Chapter 6- Market Failure Flashcards
What is market failure?
A situation where market forces lead to a suv-optimal allocation of resources
What are externalities?
A good or bad impact of a transaction on people who are external to that transaction.
What are positive and negative externalities?
Positive- benefits form production or consumption of a good or service that extend beyond the trading parties (buyer/seller)
Negative- Costs from production or consumption of a good or service that extend beyond those paid for by the trading parties.
What is a merit and demerit good?
Merit- good that generate positive externalities to society as a whole (social benefits) e.g. vaccinations and education
Demerit- good that generate negative externalities to society as a whole (social benefits) e.g. smoking
Failure to provide public goods:
Non-diminishability
Non-exclusivity
Non-diminishability- serve a large number of people ay exactly the same cost
Non-exclusivity- not an exclusive good as everyone can access it (like NHS)
What is the free-rider problem?
If no one will voluntarily pay for a good/service, no private enterprise is likely to supply the good.
(most obvious remedy to this problem is the
Exploiting market power:
large firms charging unfairly high prices or paying unfairly low wages
What is the free market?
Government aren’t involved
What is an indirect tax?
A tax levied on spending.
PED and impact of indirect taxes
if PED is inelastic then quantity demanded will not fall significantly as a result of price rise
If PED of supply is inelastic then quantity supplied will not fall significantly and in some cases supply may be fixed in the short term regardless of price.
So imposition of indirect tax may not achieve a significant reduction in the consumption of a demerit good.
What are the polluters pay policies?
Tradable permits (firm allowed to produce a certain level of pollution or else will need to pay additional permits)
Charges for dumping waste (landfill tax)
Fines for breaching regulations
What is subsidy and its aims?
financial contribution from the government to reduce the costs of production.
- reduce cost of living by making essential goods affordable
- to encourage production or consumption of merit goods
- to stabilise incomes of producers (e.g farm subsidies)
PED and the impact of subsidies:
If the PED of demand is low then quantity demanded will not rise significantly as a result of lower price
If PED of supply is low then quantity supplied will not rise significantly bc supply may be fixed in the short term regardless of price
Price Regulation:
gov can set max and min prices for the goods/services.
What are minimum pricing policies?
price level below which the market price will not be permitted to fall
