4.1.8 Market Mechanism, Market Failure and Government Intervention in Markets (ONLY 4.1.8.1-4.1.8.6) Flashcards
(28 cards)
What does the price mechanism do?
Moves resources to where they are demanded or where there is a shortage
And
Removes resources from where there is a surplus
What are the 3 main function the price mechanism uses to allocate resources?
Rationing
Incentive
Signaling
When does market failure occur?
Whenever a market leads to a misallocation of resources
What are the types of market failure?
- Externalities
- Under-provision of public goods
- information gaps
- inequalities in income/wealth distribution
What is the free-rider problem?
Once a public good is produced, there is no way to control who benefits from it
What is a public good?
A non-excludable, non-rival good
What is a quasi-public good?
Goods that have characteristics of both public and private goods
What is a tax?
A compulsory Levi imposed by the government to de-incentivise production of a good
What is a subsidy?
A payment made by the government to incentivise the production of a good
When does partial market failure occur?
When the market produces a good but it is the wrong quantity or the wrong price
Due to misallocation
When does complete market failure occur?
When there is a missing market as the market does not supply the products at all
What does non-rival mean?
The benefit other people receive from the good does not diminish if more people consumer the good
What is the tragedy of the commons?
Individuals prioritizing personal gain over the well-being of society
What are private goods?
Rival and excludable goods
What is an externality?
The cost or benefit a third party receives from an economic transaction
What are demerit goods?
Goods which yield negative externalities when consumed
What are merit goods?
Goods which yield positive externalities in consumption
Calculation for social costs
Private costs + external costs
What does private cost determine?
- How much the producer will supply
- The market price which the consumer pays for the good
What does private benefit refer to?
- The benefits a consumer will receive from consuming the good
- Firm’s revenue from selling the good
Social beinift calculation
Private benefit + external benefit
Where is the social optimum position?
Where MSC = MSB
(The point of maximum welfare)
How do you show negative externalities on a graph?
MSC>MPC
