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economics > Market Mechanism And Market And Government Failure > Flashcards

Market Mechanism And Market And Government Failure Flashcards

1
Q

What are the 4 functions of prices

A

Signalling
Rationing
Allocating
Incentive

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2
Q

Signalling function

A

Provides info to buyers and sellers to manage economic activity

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3
Q

After signalling what does the incentive function mean

A

Firms will alter price to achieve greater profit. May be excess supply or demand

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4
Q

What is the rationing function

A

Rising prices to ration the demand for a parody (contract/expand)

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5
Q

Allocative function

A

Directs resources between markets
Away from firms with excess supply and too high price
Towards markets with excess demand and too low price

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6
Q

When does market failure occur

A

When the price mechanism performs unsatisfactory or fails to work at all

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7
Q

Complete market failure

A

Market simply does not exist

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8
Q

Partial market failure

A

Market functions but produces the wrong quantity of a good or service

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9
Q

Market failure in monopoly

A

Good too expensive
Underproduction and underconsumption

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10
Q

Define a private good

A

Excludable and rival

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11
Q

Describe a public good

A

Non excludable and non rival

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12
Q

Examples of private goods

A

Chocolate
Phones

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13
Q

Examples of public good

A

Lighthouse
Radio
Street light

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14
Q

What is the free rider problem

A

Those that benefit without paying or contributing to an economic exchange

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15
Q

Quasi public goods example

A

Electronic pricing of road use

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16
Q

Example of quasi oublic good

A

London roads due to congestion charge

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17
Q

Positive externality

A

Benefit of production and consumption to third parties
Social benefit > private benefit

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18
Q

Negative externality

A

Impacts third party through production or consumption
Social cost > private costs

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19
Q

Negative externality examples

A

Smoking - passive smokers
Alcohol - drunk driving accidents

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20
Q

Positive externality examples

A

Education - productivity - income - tax - revenue - investment

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21
Q

Social cost equation

A

Private cost + external costs

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22
Q

What is a merit good

A

Social benefits of consumption exceed private benefits e.g healthcare

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23
Q

Are merit goods public or private

A

Private, though often provided by public sector

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24
Q

Value judgements

A

Decide if a good is merit or demerit

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25
Q

What is a demerit good

A

Social costs of consumption exceed private costs

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26
Q

Example of demerit good

A

Tobcco

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27
Q

How do governments try reduce consumption of demerit goods

A

Taxation

28
Q

Information problem

A

Occurs when people make wrong decissions because they do not have correct information

29
Q

Why monopoly leads to market failure

A

They limit output and raise prices to max profits
Prices too high and resources allocatively inefficient

30
Q

How does immobility lead to market failure

A

Unemployment and waste of scarce resources

31
Q

Two types of immobility of labour

A

Geographic
Occupational

32
Q

Reasons against government intervention

A

Pro free market economist
Interventionist economists

33
Q

Explain free market economists

A

Market mechanism achieves more optimal outcome through incentives by price signals

34
Q

Explain interventionist economists view on govt intervention

A

Markets are uncompetitive and monopolistic so prone to market failure
Govt can impose regulations

35
Q

Two main government intervention

A

Regulation
Taxation

36
Q

Regulation

A

Influences the quantity of the externality a firm can generate

37
Q

Taxation

A

Adgjusts the market price higher due to its externality

38
Q

Example of taxation on negative externalities in production and consumption

A

Consumption - tax on tobacco to discourage demand
Production - taxing pollution to incentivise factories to produce cleaner

39
Q

Tax definition

A

A compulsory levy imposed by the government to pay for its activities

40
Q

Example of global tax on negative externality

A

Tradable pollution permits

41
Q

Negative of maximum prices

A

Can create excess demand

42
Q

Negative if minimum prices

A

Distort markets creating excess supply

43
Q

Where must minimum. Prices must be set

A

Above the free market price

44
Q

Where must maximum prices be set

A

Below the free market price

45
Q

Government failure

A

Occurs when govt intervention reduces economic welfare
Leads to misallocation of resources

46
Q

what is the classification of a merit/demerit good

A

value judgement

47
Q

monopoly market failure

A

not enough of a good is produced
the price of a good is too high
does not maximise welfare for society

48
Q

immobile factors of production = market failure

A

resources are underutilised
inefficiency

49
Q

govt int - subsidies

A

increase supply and increased profit revenue

50
Q

why might min prices be set

A

to increase wages
make demerit goods more expensive and less desirable e.g. alcohol

51
Q

min price diagram analysis

A

will lead to a surplus of supply which the govt buys (subsidies)

52
Q

issues of min price

A

costly for the govt to cover the subsidy
a min price encourages famers to increase supply which will cost more than expected on the govt which occured in the EEC CAP

53
Q

why might max prices be set

A

if suppliers have monopoly power
the good is socially important
to encourage consumption of merit goods
demand is price elastic because the good is necessary for mainitining good living standards

54
Q

max price diagram analysis

A

set below the equilibrium
there will be a shortage and demand is greater than supply
encourages black markets
goods will be rationed

55
Q

government failure

A

when the government intervening leads to a loss of economic welfare and misallocation of resources

56
Q

examples of govt failure

A

distortion of prices/ free market mechanism
e.g subsidising a failing industry

unintended consequences

excessive administrative costs - social benefits of a policy might not be worth the costs

info gaps - policies require full CBA which is timely
e.g. housing policies are long term and may fail

57
Q

market mechanism and inequitable distribution of income

A

likely to lead to higher consumption of demerit goods with neg externalities from lack of govt intervention

58
Q

govt intervention into inequitable incoem

A

progressive taxation
govt spending on welfare spending

59
Q

competition policy aims to ensure

A

technological innovation and dynamic efficiency
effect price competition between suppliers

60
Q

four key pillars of competition policy

A

antitrusts and cartels
market liberalisation
state aid control
merger controls

61
Q

antitrusts and cartels (comp policy)

A

elimination of agreements that restrict competition including price fixing and abuse by any firms who hold dominant market position

62
Q

market liberalisation

A

introducing competition in previous monopoly industries such as energy supply, retail banking

63
Q

state aid control (comp policy)

A

comp policy analyses state made measures such as subsidies to ensure that such measures do not distort the level of competition in the single market

64
Q

merger control (comp policy)

A

investigation of mergers and take over between firms

65
Q

main comp regulator in uk

A

competition and markets authority

66
Q

examples of comp policy in action

A

privatisation- transferring ownership (Stockmarket floatation of Royal Mail)

deregulation - preventing mergers/acquisitions that create monopoly, forced sales of assets e.g. BAA

law enforcement - fines and penalties against price fixing

reducing trade imports- encourages cheaper goods from abroad
allowing new countries into EU single market increases contestibility

67
Q
A

economics (33 decks)

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