Unit 2B market failure and government intervention Flashcards
What are advantages of a market system
it automatically adjusts to peoples wants
there’s a wide variety of g/s to create market power and meet consumer needs
competition forces businesses to be efficients
government doesn’t have to solve basic economic problem
what are the disadvantages of market system
FOP’s aren’t employed if not profitable
certain g/s like public goods and services may not be produced
demerit goods can be introduced
production leaves to negative externalities
what is market failure
when the outcome of a free market differs from a socially optimal outcome
what can price mechanisms fail to acount for
all costs and benefits of consuming or producign a good which leads to overproduction of demerit goods and underproduct of merit goods
types of market failure
monopolies
lack of provision of public goods
externalities
factor immobility
underprovision and underconsumption of merit goods
over provision and over consumption of demerit goods
how does market failure occur
when free markets do not operate efficiently the inefficiency in the allocation of resources hinder and reduce the production of some essential goods and services
how is consumption of merit goods increased
by advertising, subsidies or tax reductions, and most commonly government provisions
What is a public good
extreme examples of merit goods that are provided by the government
what is a merit good
goods for which the social benefits of consumption outweigh private benefits
What are properties of merite goods
they create positive benefits and are under-produced by the free market and under consumed by consumers
what is the solutions to public goods
direct provision is when government provides public goods
contracting out where governments fund public services that are provided by the private sector
define externalities
the consequences of the actions of consumer and producer that affect a 3rd party
what’s private cost
costs for consumers or firms
what’s external cost
costs affecting people not involved in the buying and producing of g/s
what’s private benefit
advantages for a consumer or firm after purchase
what’s social benefit
the full advantages for society as a result of the consumption or production of g/s
whats social cost
societal impact by economic actions of consumers and producers
whats external benefit
advantages for theose who didn’t produce or consume the g/s
what does a negative externality allow us to infer about a g/s
when social costs are greater than private costs so there’s the overproduction of a good, private benefits are greater than social benefit causing over consumption
what do positive externalities show us
that social benefit is greater than private benefit thus under consumption of it and private costs are greater than social costs meaning that goods are underproduced
how to decrease consumption of demerit good and solve over production of demerit good
by taxation, banning of good, regulation, e.t.c
what are main reasons that government intervenes in markets
equity and efficiency
what’s direct tax and who is it paid by
tax that is paid directly to the government and it’s paid by households and firms
What are the 2 types of tax
direct and indirect ax
what is incidence tax for g/s with elastic demand
supplier will carry more of the tax as they want profit maximisation
what is tax incidence
the division of tax between producers and consumers
what’s specfic tax
a fixed amount of tax placed on a particular good
what’s indirect tax and who pays it
its tax money collected by a producer of a g/s then to government and it’s paid by households
how is specific tax carried out
cost that is paid by the porducer of the g/s then the cost of it will be passed onto the customar by the increasing the price of the g/s
what is incidence tax for g/s with inelastic demand
buyers will carry a higher amount of the tax then the supplier.
reasons that government impose indirect taxes
good source of tax revenue if g/s is inelastic in demand and supply
discourages demerit good consumption
and correct negative externalities
what occurs to the supply curve once a tax is introduced
it shifts to the left as tax can be a additional cost for production
what’s the impact of a specific tax on consumers
specific tax will raise prices of g/s and they opt for substitues of the g/s
what’s the impact of a specfic tax on producers
increased cost of production thus a shift to the left for quantity supplied
what’s the impact of a specific tax for government
increase in revenue
impact of indirect tax on consumers
g/s price increase, less disposable income
impact of indirect tax on producers
increase production costs, leading to a shift in the supply curve to the left.
impacts of indirect tax on government
Indirect taxes generate revenue for the government, helping to finance public goods and services.
what is a grant/subsidy
money given by the government to encourage the production of a g/s
how subsidies help society
it can lower FOP prices thus encouraging production, such as new technologies or discoveries.
how can subsidies negatively impact society
creates a dependance on subsidies perhaps, inefficient resource allocation, e.t.c
why do governments offer subsidies
to increase revenues of firms
to make products more affordable
to encourage production and consumption of merit goods
what are consequences of subsidies
competing foreign firms suffer as they may not be price competitive anymore
society is worse off due to an over allocation of resources to the good
more workers are likely to be hired increasing employment
producers gain a higher price or income and make a higher quantity of products
quantity demanded increased due to fall of price in subsidized good
what effect would subsidies have on inelastic demand
there would be a small increase in quantity demanded
The subsidy will cause a small reduction in price, but the effect on quantity demanded will be limited
what effect would subsidies have on elastic demand
they would increase quantity demanded by a lot
price reduction would be sighnificant
what effect would subsidies have on consumers
their g/s would be lower in price, higher availability
what effect would subsidies have on producers
helps increase demand for their product
helps them stay competitive
but can be disadvantaging firms without government support
Subsidies can reduce incentives for producers to innovate and improve efficiency. making them ore dependent on government support
what effect do subsidies have on governments
significant government funding tax money
could cause market inefficiencies
helps achieve social and economic policy goals by supporting merit good production
help stabilize prices and reduce inflation, especially in essential sectors like food and energy.
whats a price floor
a legal minimum price for the market
why are price floors imposed
they’re imposed bc. governments beleive market price is too low
where do price floors need to be set for it to be effective
above the market equilibrium
who does the price floor protect
producers,
what are sellers protected from in price floors
a market equillibrium that’s too low for producers to cover costs and keep the producers competitve and in business
common businesses that recieve price floors
agricultre or food as they’re essential for domestic food supply
Result of price floor for markets
a surplus of g/s occurs
what are price ceilings
a maximum legal price for the market of a g/s
who and why does a price ceiling protect
households, they protect households from high prices
What g/s is price ceilings put at
neccesiity goods, housing, energy
implications of price ceiling
shortages, now many consumers are happy to buy but producers only want to give a lesser ammount giving rise to black markets, rationing, and longer wait for g/s
what’s nationalisation
the process of moving ownership of private sector firms to the public sector
benefits of nationalisation
increased control over key industries, allowing better management of the countries economy
they will be better equipped to provide esential services
also allows access to key services for low income households
what are the drawbacks of nationalisation
there could be a lack of competion that results in high prices and low quality products.
there’s a opportunity cost heavily associated with govrnment speding of tax money as it could’ve been used to make another school
what’s privatisaiotn
when process is moving firms from the public sector to the private sector
what’s benefits of privatisatioin
increased efficency as private sector companies aim to have the highest profit meaning greater efficency and cost savings
better decision making with this focus on profit which lead to better outcomes for companies and customars
increased accountabulity private sector companies are accountable and improve accountability and transparency
what are draw backs of privatisation
lack. ofcontrol as key industries like water can be privatised with possibilities of them becoming monopolies and exploiting the public by charging unreasonable high prices
privatising merit goods as they will be interested in porfit maximisation than providing essential services to all
why are monopolies restricted by government
to promote competition, increase consumer choice and decrease prices, and therefore achieve efficiency in production and the allocation of resources’
what’s direct provsion
government providing merit goods and public goods with their public sector companies
what’s indirect provision
when the government pays or invests private sector firms to provide merit goods at a reasonable price to the public
