1.5 Flashcards
(29 cards)
Complete market failure
Complete market failure occurs when there is no market at all – a good or service is missing and not provided at all.
partial market failure
A Partial market failure is when there is a misallocation of resources – the market is unable to efficiently allocate scarce resources to meet the needs of society
types of market failure
monopolizes
limited public goods
merit goods are unprovided
demerit goods are un provided
income inequality rises
external costs are ignored
monoploes market failure
In markets with little competition (monopoly), the consumer may be adversely affected as they may have to pay higher prices, have fewer choices and may get poorer service and quality.
no pressure for the firm to produce at the lowest average cost
able to charge higher prices, done by reducing supply leaving the customer unsatisfied
limited public goods market failure
Public goods would not be provided in a completely free market system because consumers can consume without paying so producers would not make a profit.
Markets are likely to under-provide public goods because due to no profit they would not produce a good or service that they could not withhold from a non-paying consumer. therefore the Government has to provide public goods because they are essential for the well-being of society.
merit goods being unprovided market failure
A merit good is a product that society values and judges that everyone should have regardless of whether an individual wants it
they are socially desirable but which would be under-produced if left to the free market. They would only be provided to those who could afford to pay the full economic price such as health and education
demerit goods are over-provided market failure
Demerit goods are products or services that are over-consumed or consumed to a greater extent than is considered socially desirable from the perspective of society as a whole
These goods often have negative externalities, which means that their consumption can lead to harmful consequences for individuals or society,
income inequality increases market failure
In a market economy an individual’s ability to consume goods and services depends upon his/her income or other resources such as savings An unequal distribution of income and wealth may result in an unsatisfactory allocation of resources and can also lead to alienation and encourage crime with negative consequences for the rest of society.
MPB
MPB = Marginal Private Benefit (the additional benefit a consumer gets by
consuming one more unit of a good or service)
MSB
MSB = Marginal Social Benefit (the benefits of consuming or producing an additional unit of goods or services which are received by society - includes both Marginal
Private Benefits and Marginal External Benefits)
MEB
MEB = Marginal External Benefit (the additional benefit to society of consuming or
producing one extra unit).
negative production externality
Negative production externalities occur when the activities of producers lead to costs to a third party that is not included in the price of the economic activity. such as pollution or litter
With negative externalities of production, marginal social cost (MSC) is greater than
marginal social benefit (MSB)
NEGATIVE CONSUMPTION EXTERNALITIES
Negative consumption externalities occur when the activities of consumers lead to a loss of benefit to a third party that are not included in the price of the economic activity. such as passive smoking
POSITIVE PRODUCTION EXTERNALTIES
Positive production externalities occur when the activities of producers lead to benefits for a third party that are not included in the price of the economic activity. such as the World Wide Web
POSITIVE CONSUMPTION EXTERNALITIES
Positive consumption externalities occur when the activities of consumers lead to benefits to a third party that is not included in the price of the economic activity. These occur when the consumption of a good or service creates spill-over benefits enjoyed by a third party not involved in the transaction. such as herd immunity
purpose of government intervention
In order to reduce inequalities in the distribution of income and wealth:
increase unemployment rates
ways in which the government may intervene
regulation
legislation
indirect taxation
grants and subsidies
voluntary agreements
legislation
Legislation involves creating and enacting laws in order to protect individuals, firms and society as a whole
indirect taxation
a tax on a good or service, will increase the amount per but if supply causing supply to go down and price to go up
welfare gain
Where the social cost is lower than the private cost, and society gains as it
does not have to pay for the difference. This is the benefit to society.
welfare loss
Where the social cost is higher than the private cost, and society loses out
as there is a loss of overall benefit.
government wants for the uk industury
- To achieve full employment (a government target);
- To ensure certain industries are prioritised (as more important than others due to
employing large amounts of labour) - To provide quality infrastructure (essential if business are to provide quality services) –
see pie of planned infrastructure spend in £M for 2024-2025.
regulation
Regulation means applying rules to business and other organisations.
This protects consumers from the abuse of monopoly power, which would lead to high prices, supernormal profits for the monopolist so consumer arent exploited
Advantages of legislation
o Expected standards are clear
o Failure to comply has consequences
o The consequences are known
