Year 1 micro - market failure

Question 1

What are merit goods

Answer 1

goods that are under consumed, have positive externalities and consumers fail to recognise the full benefits of consumption

Question 2

What are demerit goods

Answer 2

Goods deemed more harmful to consumers than they realise, often will generate negative externalities

Question 3

Examples of imperfect information

Answer 3

• Information failure, consumers may be choosing to ignore information, information may not be clear, information may not be present
• asymmetric information - information is available, but is not shared equally between the two parties

Question 4

examples of demerit goods

Answer 4

• cigarettes
• alcohol
• overconsumed and overproduced by free market

Question 5

characteristics of pure public goodd

Answer 5

• non excludable
• non rival

Question 6

meaning of non excludable and why

Answer 6

• everybody has access to it
• the benefits of consuming the good cannot be confined to the individual that has paid
• there is no cost efficient way to price

Question 7

meaning of non rival

Answer 7

the quantity available of the good doesn’t diminish upon consumption

Question 8

examples of public goods

Answer 8

• flood defences
• defences
• road signs
• street lights

Question 9

what is the free rider problem

Answer 9

where individuals have the incentive not to contribute anything at all to the provision of public goods because they will wait for others to contribute , and benefit off that

Question 10

why is the free rider problem bad

Answer 10

• leads to the under provision of public goods in the free market
• because nobody will want to pay towards the provision of public goods, so there will be no private motive to supply them, no chance of profit

Question 11

what are quasi public good

Answer 11

a good that sometimes shows the characteristics of a pure public good, but sometimes will show characteristics of a private good

Question 12

examples of quasi public goods

Answer 12

• roads - toll roads, excludable, congestion times diminish quantity available, making it rivalrous
• beaches - eg if a hotel can own a beach, that makes it excludable. during peak times, it can also be rival

Question 13

what are common access resources

Answer 13

natural resources over which no private ownership has been established

Question 14

examples of common access resources

Answer 14

• forests, which provide timber and pulp for us to make paper
• seas , providing us with seafood and minerals
• air, providing us with o2

Question 15

why isn’t there private ownership of common access resources

Answer 15

it would be costly and inefficient to find ways to exclude other producers from accessing the resources

Question 16

what is the tragedy of the commons

Answer 16

where the private producers will act according to their self interest and unsustainably keep exploiting common access resources, eventually leading to depletion of that resource

Question 17

examples of producers acting by self interest

Answer 17

• profit motive - private producers may keep fishing/cutting down trees if the resources that they get can be used to increase their profit
• new producers may come and take more resources after old producers stop

Question 18

impacts of resource depletion

Answer 18

Economic Costs
- Resource depletion, such as the exhaustion of fossil fuels or minerals, leads to rising extraction costs as resources become harder to access.
- This increases production costs for businesses reliant on these resources.
- Higher prices for goods and services, potentially reducing consumer spending and slowing economic growth.

Reduced Economic Growth
- Depleted resources can limit industrial productivity, especially in resource-dependent economies. This may reduce GDP growth and weaken long-term economic prospects.
- Hampers development and lowers living standards in affected regions.

Environmental Degradation
- Overextraction often damages ecosystems, causing biodiversity loss, deforestation, or water pollution. Depleted natural environments reduce the planet’s ability to regenerate resources.
- Long-term harm to the environment undermines sustainable development and increases costs for environmental restoration.

Energy Scarcity
- Depletion of energy resources like oil and gas can cause energy shortages and price volatility, especially in economies heavily reliant on these sources.
- Creates uncertainty for businesses and households, increasing costs and reducing disposable income.

Social Inequality
- Resource depletion can disproportionately affect low-income populations, as they often rely on natural resources for livelihoods, such as farming or fishing.
- Worsens poverty and income inequality, particularly in developing countries.

Trade Imbalances
- Resource depletion in a country may force it to import essential materials, increasing dependency on foreign markets and creating trade deficits.
- Weakens the balance of payments, potentially leading to currency depreciation and economic instability.

