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Microeconomics > Market failure > Flashcards

Market failure Flashcards

1
Q

types of market failure

A

PUMPIN
Public goods
Unequal distribution of income & wealth
Monopolies
Positive externalities
Immobility
Negative externalities

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2
Q

Three characteristics of public goods

A

non excludable
non rival
non rejectable

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3
Q

the free rider problem

A

as public goods are non excludable, it is difficult to charge people for benefitting once a product is available, leading to the under provision of a good and thus causing market failure

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4
Q

quasi public goods

A

near public goods as they have some of the characteristics of public goods. they are semi-non-excludable and semi-non-rival

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5
Q

income

A

a flow of money going to factors of production (wages from jobs, rental income from property, interest from savings, profits flowing to shareholders)

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6
Q

wealth

A

the current value of a stock of assets owned by someone or society as a whole (savings in bank accounts, ownership of property, shares/stocks in businesses, wealth held in pension schemes)

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7
Q

the 45° line on a lorenz curve represents

A

perfect equality

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8
Q

the further the lorenz curve is from the 45° line…

A

the more unequal the distribution of wealth and income

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9
Q

Gini coefficient- definition + equation

A

a measure of statistical dispersion intended to represent the income or wealth distribution of a country’s residents
Gini coefficient = A / A+B

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10
Q

if Gini coefficient is 0

A

perfect equality

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11
Q

if Gini coefficient is 1

A

maximal inequality

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12
Q

UKs gini coefficient

A

0.34

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13
Q

underlying causes of inequality

A

-education & qualifications
-impact of state (nmw, tax etc)
-inheritance
-virtuous cycle of W & Y inequality
-luck

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14
Q

policies to lower inequality

A

-higher minimum wage
-improved education services
-more progressive income tax
-increase benefits
-increase personal allowance

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15
Q

what does the laffer curve show

A

the relationship between tax rates and the amount of tax revenue collected by governments

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16
Q

why might total tax revenues fall if tax rate increases

A

-increased rates of tax avoidance
-greater incentive to evade taxes
-possible disincentive effects in labour market
-possible brain drain effects

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17
Q

absolute poverty

A

when a household doesn’t have sufficient income to sustain a basic acceptable standard of living. less than $1.90 a day

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18
Q

relative poverty

A

a household income that is considerably lower than the median level of income within a country. household disposable income of less than 60% of medians

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19
Q

inequality can lead to

A

-social unrest, tensions & civil disobedience
-a self-perpetuating poverty cycle can become embedded
-a loss of allocative efficiency

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20
Q

pros of inequality

A

-incentive effect
-entrepreneurs require rewards
-trickle down effect
-fairness

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21
Q

information failure

A

when people have inaccurate or incomplete data and so make potentially wrong decisions

22
Q

causes of information failure

A

-long term consequences
-complexity
-asymmetric information
-price information

23
Q

moral hazard

A

when the party with superior information alters their behaviour in such a way that benefits them while imposing costs on those with inferior information

24
Q

policies for addressing information failure

A

-compulsory labelling
-improved nutritional information
-campaigns to raise awareness
-consumer protection laws
-industry standards/guarantees for selling used products

25
Q

pure monopoly

A

a single seller. the firm is the industry

26
Q

working monopoly

A

any firm with greater than 25% of total sales

27
Q

dominant monopoly

A

a firm that had over 40% of the market share

28
Q

oligopoly

A

when a few firms dominate the market

29
Q

duopoly

A

when two firms dominate the market

30
Q

monopoly power

A

the ability to set price

31
Q

formation of monopolies

A

-first mover advantage
-exclusive ownership of a scarce resource
-government grant firm monopoly status
-parents or copyrights
-firms merge

32
Q

barriers to entry

A

designed to block rival businesses from entering a market profitably

33
Q

structural barriers

A

arising from differences in average production costs e.g integrating, economies of scale

34
Q

strategic barriers

A

deliberately created by the behaviour of incumbent firms e.g advertisement, predatory pricing

35
Q

statutory barriers

A

entry barriers given force of law e.g trademark, patent, broadcasting licenses

36
Q

DWL

A

dead weight loss
the mis allocation of resources

37
Q

how does monopoly power lead to market failure

A

-makes higher profits at a loss of allocative efficiency
-monopolist will extract a price that is above cost of resources
-high prices means consumer wants are not satisfied as the product is under-consumed
-loss of consumer surplus and welfare, disproportionately affecting low income families

38
Q

benefits of monopoly power

A

-research and development
-economies of scale
-international competition
-regulation

39
Q

negatives of monopoly power

A

(SPEW)
Service (standard)
Price (high)
Efficiency (not productively)
Welfare (DWL)

40
Q

occupational immobility

A

when there are barriers limiting the transition of labour from the industry to another leading to these factors remaining unemployed or being used inefficiently

41
Q

why labour immobility is a problem

A

-causes structural unemployment and economic vulnerability
-causes persistent relative poverty
-loss of economic efficiency and social welfare

42
Q

geographical immobility

A

barriers which restrict labour from moving to areas where there is applicable work available

43
Q

reasons for geographical immobility

A

-family and social ties
-financial costs of moving
-variations in house prices
-cost of living
-migration controls
-language barriers

44
Q

policies to help geographical immobility

A

-infrastructure projects
-regional policies to create jobs and businesses
-rise in house-building to lower prices
-immigration laws, visa controls

45
Q

policies to help occupational immobility

A

-funding education system
-more effective workplace training
-teaching new skills (e.g coding)
-an expansion of apprenticeship/internship programmes

46
Q

externalities

A

spillover effects onto a third party not involved in the economic transaction
(they lie outside the initial price we pay)

47
Q

how do externalities cause market failure

A

cause market failure if the price mechanism does not take account of the social costs and benefits of production and consumption

48
Q

shadow pricing

A

calculating a monetary value to assign to the externality

49
Q

compensation

A

estimate the cost of putting right an externality

50
Q

revealed preference

A

how much people are willing to pay to avoid an externality

51
Q

merit goods

A

goods and services that have positive externalities associated with them and are under-consumed in a free market due to information failure e.g healthcare, education

52
Q

demerit goods

A

goods and services that have negative externalities associated with them and are over-consumed in a free market due to information failure e.g violent games, tobacco products

Microeconomics (12 decks)

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