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A Level Economics > 2: Market Failure > Flashcards

2: Market Failure Flashcards

(62 cards)

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1
Q

Market failure

A

When the price mechanism leads to a misallocation of resources

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2
Q

Complete market failure

A

Happens where unless the good or service is provided outside the price mechansim there wouldn’t be a market for it i.e. the military

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3
Q

Partial market failure

A

Happens when the private sector may partially provide it but at the wrong price or quantity i.e. private health care vs NHS

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4
Q

What are the benefits of a good seperated into?

A

Private and external benefits

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5
Q

What are the costs of a good seperated into?

A

Private and external costs

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6
Q

What is a source of market failure due to costs and benefits of goods?

A

Some are over/under consumed

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7
Q

Social benefit =

A

External + private benefits. Socially optimal level is where it is allocatively efficient to produce and consume -> a different quantity to what is observed in the free market

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8
Q

What is the difference between the social benefit and the private benefit?

A

The external benefit

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9
Q

When is the external benefit constant?

A

When social + private curves are parallel

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10
Q

When is the external benefit greater as output increases?

A

When social + private curves diverge

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11
Q

Causes of market failure

A

Externalities
Lack of public goods
Infomation gaps

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12
Q

Externalities

A

Effects of producing/consuming a good on a 3rd party

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13
Q

Positive consumption externalities

A

‘Good’ externalitie created in consumption of a good
MSB is more than MPB
Consumers won’t account for the benefit of the externality and this good will be underconsumed i.e. education

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14
Q

Negative consumption externalities

A

‘Bad’ externality created in consumption of goods/services
MSB is less than the MPB and the good will be overconsumed i.e. cigarettes

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15
Q

Positive production externalities

A

‘Good’ externality incurred when producing good/service
MSC is less than the MPC and the good will be underproduced

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16
Q

Negative production externailities

A

‘Bad’ externality incurred when producing good/service
MSC is greater than the MPC and the good will be overproduced (Vs socially optimal level) i.e. factory noise + air pollution

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17
Q

Private cost/benefit

A

Benefit/cost to an individual in the market

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18
Q

External cost/benefit

A

Cost/benefit a 3rd party receives due to a positive/negative externality

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19
Q

Social cost/benefit

A

Cost/benefit to society due to a positive/negative externality

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20
Q

What do firms only account for when producing goods?

A

MPC

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21
Q

What do consumers only account for when consuming goods?

A

MPB

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22
Q

Deadweight welfare loss

A

Loss to society when overproducing something that has a negative externality

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23
Q

Characteristics of a public good

A

Non-rivalrous (more than one person can consume)
Non-excludable (not paying can still consume)