Risk to Future Generations
- Unsustainable resource use depletes reserves that future generations would rely on, reducing their ability to meet economic and social needs.
- Undermines intergenerational equity and sustainability, limiting long-term global development prospects

Question 19

what is government failure

Answer 19

when government intervention leads to a misallocation of scarce resources, harming social welfare

Question 20

what is government failure an argument for

Answer 20

not having any government intervention, even if there is a market failure

Question 21

Causes of government failure - Information failure

Answer 21

• Governments often lack complete or accurate information when implementing policies.
• For example, a policy designed to reduce unemployment may overestimate the demand for labor, leading to overspending on ineffective training programs.
• Misallocation of resources can occur, reducing the effectiveness of the policy and potentially worsening the issue it was meant to solve.

Question 22

Causes of government failure - costs

Answer 22

• High administrative, enforcement, or implementation costs can outweigh the benefits of a policy.
• For example, subsidies for renewable energy projects might involve significant financial support and administrative overheads.
• These high costs can strain government budgets, leading to reduced funding for other essential areas such as healthcare or education, (high opp cost)

Question 23

Causes of government failure - unintended consequences

Answer 23

• black markets
• negative impacts on people not part of the policy, eg regressive taxes/min price
• impact on firms, overstrict regulation on tax, may shut down, leading to unemployment
• firms may become dependent/ wasteful on their subsidies
• state provision could lead to excess demand
• Policies can have unexpected side effects. - For instance, imposing rent controls to make housing affordable may discourage landlords from maintaining or investing in properties, leading to a decline in housing quality.
• The original problem (e.g., affordable housing) might not only persist but also worsen, leading to further intervention and inefficiencies.

Question 24

causes of government failure - regulatory capture

Answer 24

• Regulators may become influenced by the industries they are supposed to oversee, prioritizing the interests of firms over the public.
• For instance, energy regulators might approve price increases that disproportionately benefit providers.
• Regulatory capture distorts policy objectives, leading to inefficiencies, reduced consumer welfare, and potentially higher prices.
• when governments try to regulate monopoly power
  
  • occurs when the interests of society are overlooked for the interest of CEOS
  • so CEOs can influence regulators to reduce the extent of regulation

Question 25

how would an indirect tax solve market failure (negative production externality)

Answer 25

• increases firms cost of production, MPC shifts left to MSC = MPC + tax
• price increases and quantity decreases(assuming the tax is perfect)

Question 26

how would an indirect tax solve market failure (consumption)

Answer 26

• we want the MPC = MPB
• MPC curve shifts left to MPC + tax
• price increases and quantity decreases

Question 27

what is a hypothecated tax

Answer 27

specific taxes introduced for a specific purpose, eg revenue used to advertise

Question 28

cigarette black market value

Answer 28

2 billion per year

Question 29

alcohol black market value uk

Answer 29

1.6 billion

Question 30

When are subsidies used?

Answer 30

When there is an under consumption or production of a good

Question 31

how does a subsidy affect an externality graph

Answer 31

FOR CONSUMPTION
- MPB shifts right as cop reduces and will hit MPB at the socially optimum level

FOR PRODUCTION
- MPC will shift to the right to be equal to MSC , so MSC = MPC + sub
- increase in quantity and reduction in price

Question 32

issues with subsidies

Answer 32

• cost, if money has been borrowed to fund these subsidies, taxes may eventually increase , which may hurt the poor
• oppurtunity costs, may cut money from other areas such as NHS. if the extent of the market failure is limited, the monkey could be used elsewhere
• assuming that govts have perfect info, may set the sub too high or low, firms could become long run dependent and become less efficient and it’s expensive
• firms may use the subsidy to pay shareholders, increase pay of workers etc, this won’t lower COP

Question 33

what is regulation

Answer 33

a rule of law enacted by the government that must be followed by economic agents to encourage a change in behaviour

