Why governments intervene Flashcards
Explain social efficiency
A situation where it is impossible to change production/consumption so that anyone is better off without making someone else worse off. Optimal balance!
Marginal social benefit = Marginal social cost
Often markets fail to achieve this
Explain equity
The fair distribution of a societies resources
Explain private efficiency
Marginal benefit = Marginal cost (Looking purely at the firm)
Explain economic regulation
Any intervention of government in the market, including taxes/subsidies and explicit legislative/administrative controls over rates, entry and other facets of economic activity
What is the public interest theory view on regulation
Regulation is supplied in response to the demand of the public for the correction of inefficient or inequitable market practices
What is the capture theory view on regulation
Regulation is supplied in response to the demands of interest groups seeking to maximise the income of their members (knowledgeable in the field, looking to protect their membership)
Give seven market failures
Public goods Common resources Market power Imperfect information Immobility of factors and time lags Protecting people’s interests Externalities
Define externalities
Costs or benefits of production or consumption experienced by society but not by the producers and consumers themselves - measure of the difference between marginal cost/benefit and marginal social cost/benefit
Define external benefits
Benefits from production (or consumption) experienced by people other than the producer (or consumer)
Define external costs
Costs from production (or consumption) experienced by people other than the producer (or consumer)
Define social cost
Private cost plus externalities in production
Define social benefit
Private benefit plus externalities in consumption
If there are external benefits present what can we deduce about MSC and MC . Likewise if there are external costs present
Studying external Benefits - MSC are higher ( more to the right) than MC - indicating the benefit
Studying external costs MSC is lower than MC (more to the left)
Where is socially optimum level of production
Social optimum outcome of producing where MR = MSC
Where is social efficiency reached in consumption
Social efficiency occurring where MB(usually equals demand)=MC aligned
Define Non rivalry goods
Where the consumption of a good or service by one person will not prevent others from enjoying it.
Define non-excludability goods
Where it is not possible to provide a good or service to one person without it thereby being available for others to enjoy.
Explain a public good
A good or service which has the features of non-rivalry and non-excludability so private enterprise will not choose to provide it (and as a result would not be provided by the free market because there’s no mechanism for getting people to pay for it) Ex: Street Lamps, flood defences (freely available)
Explain the free rider problem
When it is not possible to exclude other people from consuming a good that someone has bought.
Define the tragedy of the commons
Where resources are commonly available at no charge, people are likely to overexploit them
Why is monopoly power a market failure for social efficency
Monopolies vs competitive market
Monopolies won’t produce at the level where MSB=MSC=P because of the lack of competition
Explain the deadweight welfare loss in monopoly structure
A deadweight loss is a cost to society created by market inefficiency.
Market with a unique price - there will be a split with the overall level of surplus and between consumer, producer. The producer gets anything below which the consumer paid
Define a surplus from production
Diff between MC and potential MR associated w production of a product
This surplus is split between consumer and producers
Give an example where consumer surplus ceases to be possible
First-degree price discrimination market done perfectly - consumer surplus goes to zero
Define merit goods
Merit goods: Goods which the government feels that people will under-consume and which therefore ought to be subsidised or provided free ex: Full cost of third-level fees
Explain the market failure of protecting interests
Involves protecting dependents and their needs
Poor economic decision making by individuals - stop foolish decisions.
Provision of merit goods
Explain the immobility of factors as a market failure
Some factors of production can be immobile; e.g. labour may be immobile across both geography and occupation
Explain the time lags market failure
Many economic actions can take a long time to take effect; this can cause problems of instability and an inability of the economy to achieve social efficiency
Explain asymmetric information
occurs when different sides in an economic relationship have different amounts of information
Explain the market failure imperfect information
In practice, this is a reality. Perfect competition assumes perfect knowledge of costs and benefits
