1.8 Market failure

Question 1

What is a demerit good

Answer 1

A good that is over-produced and or overconsumed where private benefits exceed social benefits if left of the free market

Question 2

What is a merit good

Answer 2

A good that is under consumed and or under produced that has a greater social benefit then private benefit if left of the free market

Question 3

What is a negative externality

Answer 3

Costs to a third party that are not included in the price of the economic activity

Question 4

What is a positive externality

Answer 4

benefits to a third party that are not included in the price of the economic activity

Question 5

What is an information failure

Answer 5

A lack of information leading to merit goods being under-produced and under-consumed while demerit goods are over-produced and over-consumed

Question 6

What are the 2 characteristics of public goods

Answer 6

non excludable(available to everyone) and non rivalrous(no competition for the good)

Question 7

What is a public good

Answer 7

A good that is produced by the government and open to everyone

Question 8

What are monopolies

Answer 8

Firms that dominate the market as they are the only seller of the good allowing them to charge whatever price they would like

Question 9

What is factor immobility

Answer 9

It causes unemployment and a loss of productive efficiency

Question 10

What is equity issues

Answer 10

Markets can generate an unacceptable distribution of income and consequent social exclusion which the government may choose to change

Question 11

What is the tragedy of the Commons

Answer 11

It occurs on common ground where everyone has the same access to the land and try to maximise their private benefits at the expense of society(resources eventually diminish)

Question 12

draw a negative consumption externality

Question 13

Draw a positive production externality

Question 14

Draw a negative production externality

Question 15

Draw a positive consumption externality

Question 16

What is indirect taxation

Answer 16

A tax on a good or service(tax on spending) in order to reduce the consumption of demerit goods by rising prices

Question 17

How does indirect taxation affect firms

Answer 17

Increases their cost of production causing them to raise prices

Question 18

Advantages of indirect taxation

Answer 18

High tax revenues(inelastic PED)

Use of price mechanism(still consumer choice)

Internalises the externality by quantifying it (tax per unit=external cost per unit)

Question 19

Disadvantages of indirect tax

Answer 19

May not significantly reduce demand if good is inelastic(addictive products such as alcohol)

Hard to quantify the externality/know the correct level of tax

Regressive taxation- more impactful on lower income households

Impacts global competitiveness for UK firms

Question 20

Show the incidence of tax on an externality diagram

Question 21

What is a subsidy

Answer 21

A payment made to producers to encourage the production of a good or service to increase the production of merit goods

Question 22

Advantages of subsidies

Answer 22

Can increase consumption of merit goods

lower prices so more affordable for low income earners

Question 23

Disadvantages of subsidies

Answer 23

Difficult to judge size of externality

Opportunity cost

Firms become reliant

Seen as artificial trade protection

If inelastic, may not increase consumption by that much

Question 24

Draw the incidence of a subsidy on an elastic good

Question 25

What is a minimum price

Answer 25

A floor price on a good or service that is over the market equilibrium to reduce consumption of demerit goods

Question 26

Advantages of minimum price

Answer 26

Producers get a minimum guaranteed price Encourage production of essential goods Excess supplies can be stored

Question 27

Disadvantages of minimum prices

Answer 27

Consumers may pay a higher price Can encourage overproduction Opportunity cost of Gov expenditure Reduce international competitiveness May encourage consumers to seek cheaper, more harmful alternatives

Question 28

What are maximum prices

Answer 28

A ceiling price on a good or service to create excess demand and prevent the consumer from being exploited

Question 29

Advantages of maximum prices

Answer 29

Allow less well of people to afford necessities Lessen monopoly power to exploit consumers

Question 30

Disadvantages of maximum prices

Answer 30

May create an excess of demand-people unable to access product/service Excess demand= queues, shortages and waiting lists Black markets may appear

Question 31

What is state provision

Answer 31

Occurs when the government intervenes in the market in order to supply a good or service such as the NHS and public goods to ensure that an adequate amount of these products are available in the market

Question 32

Advantages of state provision

Answer 32

Individuals do not have to worry about paying at point of consumption Could improve equality Can match government objectives

Question 33

Disadvantages of state provision

Answer 33

Opportunity cost Government may not have sufficient information

Question 34

What is regulation

Answer 34

When the government attempts to create competitiveness in the market to protect the interests of consumers so that they are not exploited by firms

Question 35

Advantages of regulation

Answer 35

Helps consumers make better decisions

Question 36

Disadvantages of regulation

Answer 36

Interference from the 'nanny state' Suppliers may find way around the legislation

Question 37

How does information failure lead to market failure

Answer 37

Consumers consume too much/little of a good due to a lack of information. By fixing it, consumers have more information to make more rational decisions and consume more merit goods and less demerit goods

Question 38

Advantages of correcting information failure

Answer 38

Less costly solution Targeted at specific individual/groups

Question 39

Disadvantages of correcting information failure

Answer 39

Government does not always know best No ideal solution

Question 40

Example of correcting market failure

Answer 40

Food labelling(traffic light system)

Question 41

What does extending property rights do

Answer 41

extending property rights may encourage greater valuing of the environment as a resource

Question 42

What are the advantages of extending property rights

Answer 42

Property rights uses the market mechanism to ensure an efficient use of resources There is an increase in knowledge and expertise for the organisation with the property right. It takes away pressure from the government to assess the pollution There is a greater likelihood that the property resources will be managed carefully to ensure its availability for the future The property owners can charge firms that need to pollute the environment

Question 43

What are disadvantages of extending property rights

Answer 43

It is difficult for a government to extend property right It could be difficult to trace the source of environmental damage The legal costs involved in prosecuting a polluter could be extremely high which may deter victims from taking action

Question 44

What are pollution permits

Answer 44

It is when the government gives firms a legal right to pollute a certain amount e.g. 100 units of Carbon Dioxide per year. The aim of them is to provide market incentives for firms to reduce pollution and reduce the external costs associated with it.