Question 34

regulation is a non market based approach, what does this mean

Answer 34

it doesn’t work through a market (changing price then changing quantity)

Question 35

examples of command regulation

Answer 35

• age limits
• time limits
• caps
• compulsory regulation eg vaccines
• bans

Question 36

example of control regulation

Answer 36

• needs to be enforcement of the regulation, or ppl won’t follow it
• needs to be effective punishment to make sure there is an incentive to follow it

Question 37

how regulation helps market failure

Answer 37

• incentive for firms and consumers to change behaviour , to move quantity to socially optimum level
• solves issues in free market
• to bring about allocative efficiency

Question 38

issues with using regulation

Answer 38

If command/control aspect of regulation fails, it wont work
- Regulations that rely on strict control mechanisms may fail if the rules are not enforceable or followed.
- This reduces the effectiveness of the regulation, meaning the intended goals, will not be achieved, leading to wasted resources.

Cost, administrative costs and enforcement
- Effective regulation requires significant funding for administration and enforcement.
- If government revenues are low, enforcement becomes inadequate, leading to weak compliance and ineffective regulation.

Setting the right regulation.
- Striking the right balance is challenging. Overly strict regulations can lead to unintended consequences like a brain drain, where skilled workers leave to avoid restrictive policies. Alternatively, overly relaxed regulations may fail to deter harmful practices.
- Misjudged regulations can reduce government revenue (e.g., fewer businesses operating domestically due to strict rules) and undermine the policy’s goals, causing inefficiencies.

Firms may also try to cheat the system,
- Some firms may exploit loopholes or falsify compliance reports to avoid the costs associated with regulation. For example, firms could underreport emissions or use creative accounting to meet financial reporting standards.
- This not only leads to government failure but also creates an uneven playing field, where honest firms are disadvantaged

Equity
- Regulations may disproportionately affect certain firms or groups. For example, pollution taxes might heavily impact industries reliant on fossil fuels, while firms in cleaner sectors are less affected.
- This creates perceived or real unfairness, potentially leading to resistance from businesses and workers in the affected sectors, which could further hinder compliance.

Paternalistic nature
- Regulations often restrict individual or corporate freedoms, as the government takes on a dominant role in decision-making. For example, bans on certain products (e.g., plastic straws) limit consumer and producer choices.
- This could lead to public backlash, resistance to government intervention, and a reduced sense of autonomy among businesses and individuals.

Question 39

advantages of regulation

Answer 39

Addresses market failure effectively
- Regulations can correct market failures by imposing restrictions or standards that ensure optimal resource allocation. For instance, environmental regulations can reduce negative externalities like pollution by setting emissions caps or penalties.
- This leads to improved societal welfare, as external costs are reduced, creating a cleaner environment and healthier communities.
Provides consumer protection

• Regulations ensure safety and fairness, such as product quality standards, food safety checks, or financial regulations that protect consumers from predatory practices.
• This builds trust in markets and reduces exploitation, which encourages consumer participation and boosts economic activity.

Encourages fair competition
- Anti-monopoly regulations prevent firms from abusing market power through predatory pricing or collusion, maintaining a level playing field for smaller businesses.
- This fosters innovation, diversity in product offerings, and competitive pricing, ultimately benefiting consumers.

Promotes long-term sustainability
- Regulations often aim to balance short-term profit motives with long-term environmental or social goals. For instance, renewable energy mandates encourage firms to invest in sustainable technologies.
- This ensures that resources are used responsibly, preserving them for future generations and promoting sustainable development.

Can reduce inequality
- Social regulations, such as minimum wage laws or anti-discrimination policies, help address income disparities and promote inclusivity in workplaces.
- This improves social cohesion and reduces poverty, creating a more equitable society where opportunities are accessible to all.

Question 40

what is welfare gain

Answer 40

the excess of social benefit over social cost for a given quantity