Year 1 micro - Market failure Flashcards

Question

what are social costs

Answer 1

private costs + any external costs

Answer 2

costs imposed on third parties who are not directly involved in the economic transaction eg pollution

Answer 3

individual consumer benefit upon consumption

Answer 4

private benefits + external benefits

Answer 5

- there is maximisation of society surplus: the sum of producer and consumer surplus, that occurs at equilibrium - maximisation of net social benefit, where MSB = MSC - where resources perfectly follows consumer demand, no excess

Answer 6

- there are many buyers and sellers in the market - both buyers and sellers have perfect information - there are no barriers to entry - firms are profit maximisers and consumers are utility maximisers

Answer 7

when there is a misallocation of scarce resources at the socially optimum level of output

Answer 8

negative and positive externalities, but these are ignored by firms and consumers demerit and merit goods - there is not enough information about how good/bad these things are for us - public goods - free rider problem / they are under provided by the free market - common access resources (tragedy of the commons) - things that are over consumed and produced - income inequality - monopoly power - one dominant selling and high barriers to entry - factor immobility

Answer 9

costs on third parties because of the actions of a separate agent

Answer 10

- costs to 3rd parties as a result of the actions of producers - air pollution (general public) - resource depletion (future gen) - resource degradation (residents affected by waste - deforestation

Answer 11

- MSC > MPC - welfare loss triangle points towards the social optimum - Firms are ignoring social costs because of self interest, leading to over production - prices are too low at p1, p1 only accounts for private costs, not external/social costs - These result in a misallocation of resources

Answer 12

Costs to 3rd parties as a result of the actions of consumers - For example, smoking, alcohol, sugary drinks, and fast food

Answer 13

- MSB < MPB - welfare loss points to the social optimum - Consumers prioritise their own private benefits over social benefits due to self interest or

Answer 14

benefits to third parties as a result of the actions of consumers/producers - eg healthcare - excercise - healthy eating - in work training - research and development

Answer 15

- in consumption - MSB > MPB - in production, MSC < MPC

Answer 16

social benefits are greater than social costs, by not producing extra units of quantity demanded, we lose out on potential extra social benefit - underconsumption and underproduction

Answer 17

Short-Term Relief vs. Long-Term Impact - While maximum prices provide immediate affordability for consumers, they may disincentivize producers in the long run. - Asymmetric info - govt may set the cap too high or too low - Maximum prices are more effective in markets with relatively elastic supply, where producers can adjust to meet demand. Evaluation: In markets with inelastic supply (e.g., housing), shortages are more likely, reducing the policy's effectiveness. Targeting Essential Goods - Maximum prices are most beneficial for essential goods and services, ensuring affordability for low-income households. - If applied to non-essential goods, the policy may have minimal social benefit while still creating distortions in the market. Maximum prices benefit those who can access the good at the capped price. However, shortages may exclude some consumers altogether. . Risk of Shortages - Maximum prices below the market equilibrium may lead to excess demand and insufficient supply.. Black Markets - Artificially low prices can incentivize illegal markets, where goods are sold at higher prices. in the case of excess demand - The scale of black markets depends on enforcement strength. Quality Decline - Producers might cut corners to maintain profitability under capped prices, resulting in lower-quality goods and services. Impact on Supply - Reduced profitability may disincentivize production, particularly for small-scale or marginal producers.w

Answer 18

Regressive Nature - Indirect taxes disproportionately affect low-income households, as they spend a larger share of their income on taxed goods. -May increase inequality unless mitigated through targeted subsidies or exemptions. Administrative and Compliance Costs - Businesses bear the cost of implementing, reporting, and remitting taxes to the government. - Can reduce profitability, especially for small enterprises. Black Market Risks - High taxes on certain goods (e.g., alcohol or fuel) can encourage smuggling or illegal trade. - Reduces government revenue and undermines legitimate businesses. Elasticity Dependency - Effectiveness in changing behavior depends on the price elasticity of demand. For inelastic goods (e.g., fuel), consumption may not decrease significantly. - Limits the tax’s effectiveness in achieving social objectives.

Answer 19

- The success of indirect taxes often depends on being paired with other policies, such as subsidies for healthier alternatives or investments in green technology. - Indirect taxes may inadvertently encourage undesirable outcomes, such as black markets or tax evasion - The success of an indirect tax in reducing harmful consumption depends on the good's price elasticity. Evaluation: For inelastic goods, complementary policies like public education or subsidies for alternatives may be necessary.

