Week 6 - Market Failure and Government Intervention Flashcards
Define the term ‘Externaility’?
the uncompensated impact of a person’s actions on the well-being of a bystander. A positive externality makes the bystander better off. A negative externality makes the bystander worse off.
What does Iinternalising the externaility’ mean?
alters incentives so that people consider the external effects of their actions. This works in line with one of the 10 Principles of Economics: people respond to incentives
Fill in the following one-word gaps: ______ externalities cause _______, while _______ externalities lead to _______
Negative, overproduction, positive, underproduction
Define ‘corrective taxes’?
A tax enacted to correct the effects of a negative externality.
What is the ‘Coase Theorem’?
The proposition that if private parties can bargain over the allocation of resources at no cost, they can solve the problem of externalities on their own.
Define the term ‘Excludability ‘?
the property of a good whereby a person can be prevented from using it.
What is the ‘Transaction costs’ in terms of microeconomics?
the costs that parties incur in the process of agreeing to, and following through on, a bargain.
What does ‘Rivalry in consumption’ mean?
the property of a good whereby one person’s use diminishes other people’s use.
What are ‘Private goods’?
goods that are both excludable and rival in consumption
What are ‘Public goods’?
goods that are neither excludable nor rival in consumption
What are ‘Common resources’?
goods that are rival in consumption but not excludable
What are ‘Club goods’?
goods that are excludable but not rival in consumption
What does ‘free rider’ mean in terms of microeconomics?
a person who receives the benefit of a good without paying for it
Name 3 examples of public goods?
- National Defence
- Basic Research
- Fighting Poverty
What is ‘Cost-benefit analysis’?
a study that compares the costs and benefits to society of providing a public good.
What does it mean by ‘market failure’?
When the market does not result in an economically efficient outcome.
What are the 4 key reasons for market intervention?
- Maintaining the legal system or rule of law (protection of property rights)
- Merit goods (merit bads)
- Equity
- Stabilisation policy (macroeconomic, fiscal and monetary policy)
Define the term ‘Non-excludable’?
a person can’t be prevented from using or obtaining benefits from a good or service
Define the term ‘Non-rival’?
consumption does not reduce availability to others.
What are the 4 private solutions to negative externalities?
- Moral codes and social sanctions
- Charitable organisations
- Integrating different types of businesses
- Contracts (the Coase theorem) between interested parties (but not easy with large numbers).
What form are ‘Command-and-control policies’ usually in?
usually in the form of regulations.
What are ‘Market-based instruments’?
policies intended to influence people’s market behaviour to achieve the targeted outcome.
