cc4 market failure

Question 1

what is market failure

Answer 1

this is when there is inefficient allocation of resources

Question 2

why does market failure occur

Answer 2

• a lack of profit incentive

- asymmetric information

Question 3

define externalities

Answer 3

this is third party affect cause by production or consumption of a product that isn’t represented in the price of the good

Question 4

state the first, second and third party in a market transaction

Answer 4

first - supplier
second - consumer
third - anyone that didn’t buy the product

Question 5

what is a negative externality

Answer 5

this is when a third party is negatively affected as a result of production or consumption of a product

Question 6

what is the social cost

Answer 6

social cost = private cost + external cost

this is the total cost to society

Question 7

what is marginal private cost (MPC)

Answer 7

this is the cost to the firm of producing an additional unit

Question 8

what is marginal external cost (MEC)

Answer 8

this is the cost to the third party of the production of an additional unit

Question 9

what is marginal social cost (MSC)

Answer 9

this is the total cost of the production of an additional unit
MSC = MPC + MEC

Question 10

what is social benefit

Answer 10

social benefit = private benefit + external benefit

Question 11

define an indirect taxes

Answer 11

these are taxes imposed on producers, and unlike direct taxes they are imposed on the products that they produce

Question 12

define ad valorem taxes

Answer 12

these are taxes that are percentages of the original price

Question 13

define a specific tax

Answer 13

these are taxes that are fixed no matter the price

Question 14

what is the current rate of VAT

Answer 14

20%

Question 15

why are indirect taxes used

Answer 15

• to gain revenue

- to reduce the consumption of goods with negative externalities

Question 16

state the advantages and disadvantages of using an indirect tax to reduce the negative externalities

Answer 16

+ the higher prices will reduce consumption
+ large amounts of revenue can be raised by these taxes

• can be regressive
• won’t necessarily reduce consumption if the demand is inelastic
• the government may not spend the revenue in reducing the negative externalities

Question 17

what is air passenger duty (APD)

Answer 17

this is a tax on the passengers that the airline has to pay.

Question 18

pros and cons of (APD)

Answer 18

+ raises revenue for the government

• this tax doesn’t prevent the pollution or the noise pollution surrounding Heathrow
• it doesn’t reduce the amount of flights
• all it does is cause damage to the economy as more money is taken out of the economy as a tax and there is less passengers flying

Question 19

what are regulations

Answer 19

these are a set of boundaries that companies are not allowed to break.
if they break the rules they experience heavy fines

Question 20

what are the problems with regulations

Answer 20

• regulations can be costly to enforce, ie - paying inspectors
• firms have to pay compliance costs - eg they need to retrain or invest in new cleaner tech
• fines have to be set very high to deter the richest firms

Question 21

why do we have regulations

Answer 21

to protect things that if left to the markets would likely be exploited eg

• workers rights
• the environment
• animal testing
• land exploitation

Question 22

what are the arguments against regulations

Answer 22

it limits businesses

they can be unreasonable forcing businesses to close

Question 23

what are pollution permits

Answer 23

these are permits that correspond to a certain amount of pollution. these can be traded between companies.
this encourages companies that can cut down on pollution to do so as they can sell the un-needed permits.

Question 24

how well did pollution permits work

Answer 24

when the eu introduced this concept it wasn’t very effective as the eu issued too many permits rendering the price too low. this meant the incentive to reduce was very low

Question 25

what is a subsidy

Answer 25

this is a government grant given to companies to encourage research in those areas

Question 26

describe the effects of a subsidy

Answer 26

• the subsidy will reduce the cost of production
• this allows firms to lower there prices and keep a profit
• the lower price gives these products an advantage in the markets
• this leads to greater consumption of those products

Question 27

arguments against subsidies

Answer 27

• can distort price signals
• is seen as unfair
• can lead to government failure
• can encourage inefficiency
• the international trade is dominated by subsidised products out-competing products from poorer nations

Question 28

what is a pure public good

Answer 28

a good that is non-excludable, non-rejectable and non-rivalrous

Question 29

what does non-rejectable mean

Answer 29

an individual cannot choose to not benefit from this god eg - nuclear defenses, a person couldn’t choose to not be protected from missiles

Question 30

what does non-excludable

Answer 30

it is impossible to exclude people from using the product

Question 31

what does non-rivalrous mean

Answer 31

this means that the consumption of this good won’t affect the ability of another person from consuming the same good

Question 32

describe the free rider problem

Answer 32

the problem is that there is no incentive for people to pay for public goods as they are non-excludable so they can use it regardless of if they payed for it

Question 33

what is a quasi-public good

Answer 33

this is a good that possesses some of the aspects of a public good but not all

Question 34

what is government provision

Answer 34

this is when the government provides goods and services

Question 35

why does the government provide public goods

Answer 35

this is because essential goods for the economy wouldn’t be provided if it was left up to the markets as they aren’t profitable

Question 36

positives of government provision

Answer 36

• essential goods and services wouldn’t be provided other wise
• allows for affordable health care
• because of economics of scale the government can provide goods at a lower cost
• social welfare is improved