1.3 Flashcards
Market Failure (48 cards)
What is market failure?
Is when the market fails to allocate scarce resources efficiently in a way that achieves the highest total social welfare.
What are private costs?
The cost of production to the producer e.g. materials or wages.
OR
The cost to the private individual of buying the product.
What are social costs?
Social costs (spillover effects) are costs to the rest of society of production of that good or service e.g. pollution crime, NHS burden.
ALSO
Costs to society through consumption of that product e.g. cigarettes and the impact on the NHS.
What are private benefits?
The benefits of consuming a good or service i.e. the utility derived e.g. a sports car gives travel and esteem benefits.
What are social benefits?
The benefits (which is very often less than the net private benefits) of consumption or production e.g. society will benefit by the sales of push bikes as they increase fitness, putting less strain on the NHS, or job creation of a new factory.
What are some possible examples of private costs and benefits?
Costs - construction, maintenance, wages, marketing, advertising, fuel.
Benefits - utility gained, revenue and profits to a business or their owners e.g. football clubs and stadium owners.
What are some possible examples of social costs and benefits?
Costs - congestion, litter, noise, fall in property values.
Benefits - employment, custom to local businesses, revenue to companies e.g. transport, no VAT.
What are externalities?
Common in virtually every area of economic activity. They are defined as third party (or spill-over) effects arising from the production and/or consumption of goods and services for which no appropriate compensation is paid.
Are externalities positive or negative?
They can be either and are linked to the social costs and benefits.
What are some positive and negative externality examples?
Positive Externalities - increased labour efficiency, healthier workforce.
Negative Externalities - pollution, congestion, litter.
What is marginal analysis?
An economic concept that helps businesses and individuals make decisions by comparing the costs and benefits of a small change in production or activity.
What does the optimum level of output/consumption show?
That if they don’t want to pay as much then it will lead to less utility.
What do the S and D mean in terms of a diagram for production and consumption externalities - at optimum level?
S - Marginal costs (where social and private costs are equal).
D - Marginal benefits (where social and private benefits are equal).
How can you identify whether the marginal benefits or costs stay constant?
If it is optimum level of production then marginal benefits stay constant.
Whereas if it the optimum level of Consumption marginal Costs stay Constant.
What way round do marginal social costs and marginal private costs go if the diagram is showing NEGATIVE externalities of PRODUCTION?
Marginal social costs will be higher as it will be where the social optimum level of output is.
The private costs of production haven’t taken into account the pollution, so the social costs are higher than the private costs. Therefore the socially optimum output is where MSC and MSB=MPB cross.
What way round do marginal social costs and marginal private costs go if the diagram is showing POSITIVE externalities of PRODUCTION?
Marginal private costs will be higher as it will be where the private market equilibrium is.
The private costs of production do not take this into account, so the social costs are lower than the private costs. Therefore the socially optimum output is where MSC and MSB=MPB cross.
What way round do marginal private benefits and marginal social benefits go if the diagram is showing NEGATIVE externalities of CONSUMPTION?
Marginal private benefits will be higher than marginal social benefits.
Private benefits exceed social benefits due to the strain that eating unhealthy food puts on the national health service.
Therefore the socially optimum level of consumption is where MSB and MSC=MPC cross.
What way round do marginal private benefits and marginal social benefits go if the diagram is showing POSITIVE externalities of CONSUMPTION?
Marginal social benefits will be higher than marginal private benefits. They exceed private benefits due to the positive affects on society that education has.
Therefore the socially optimum level of consumption is where MSB and MSC=MPC cross.
What is a deadweight loss?
It is a loss of economic efficiency.
What is a welfare loss?
Is a situation where marginal social benefit is not equal to marginal social cost and society does not achieve maximum utility.
What do deadweight loss and welfare loss show?
That the economy is not allocating its scarce resources in a way that maximises utility. This can be from over consumption of goods giving negative externalities and the under consumption of goods giving positive externalities.
How do you indicate deadweight loss?
Where both private costs and benefits cross and then where the line goes whether its above or below the marginal private cost/benefit.
How may the government intervene to either encourage markets that create positive externalities or to limit those markets that create negative externalities?
Negative externalities - Road vehicle excise duty, emissions, congestion charges, regulations, interlacing costs, carbon permits, subsidies, carbon tax.
Positive externalities - free healthcare, educational adverts, subsidies, direct provision, free education (both children and adults).
What is a public good?
A product or service that is available to everyone and can be used without reducing its availability to others.
