characteristics of both public and private goods. partially provided by the free market
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what is the tragedy if commons

A
  • how individuals prioritise personal gain over the wellbeing of society
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what does it mean when resources are held in common

A

noone owns the resource but everyone can acess it

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is an externality

A

a cost it benefit a third party receives from an economic transaction outside of the market mechanism

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what 2 things can externalities be

A

positive- caused by merit goods
negative- caused by demerit goods

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what are private costs

A

the direct costs that producers or businesses pay to create a product it service or the market price consumers pay as it reflects the producer costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what are social costs

A

the total costs of an economic activity combining private costs and external costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

how are external costs depicted

A

the verticle distance between the 2 curves ( typically the MPC and MSC)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

what does private benefit refer to

A

for consumers - the satisfaction they get from comsuming the good
for firms - revenue earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what is social benefit

A

the total benefit to society from an economic activity including private benefits and external benefits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

social output is where..

A

MSC=MSB (maximum point of welfare)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

the output where social costs > private costs is known as the area of

A

deadweight welfare lose

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

with negative externalities what is the supply

A

MSC > MPC

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

the output where social benefits > private benefits is known as the area of

A

welfare gain

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

what is the absence of property rights

A

it is not clear who owns what

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

why the absence of property rights leads to externalities

A
  • markets become inefficient where there are no property rights ( free riders can have unlimited acseess)
  • the moral hazard assumes someone else eill pay for the consequences of a poor choice
  • scarce resources could be over used or exploited
27
Q

symmetric information

A

consumers and producers have perfect market information to make their decision. this leads to efficient allocation of resources

28
Q

asymmetric information

A

when there is unequal knowledge between consumers and producers. leads to market failure

29
Q

imperfect information

A

where information is missing so an informed decision cannot be made

30
Q

principal - agent problem

A

when the agent makes decisions for the principal but the agent is inclined to act in their own interest rather than those of the principal. linked to asymmetric information

31
Q

the mobility of labour

A

the ability of workers to change between jobs

32
Q

frictional unemployment may exist while

A

people move between jobs and search for new ones

33
Q

structural unemployment occurs when

A

there is a decline in an industry. thus can mean workers skills do not match the location and skills required for the job

34
Q

the geographical immobility of the factors of production refers to

A

the obstacles which prevent the factors of production moving between areas

35
Q

the occupational immobility of the factors of production refers to

A

the obstacles that prevent the factors of production changing there use

36
Q

the basic model of monopoly suggests

A

that higher prices and profits and inefficiency may result in a misallocation of resources compared to the outcome in a competitive market

37
Q

consumer surplus

A

difference between what a consumer is willing to pay for a good or service and what they actually pay

38
Q

producer surplus

A

the difference between what a producer receives for a good or service and the minimum amount they are willing ti accept to produce that good or service

39
Q

what does the uks compettiton policy aim to reduce

A

the amount of anti competitive behavior in markets to protect consumers ( undertaken by the CMA)

40
Q

why do governments encourage competiton

A

leads to lower prices , higher quality of goods, improvements in technology

41
Q

what is the red tape challenge

A

aim to simplify regulation for businesses especially aimed towards small businesses. aims to make it cheaper and easier to meet environmental targets and create jobs

42
Q

what is the idea of creative destruction schumpeter proposed

A

new entrepreneurs are innovative which challenges existing firms. the more productive firms then grow whilst the least productive are forced to leave the market. this results in an expansion of the economys productive potential

43
Q

deregulation

A

the act of reducing how much an industry is regulated. it reduces government power and enhances competition

44
Q

privatisation

A

assets are transferred from the public sector to the private sector

45
Q

nationalisation

A

when a private sector assests are sold to the public sector

46
Q

regulatory capture happens when

A

regulators instead of protecting consumer interests act in the interest of companies they oversee. this can happen when they rely heavily on information provided by these companies leading to bias or influence

47
Q

what does indirect tax do

A

its spent on expenditure so they increase the production costs for producers so producers supply less. this increases market price and demand contracts. they can be used to discourage the production or consumption of a demerit good

48
Q

2 types of indirect tax

A
  • ad valorem
  • specific tax
49
Q

ad valorem

A

are taxes such as VAT which adds 20% of the unit price (the main indirect tax in the UK)

50
Q

government revenue from ad valorem taxes is larger if the demand is price elastic or inelastoc

A

inelastic bcs demand falls only slightly with tax

51
Q

specific taxes

A

set tax per unit

52
Q

supply curve shift when ad valorem tax is added

A

the supply curve pivots or rotates upwards due to the tax being a percentage of the price.as the price of the good rises the amount of tax also increases making the curve steeper as price levels rise

53
Q

supply curve shift when specific tax is added

A

the entire supply curve shifts vertically upwards by a fixed amount equal to the tax. This is because the tax is set amount per unit regardless of the price

54
Q

what is a subsidy

A

a payment from the government to a producer to lower their costs of production and encourage them to produce more.
they encourage the consumption of merit goods. this includes the full social benefit so the external benefit is internalised

55
Q

do consumers gain more from the subsidy is the demand is price inelastic or elastic

A

inelastic

56
Q

why are maximum prices set

A

where the consumption or production of a good is to be encourages so the good does not become too expensive to produce or consume

57
Q

where are maximum prices set price wise

A

below the free market price or they are ineffective

58
Q

benefits of maximum price

A

-prevents monopolies from exploiting consumers
-could lead to welfare gains for consumers by keeping prices low and could lead to efficieny bcs they have an incentive to keep their costs low to maintain a profit level

59
Q

disadvantages of macimum price

A
  • control the market price so could lead to government failure if they misjudge where the optimum market price should be
  • could reduce a firms profits which could lead to less investment in the long run
  • firms might increase the price of other goods so consumers might have no net gain
60
Q

why might the government set a minimum prive

A

where the consumption or production of a good is to be discourages

61
Q

tradeable pollution permits

A

limit the amount of negative externalities in the form if pollution created in industries.their permits can be traded

62
Q

state provision of goods

A

governments role in providing goods and services that are non excludable and non rivalous

63
Q

government intervention to target market failure

A

-indirect taxes
-subsidies
- maximum and minimum prices
- tradeable pollution permits
- state provision of public goods
- provision of information
- regualtion

64
Q

causes of government failure

A
  • distortion of price signals- market mechanism cant act freely cos of subsidies
    -unintended consequences-inffective
  • high administrative costs
  • imperfect information

Economics (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions