1.5 The market mechanism, market failure and government intervention in markets

Question 1

Negative production externalities

Answer 1

Have negative spill-over effects on third parties as a result of production. (fossil fuel energy, transport, farming, landfill, plastic waste)

Question 2

Why are goods over/under consumed/produced

Answer 2

Consumers/producers only consider PC and PB and ignore externalities so over/under consume/produce.

Question 3

Market failure

Answer 3

Misallocation of resources

Question 4

Ring fencing

Answer 4

Ensuring that a pool of money is only spent on a specific thing

Question 5

Examples of negative production externalities

Answer 5

Methane from landfill
CO2 from fossil fuels - global warming
Microplastics
Smell and noise
Reduced house prices

Question 6

Policies to reduce landfill

Answer 6

Waste and landfill tax - means that it’s beneficial to recycle instead. However causes fly tipping - gov failure.

Question 7

Positive production externalities

Answer 7

Positive spill-over effects on third parties from production. (Medical research, planting forests, flood protection)

Question 8

Demerit good

Answer 8

Harms the consumer and third parties
(Cigarettes, gambling, fizzy drinks)

Question 9

Merit good

Answer 9

Good for consumer and third parties
(vaccine, education, renewable energy)

Question 10

Solutions to merit goods

Answer 10

Legislation
Gov provision
Improved info
Subsidy to producers
Max price

Question 11

Solutions to demerit goods

Answer 11

Tax
Improved info
Legislation
Advertising bans
Incentives to quit (vouchers for smoking)

Question 12

Pros and cons of NHS

Answer 12

Pros:
Based on need not wealth - equality
Not profit driven, so provides expensive medicine
Cons:
Some pay without needing
More expensive=more tax
Underfunded - not x-efficient and waiting lists

Question 13

Result of NHS being free

Answer 13

Surplus of demand as it has no price but has cost, allocatively efficient, quite productively and dynamically but not X.

Question 14

Behavioural economics

Answer 14

Attempts to understand the effect of individual psychology on economics

Question 15

Nudges

Answer 15

Feature in an environment that influences decision making (salad in front of burgers, smaller portions)

Question 16

Public goods

Answer 16

Non-excludable and non-rivalrous, must be provided by gov because free-rider problem. They are complete MF.

Question 17

Types of goods

Answer 17

Public

Quasi public - Can be excludable/rivalrous but aren’t always (fishing, parks, roads)

Private - Excludable and rivalrous

Question 18

Types of poverty

Answer 18

Absolute - Num of people below income threshold or unable to afford basic goods

Relative - The extent that a household falls below average

Question 19

Inequality in UK

Answer 19

Richest 20% are 7.2x as wealthy as bottom 20% (income gap)

Question 20

Harm of inequality

Answer 20

Life expectancy
Child wellbeing
Unsociable behaviour

Question 21

Causes of relative poverty

Answer 21

Unemployment
Single parenthood
Single pensioners
Health problems/disabilities
Poverty trap

Question 22

Policies to reduce inequality

Answer 22

Increase top rate income tax
Increase personal allowance
Raised min wage
Better education and FSM to those in poverty trap
Universal credit

Question 23

Wealth linked with income

Answer 23

Linked to income as it is turned into wealth or assets can provide income, but can be hard to get house even with good income and can have house but no income(pensioner)

Question 24

Wealth inequality in UK

Answer 24

• More unequal than income
• Inheritance tax has many loopholes

To reduce:
- Loans with flexible payment
- Auto enrollment of pensions

Question 25

Government failure

Answer 25

When gov tries to solve a MF but the policy instead deepens it or creates a new one
(fly tipping)

Question 26

Types of immobility

Answer 26

Occupational - Lack of transferable skills
Geographical - Inability to work because can’t move and unable to work in current place of residence(high housing costs, bad broadband)