Answer 20

Producers Higher and Stable Incomes: Producers benefit from a guaranteed minimum price, ensuring a stable income, particularly in volatile markets like agriculture,where prices can fluctuate significantly due to factors like weather conditions and global supply changes Encourages Investment: Predictable earnings encourage long-term investment in quality and efficiency. Consumers - Reduced Overconsumption: Higher prices on demerit goods (e.g., alcohol) can discourage excessive consumption, leading to societal benefits. Government - Reduction in Negative Externalities: For harmful goods, a minimum price can help reduce associated societal costs (e.g., healthcare for alcohol-related illnesses). - Market Stabilization: Minimum prices can stabilize markets during periods of low demand or oversupply Protecting producers: A minimum price can ensure that producers receive a certain income level, particularly in sectors where production costs are high, or market fluctuations may lead to unstable incomes. Agricultural products, for example, often have minimum prices to protect farmers. Encouraging production: By guaranteeing a higher price, a minimum price can provide an incentive for producers to increase production, which may be essential for food security or other strategic sectors.

Answer 21

Guaranteed higher prices may lead to surplus production, particularly in agricultural markets. , may cause firms to not earn enough profit and eventually leave the market - Some industries may become reliant on minimum price schemes for survival. 1. Excess Supply and Government Surpluses A minimum price set above the equilibrium price leads to excess supply, as producers are willing to supply more than consumers demand. This surplus can be costly for governments, as they may need to buy and store excess goods (e.g., in agricultural markets) or risk wastage. 2. Higher Prices for Consumers Since the minimum price prevents goods from being sold below a certain level, consumers face higher costs. This can reduce affordability, particularly for essential goods such as food and housing, disproportionately affecting low-income households and leading to lower overall consumer welfare. 3. Risk of Black Markets and Illegal Sales When official prices are kept artificially high, some buyers may seek cheaper alternatives through informal or illegal markets. This undermines the policy’s effectiveness, leading to enforcement costs and potential losses for legitimate businesses. 4. Inefficiency and Resource Misallocation By artificially inflating prices, inefficient producers who would otherwise exit the market continue to operate. This distorts resource allocation, as firms have less incentive to innovate, cut costs, or improve productivity since they are guaranteed a higher price regardless of efficiency.

Answer 22

Impact on Equity - A minimum price may disproportionately affect low-income consumers, particularly if applied to essential goods. Mitigating measures like targeted subsidies or tax relief can address this. Market Efficiency - While a minimum price may stabilize producer incomes, it risks distorting market dynamics by encouraging overproduction or reducing consumer demand. Elasticity of Demand - The effectiveness of minimum pricing depends on the price elasticity of the good. For inelastic goods, consumers may continue to purchase despite higher prices, while for elastic goods, demand could fall significantly. Targeted Application - Minimum pricing works best when targeted at specific markets with clear externalities, such as alcohol or agriculture. Broad implementation may cause inefficiencies. Complementary Policies - Minimum pricing may need to be supported by other measures, such as investment in storage for surplus goods, subsidies for low-income households, or public awareness campaigns about harmful goods.

Answer 23

Labour immobility refers to the inability of workers to move between jobs due to barriers like a lack of skills (occupational immobility) or geographical constraints.

Answer 24

- benefits or costs outside the market transaction - social - private benefits or costs

Answer 25

the excess social cost over social benefit for a given output

Answer 26

🌾 1. Supports domestic producers → * Subsidies lower production costs for domestic firms → * This increases their competitiveness against foreign imports → * Market share of domestic firms can grow → * Helps protect and develop infant industries or maintain strategic sectors. 👩‍⚕️ 2. Promotes merit goods → * Subsidies on healthcare or education reduce consumer prices → * Encourages higher consumption of socially beneficial goods → * Leads to positive externalities (e.g. better health, higher productivity) → * Improves long-term social welfare and economic development. 🔋 3. Encourages green innovation → * Subsidies for renewable energy reduce upfront costs for firms → * Incentivises R&D in low-carbon technologies → * Increases supply and reduces prices of green energy → * Helps tackle climate change and meets sustainability goals. 🏗 4. Boosts employment in key sectors → * Subsidies can help labour-intensive industries stay profitable → * Prevents mass layoffs or closures in struggling regions → * Protects jobs and stabilises local economies → * Reduces regional inequality and social disruption. 📉 5. Tackles market failure from underproduction → * In markets with positive externalities, private firms may underproduce → * Subsidies help bridge the gap between private and social benefit → * Increases equilibrium output to the socially optimal level → * Corrects market failure and improves allocative efficiency.