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24
Q

Characteristics of a private good

A

Rivalrous
Excludable

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25
Why do the private sector rarely produce public goods?
No incentive
26
What does the government do to produce public goods?
Intervenes and decides suitable amount of public goods for society. Has to guess the MSB which can be inaccurate
27
Free-rider problem
Can't exclude someone from public goods who can't pay for it, so everyone gets the same benefit -> disincentives people from producing a good in the free market which is a form of market failure
28
What else disincentives production of a public good in the free market?
It is hard to price. Producers may overvalue, consumers may undervalue
29
Asymmetric infomation
Both parties in a transaction have unequal amounts of infomation. Can cause a decline in price or quantity of products solds. i.e. producer may know a product is faulty and consumer doesn't -> misallocation of resources + limits ability to make rational choices and pay appropriate price for a product
30
Thin market
Buyers + sellers discouraged from participating in a market, fewer active in said market
31
Thick market
Lots of buyers and sellers
32
What do buyers with imperfect infomation believe?
Price = Quality i.e. Michelin Star > Mcdonalds. Leads to markets struggling to reach an equilibrium price and quantity
33
Demerit goods
Negative effects of a good i.e. smoking
34
Merit goods
Positive effects of a good i.e. education
35
What can solve overconsumption of a demerit good?
Taxes/bans -> correct market failure
36
What can encourage consumption of merit goods?
Subsidies -> correct market failure
37
Advantages of a subsidy
Reduce cost of product and allow firms to exploit economies of scale -> will improve long run efficiency + competitveness abroad Consumer preference may change
38
Disadvantages of a subsidy
Encourages laziness from producers as don't need to be efficient Elasticity of demand determines how effective a subsidy is May be of a lower standard than the good they are replacing
39
Max price
Used to increase consumption of a good If max price above equilibrium not effective, if below it there will be more demand. Shortage of supply leads to excess demand however -> lead to a good being sold in the black market as less people have it
40
Pros of max price
Protects consumers from exploitation Makes firms more efficient as pay attention to costs
41
Cons of max price
Deters firms from entering a market Limited investment into a market due to limited profit Firms could cut costs too aggressively to boost profit leading to a poor quality good
42
Min price
Corrects market failures in monoplies If below equilibrium no change, if above there will be less demand but increased supply leading to excess supply
43
Min price pros
Suppliers get reasonable price for goods
44
Min price cons
Consumers pay more for goods Resources wasted when excess goods are destroyed Resources allocated inefficently (excess supply) Opportunity cost
45
Tradeable pollution permits
Allocated to businesses to control pollution levels
46
Tradeable pollution permits pros
Put cap on pollution Lower pollution for a firm, more they can benefit -> incentive to lower pollution levels Government makes revenue
47
Tradeable pollution permits cons
Costs Deciding on pollution level is difficult Market for permits is subject to failure
48
What does the European Union emissions trading system (ETS) do to incentives less pollution?
Cut members of permits, forcing firms who don't comply to buy more permits
49
Regulation pros
Correct market failures that arise from externalities i.e. limit pollution a firm makes Can control monoplies and stop them taking advantage of customers and reducing welfare Legislation provides a means of punishing firms for their anti-competitive behaviour Protects environment
50
Regulation cons
Hard to know what industries to regulate and how to regulate them -> needs value judgement i.e. what level to set for pollution Expensive to monitor firms and opportunity cost Expensive to follow regulations -> firms may close down or relocate due to high costs
51
Deregulation pros
Allocation of resources will improve due to less governmet intervention By reducing the bureaucracy associated with legislation, efficiency will improve
52
Deregulation cons
Customers no longer protected from the anti-competitive behaviour from firms and may lose out Some market failures can't fix themselves i.e. externalities -> deregulation of industries may lead to an increase in pollution due to tragedy of the commons Some natural monoplies need regulation i.e. sewage services
53
Renewable obligation certificates (ROCS)
Set regulations to try to promote the use of renewable energy sources. Suppliers that don't comply with purchasing energy from accredited electricity generators will be fined -> money is shared between suppliers that do
54
State-provision
When states provide good/services to consumers. Either provided by government themselves (education) or purchased via private sector so public use for free (NHS) -> paid for by tax revenue
55
State provision pros
Reduce inequality by distributing money from wealthy to poor Provides services that my not be profitable (some train routes) Value judgements decide what state can and can't provide well
56
State provision cons
Less incentive to make a service as efficient as possible if it isn't profitable -> economics incentives for efficiency may be eroded Opportunity cost Asymmertic infomation may lead to government failure
57
When have the government spread infomation to overcome market failures?
Diptheria vacccine - 1942 advertised by govt as people though it was more common during war Polio vaccine - 1956 campaign to vaccinate everyone under 40. Eradicated by 1980 Lifestyle campaigns - 2004, DrinkAware, Change4Life
58
Government failure
The unintended worsening allocation of resources as a consequence of a policy the government has implemented to correct market failure. Produces net welfare loss i.e. Council charging for forms of waste disposal may increase fly-tipping
59
Administrative costs
Resources needed to implement government intervention. If costs too high, intervention not worthwhile. Governments may underestimate costs of their projects
60
Bureaccuracy
Individuals working for the government don't see benefits directly Governments also very large and may suffer from material diseconomies of scale
61
Imperfect infomation
Limits governments ability to critically assess market failures and possible solutions -> right decision may not be made and government failure may arise
62
What can government failure lead to?
Conflicting polivy objectives - trying to satisfy one objective may be compromised or politicians may be influenced by what's politcally acceptable or not i.e. can't ban cars as people rely on them or macro economic policies clash with environmental ones Market distortions - can affect the way price mechanism works i.e. income taxes give less incentive to work -> reduces efficiency, subsidies allow firms to make profits without being efficient, min and max price can distort price signals (overproduction as firms can gurantee a min price)

A Level Economics (15 decks)

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