Unit 5- Market Mechanism Failure And Goverment Intervention Flashcards
Signalling function of prices
Prices provide information to buyers and sellers
Incentive function of prices
Prices create incentives for people to alter their economic behaviour for example a higher price creates and incentive for firms to supply more of s good or service supply increase to match demand
Define rationing function of prices
Rising prices ration demand for a product reduces excess demand
Define allocative function of prices
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into market in which there is excess demand
Define market failure
When the market mechanism leads to a misallocation of resources in the economy either completing failing to provide a good or just the wrong quantity
Define missing market
No market as price function of prices has broken down
Define private good
A good such as an orange that is excludable and rival
Define public good
Non excludable non rival
Define quasi public good
A good which is not fully non rival and/or where it is possible to exclude people form consuming the product
Define externality
A public good in the case of an external benefit or a public bad in the case of an external cost that is paid for by 3rd party
Define positive externality or external benifit
When consumption or production of a good causes benefit to a 3rd party where social benifit it greater than private benefit
Define negative externality or external cost
Occurs when consumption or production of a good causes costs to a third party where social cost is greater than private cost
Define production externality
An externality generated in the course of producing a good or service which can be positive or negative
Define consumption externality
An externality generated in the course of consuming a good or service
Social benefit define
The total benefit of an activity including external benefit as well as the private benefit.
Social benefit=private benefit+ external benefit
Define merit good
A good such as healthcare which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good
Define subsidy
A payment made by the government or another authority to producers for each unit of a subsided good they produce or for consumers to Mae things cheaper eg bus pass
Define demerit good
A good such as tobacco for which the social costs of consumption exceed the private costs. Value judgments are involved in deciding that a good is demerit good
Define social cost
The total cost of an activity including the external cost as well as the private cost.
Social cost = private cost + external cost
Define information problem
Occurs when people make the wrong decisions because they don’t posses or they ignore relevant information often short sights about the fiture
Define price ceiling
Price at which is it illegal to trade above
Define price floor
A price at which is it illegal to trade below
Define government failure
Occurs when the government intervention reduces economic welfare leading to an allocation of resources that is worse than the free market outcome
