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Economics A level Edexcel A > Year 1 micro - market failure > Flashcards

Year 1 micro - market failure Flashcards

1
Q

What are merit goods

A

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

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2
Q

What are demerit goods

A

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

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3
Q

Examples of imperfect information

A
  • 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
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4
Q

examples of demerit goods

A
  • cigarettes
  • alcohol
  • overconsumed and overproduced by free market
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5
Q

characteristics of pure public goodd

A
  • non excludable
  • non rival
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6
Q

meaning of non excludable and why

A
  • 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
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7
Q

meaning of non rival

A

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

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8
Q

examples of public goods

A
  • flood defences
  • defences
  • road signs
  • street lights
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9
Q

what is the free rider problem

A

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

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10
Q

why is the free rider problem bad

A
  • 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
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11
Q

what are quasi public good

A

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

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12
Q

examples of quasi public goods

A
  • 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
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13
Q

what are common access resources

A

natural resources over which no private ownership has been established

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14
Q

examples of common access resources

A
  • forests, which provide timber and pulp for us to make paper
  • seas , providing us with seafood and minerals
  • air, providing us with o2
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15
Q

why isn’t there private ownership of common access resources

A

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

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16
Q

what is the tragedy of the commons

A

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

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17
Q

examples of producers acting by self interest

A
  • 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
18
Q

impacts of resource depletion

A
  • negative impact on future generations, losses of income
  • goods and services made with these resources may not be available
19
Q

what is government failure

A

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

20
Q

what is government failure an argument for

A

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

21
Q

Causes of government failure - Information failure

A
  • policy makers/govts may not have all necessary information to make an effective decision
  • may not value externalities
22
Q

Causes of government failure - costs

A
  • admin and enforcement costs may be very high
  • regulation, subsidies, price control and state provision have significant costs and may induce an oppurtunity cost
23
Q

Causes of government failure - unintended consequences

A
  • 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
24
Q

causes of government failure - regulatory capture

A
  • 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
25
Q

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

A
  • increases firms cost of production, MPC shifts left to MSC = MPC + tax
  • price increases and quantity decreases(assuming the tax is perfect)
26
Q

how would an indirect tax solve market failure (consumption)

A
  • we want the MPC = MPB
  • MPC curve shifts left to MPC + tax
  • price increases and quantity decreases
27
Q

impacts of indirect taxes

A
  • increases cop for firms, which internalises the externality, less overconsumption and production, promoting allocative efficiency
28
Q

what is a hypothecated tax

A

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

29
Q

issues with using indirect taxes to solve market failure

A
  • price inelastic demand for inelastic/addictive goods
  • assumption that government has perfect information, and will set tax at a perfect level
  • regressive taxes
  • black markets
  • affects individual liberty and choice, especially if you don’t agree that the market failure is that significant
30
Q

cigarette black market value

A

2 billion per year

31
Q

alcohol black market value uk

A

1.6 billion

32
Q

When are subsidies used?

A

When there is an under consumption or production of a good

33
Q

how does a subsidy affect an externality graph

A

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

34
Q

issues with subsidies

A
  • 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
35
Q

what is regulation

A

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

36
Q

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

A

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

37
Q

examples of command regulation

A
  • age limits
  • time limits
  • caps
  • compulsory regulation eg vaccines
  • bans
38
Q

example of control regulation

A
  • 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
39
Q

how regulation helps market failure

A
  • 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
40
Q

issues with using regulation

A
  • if command/control aspect of regulation fails, it wont work
  • cost, administrative costs and enforcement, if govt rev is low, regulation probably wont work as enforcement will be too low
  • setting the right regulation. they cant be too strict (causes unintended consequences like brain drain / black market) or too relaxed, may reduce govt revenue
    • firms may also try to cheat the system, these all cause govt failure
  • equity - may be unfair/difficult to follow regulations, eg, firms who use a lot of fossil fuels having a pollution tax
  • paternalistic nature - lack of freedom, govt is very dominant

Economics A level Edexcel A (39 decks)

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