Unit 8 - The Market Mechanism, Market Failure And Government Intervention In Markets 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, e.g. a higher price creates an incentive for firms to supply more of a good or service.
Rationing function of prices
Rising prices ration demand for a product.
Allocative function of prices
Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand.
Market failure
When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity.
Complete market failure
A market fails to function at all and a ‘missing market’ results.
Partial market failure
A market does function, but it delivers the ‘wrong’ quantity of a good or service, which results in resource misallocation.
Missing market
A situation in which there is no market because the functions of prices have broken down.
Private good
A good,such as an orange, that is excludable and rival.
Excludable good
People who are unprepared to pay can be excluded from benefiting from the good.
Rival good
When one person consumes a private good, the quantity available to others diminishes
Public good
A good, such as a radio programme, that is non excludable and non rival.
Quasi public good
A good which is not fully non rival and/or where it is possible to exclude people from consuming the product.
Externality
A public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is dumped on third pasrties outside the market.
Positive externality
An external benefit that occurs when the consumption or production of a good causes a benefit to a third party, where the social benefit is greater than the private benefit.
Negative externality
An external cost that occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost.
Property right
The exclusive authority to determine how a resource is used.
Free-rider problem
A free rider is someone who benefits without paying as a result of non excitability. Customers may choose not to pay for a good, preferring instead to free ride, with the result that the incentive to provide the good through the market disappears.
Production externality
An externality ( Which may be + or - ) generated in the course of producing a Good or service.
Consumption externality
An externality ( Which may be + or - ) generated in the course of consuming a Good or service.
Merit good
A good, such as healthcare, for which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good.
Information failure
Occurs when people make wiring decisions because they do not possess or they ignore relevant information. Very often they are myopic (short-sighted) about the future.
Social benefit
The total benefit of an activity, including the external benefits as well as the private benefit. Expressed as an equation: social benefit = private benefit + external benefit.
Subsidy
A payment made by government or other authority, usually to producers, for each unit of the subsidised goods that they produce. Consumers can also be subsidised: for example, bus passes given to children to enable them to travel on bussess free or at a reduced price.
Demerit goods
Goods, such as tobacco, for which the social costs of consumption exceed the private costs. Value judgements are involved in deciding that a good is a demerit good.
Social cost
The total cost of an activity, including the external cost as well as the private cost. Expressed as an equation: social cost = private cost + external cost.
Moral hazard
The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely.
Immobility of labour
The inability of labour to move from one job to another, either for occupational reasons (e.g. the cost of moving to another part of the country).
Competition policy
The part of the government’s microeconomic policy which aims to make goods markets more competitive. It comprises policy toward monopoly, mergers and restrictive trading practices.
Competition and markets authority
Government agency responsible for advising on and implementing uk competition policy.
Public ownership
Ownerships of industries, firms and other assets such as social housing by central government. The state’s acquisition of such assets is called nationalism.
Privatisation
The transfer of assets from the public sector to the private sector.
Regulation
The imposition of rules and other constraints which restrict freedom of economic action.
Deregulation
The removal of previously imposed regulations.
Regulatory capture
Occurs when regulatory agencies act in the interest of regulated firms on behalf of the consumers they are supposed to protect.
Tax
A compulsory levy imposed by the government to pay for its activities. Taxes can also be used to achieve other objectives, such as reduced consumption of demerit goods.
Price ceiling
A price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets creating excess demand.
Price floor
A price below which it is illegal to trade. Price floors l, or minimum legal prices, can distort markets by creating excess supply.
Government failure
Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome.
