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Economics > Unit 2B market failure and government intervention > Flashcards

Unit 2B market failure and government intervention Flashcards

1
Q

What are advantages of a market system

A

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

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2
Q

what are the disadvantages of market system

A

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

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3
Q

what is market failure

A

when the outcome of a free market differs from a socially optimal outcome

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4
Q

what can price mechanisms fail to acount for

A

all costs and benefits of consuming or producign a good which leads to overproduction of demerit goods and underproduct of merit goods

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5
Q

types of market failure

A

monopolies

lack of provision of public goods

externalities

factor immobility

underprovision and underconsumption of merit goods

over provision and over consumption of demerit goods

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6
Q

how does market failure occur

A

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

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7
Q

how is consumption of merit goods increased

A

by advertising, subsidies or tax reductions, and most commonly government provisions

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7
Q

What is a public good

A

extreme examples of merit goods that are provided by the government

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8
Q

what is a merit good

A

goods for which the social benefits of consumption outweigh private benefits

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9
Q

What are properties of merite goods

A

they create positive benefits and are under-produced by the free market and under consumed by consumers

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10
Q

what is the solutions to public goods

A

direct provision is when government provides public goods

contracting out where governments fund public services that are provided by the private sector

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11
Q

define externalities

A

the consequences of the actions of consumer and producer that affect a 3rd party

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12
Q

what’s private cost

A

costs for consumers or firms

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13
Q

what’s external cost

A

costs affecting people not involved in the buying and producing of g/s

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14
Q

what’s private benefit

A

advantages for a consumer or firm after purchase

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14
Q

what’s social benefit

A

the full advantages for society as a result of the consumption or production of g/s

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14
Q

whats social cost

A

societal impact by economic actions of consumers and producers

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14
Q

whats external benefit

A

advantages for theose who didn’t produce or consume the g/s

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15
Q

what does a negative externality allow us to infer about a g/s

A

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

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16
Q

what do positive externalities show us

A

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

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17
Q

how to decrease consumption of demerit good and solve over production of demerit good

A

by taxation, banning of good, regulation, e.t.c

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18
Q

what are main reasons that government intervenes in markets

A

equity and efficiency

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19
Q

what’s direct tax and who is it paid by

A

tax that is paid directly to the government and it’s paid by households and firms

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20
Q

What are the 2 types of tax

A

direct and indirect ax

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21
Q

what is incidence tax for g/s with elastic demand

A

supplier will carry more of the tax as they want profit maximisation

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21
Q

what is tax incidence

A

the division of tax between producers and consumers

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21
Q

what’s specfic tax

A

a fixed amount of tax placed on a particular good

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21
Q

what’s indirect tax and who pays it

A

its tax money collected by a producer of a g/s then to government and it’s paid by households

22
Q

how is specific tax carried out

A

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

23
Q

what is incidence tax for g/s with inelastic demand

A

buyers will carry a higher amount of the tax then the supplier.

24
Q

reasons that government impose indirect taxes

A

good source of tax revenue if g/s is inelastic in demand and supply

discourages demerit good consumption

and correct negative externalities

25
Q

what occurs to the supply curve once a tax is introduced

A

it shifts to the left as tax can be a additional cost for production

26
Q

what’s the impact of a specific tax on consumers

A

specific tax will raise prices of g/s and they opt for substitues of the g/s

27
Q

what’s the impact of a specfic tax on producers

A

increased cost of production thus a shift to the left for quantity supplied

28
Q

what’s the impact of a specific tax for government

A

increase in revenue

29
Q

impact of indirect tax on consumers

A

g/s price increase, less disposable income

30
Q
A
30
Q

impact of indirect tax on producers

A

increase production costs, leading to a shift in the supply curve to the left.

31
Q

impacts of indirect tax on government

A

Indirect taxes generate revenue for the government, helping to finance public goods and services.

32
Q

what is a grant/subsidy

A

money given by the government to encourage the production of a g/s

33
Q

how subsidies help society

A

it can lower FOP prices thus encouraging production, such as new technologies or discoveries.

33
Q

how can subsidies negatively impact society

A

creates a dependance on subsidies perhaps, inefficient resource allocation, e.t.c

34
Q

why do governments offer subsidies

A

to increase revenues of firms

to make products more affordable

to encourage production and consumption of merit goods

35
Q

what are consequences of subsidies

A

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

35
Q

what effect would subsidies have on inelastic demand

A

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

36
Q

what effect would subsidies have on elastic demand

A

they would increase quantity demanded by a lot

price reduction would be sighnificant

36
Q

what effect would subsidies have on consumers

A

their g/s would be lower in price, higher availability

37
Q

what effect would subsidies have on producers

A

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

38
Q

what effect do subsidies have on governments

A

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.

39
Q

whats a price floor

A

a legal minimum price for the market

40
Q

why are price floors imposed

A

they’re imposed bc. governments beleive market price is too low

41
Q

where do price floors need to be set for it to be effective

A

above the market equilibrium

42
Q

who does the price floor protect

A

producers,

43
Q

what are sellers protected from in price floors

A

a market equillibrium that’s too low for producers to cover costs and keep the producers competitve and in business

44
Q

common businesses that recieve price floors

A

agricultre or food as they’re essential for domestic food supply

45
Q

Result of price floor for markets

A

a surplus of g/s occurs

46
Q

what are price ceilings

A

a maximum legal price for the market of a g/s

47
Q

who and why does a price ceiling protect

A

households, they protect households from high prices

48
Q

What g/s is price ceilings put at

A

neccesiity goods, housing, energy

49
Q

implications of price ceiling

A

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

50
Q

what’s nationalisation

A

the process of moving ownership of private sector firms to the public sector

51
Q

benefits of nationalisation

A

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

52
Q

what are the drawbacks of nationalisation

A

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

53
Q

what’s privatisaiotn

A

when process is moving firms from the public sector to the private sector

54
Q

what’s benefits of privatisatioin

A

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

55
Q

what are draw backs of privatisation

A

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

56
Q

why are monopolies restricted by government

A

to promote competition, increase consumer choice and decrease prices, and therefore achieve efficiency in production and the allocation of resources’

57
Q

what’s direct provsion

A

government providing merit goods and public goods with their public sector companies

58
Q

what’s indirect provision

A

when the government pays or invests private sector firms to provide merit goods at a reasonable price to the public

Economics (5 decks)

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