8 The market mechanism, market failure and government intervention in markets (MICRO)

Question 1

What is a public good?

Answer 1

a good that is both non-rivalrous and non-excludable

Question 2

What is meant by a public good (explained)?

Answer 2

• non-excludable - no one can be excluded from consuming it
• non-rivalrous - one person’s consumption does not diminish the quality or quantity of another’s consumption

Question 3

What is meant by non-rejectability?

Answer 3

the collective supply of a public good for all means that it cannot be rejected by people

Question 4

What is a common resource?

Answer 4

a resource that no individual or organisation can lay claim to

Question 5

What is the ‘Tragedy of the Commons’?

Answer 5

the idea that individuals acting in their own best interest will overuse a common resource, leading to the depletion or degradation of this resource

Question 6

Why does the tragedy of the commons occur?

Answer 6

as the common resource is non-excludable but it is rivalrous

Question 7

What are three possible solutions to the tragedy of the commons?

Answer 7

• rules and regulations
• cultural norms
• creating property rights

Question 8

Give an example of a rule or regulation that would offer a solution to the tragedy of the commons

Answer 8

limiting the number of days that people can fish for

Question 9

What is a problem with using rules and regulations as a solution to the tragedy of the commons?

Answer 9

• often inefficient and ineffective
• limits the tragedy but rarely prevents it

Question 10

Give an example of how cultural norms could be a solution to the tragedy of the commons

Answer 10

(example)
- overfishing results in cultural disapproval
- one who honours the norms is repcted
- can be effective in relatively small, self-governing communities

Question 11

What is a problem with using cultural norms as a solution to the tragedy of the commons?

Answer 11

take a long time for cultural norms to develop

Question 12

Explain how the process of creating property rights offers a solution to the tragedy of the commons

Answer 12

• it makes the common resource excludable - therefore it makes the common resource behave like a private good
• e.g. tradable fishing allowances

Question 13

What is a problem with using property rights as a solution to the tragedy of the commons?

Answer 13

• the common resource may not stay in one place (e.g. fish)
• would need a multi-country system to be truly effective

Question 14

Market failure definiton

Answer 14

When the free market fails to allocate scarce resources at the socially optimum level of output.

Question 15

What are the causes of market failure?

Answer 15

• Negative Externalities (Self-Intrest)
• Positive Externalities (Self-Intrest)
• De-merit Goods (Information Failure)
• Merit Goods (Information Failure)
• Public Goods (Free Rider Problem + Profit Motivated Firms)
• Tragedy of the commons (Self-Intrest)
• Income Inequality (Inequality)
• Monopoly Power (One dominant seller & High barriers to entry)

Question 16

What is meant by negative externalities of production?

Answer 16

Costs to 3rd parties as a result of the actions of producers

Question 17

What are examples of negative externalities of production?

Answer 17

Air Pollution, Resource Depletion, Resource degradation, Deforestation.

Question 18

negative externalities of production graph

Answer 18

https://gyazo.com/e7598bc183473364f1ef61964252ae0e
MSC > MPC (SC = PC + EC)

In a free market, it is assumed that people ignore the external costs. (e.g. when driving you consider the cost of petrol, but, not the fact that congestion and pollution increases causing problems for others.)

Because of externalities such as pollution, the social cost of driving is higher than the private cost. Therefore, in a free market we get overconsumption. This makes common sense, just think of rush hour traffic – there tends to be overconsumption of driving because people ignore the costs to others.

Question 19

Name 2 Negative Externalities of Production Analysis Points.

Answer 19

Self-Intrest
Firms are ignoring the full social cost because of interest, they’re only considering the private cost as a result the market allocates resources at the private optimum rather than the social optimum the end result is an “Over-Production” and a “Over-Consumption” as a result.

The price is too low
P1 only accounts for Private Cost and not the full social costs which includes the external cost which incourages more over-production and over-consumption of these goods and the end result is misallocation of resources and allocatively efficiency accommodating the welfare lost

Question 20

What is meant by negative externalities of consumption?

Answer 20

Costs to 3rd parties as a result of the actions of consumers

Question 21

What are examples of negative externalities of consumption?

Answer 21

Smoking, Excessive Alcohol, Excessive Sugary Drinks, Fast Food

Question 22

negative externalities of consumption graph

Answer 22

https://gyazo.com/737b29c1778850108812f9e8693d8a8b

Question 23

Name 2 Negative Externalities of consumption Analysis Points.

Answer 23

Self-Intrest
Consumers are ignoring the full social benefit of their action and only considering their private benefit due to self-intrest, the end result is the market is allocating resources, that leads to over consumption and over production of the goods and resources as a result of all of this there is a misallocation of resources resulting in allocative inefficiency and welfare loss to society.

Question 24

what is privatisation

Answer 24

Privatisation is when the assets from the public sector are transferred to the private sector

Question 25

what are the intentions of privatisation

Answer 25

To make markets more competitive and efficient.

Question 26

privatisation advantages

Answer 26

+ Increase in allocative efficiency:
With more competition firms will drive for more efficiency, higher quality products which would increase consumer satisfaction.

+ reduction in x inefficiency:
reduction off costs as firms will drive down costs to remain competitive to maximise profits.

+ Efficiency incentive which drives dynamic efficiency:

Question 27

privatisation disadvantages

Answer 27

• Loss making services cut even if socially desirable
  If firms dont make a profit, firms wont provide them which could be a problem
• Loss of natural monopoly and loss of economies of scale
  Which would lead to product inefficiency as average costs cant be minimised as a result of lower barriers to entry allowing more firms to enter the market.