Chapter 8

Question 1

Functions of price

Answer 1

Price signalling (information)
Price rationing (best of best)
Price allocation (Change market) 
Price incentive (What to buy)

Question 2

Advantages and disadvantages of price mechanism

Answer 2

• Promoting consumer sovereignty
• Efficient allocation of resources
• Efficient allocation outcome
• Monopoly producer sovereignty
• Manipulation imperfect information
• Market failure can occur

Question 3

Why pro free market economists believe that gov intervention works badly

Answer 3

Because can lead to gov failure

Question 4

Define of market failure

Answer 4

Market mechanism leads to misapplication of resources in the economy, completely not providing the good or wrong amount

Question 5

Define complete market failure

Answer 5

Market fails to function at all and missing market occurs

Question 6

Define missing market

Answer 6

No market because functions of price have broken down

Question 7

Define partial market failure

Answer 7

Does function, but provides the wrong quantity of a good or service resulting in resource miss allocation

Question 8

Define private good

Answer 8

• Excludable (if you don’t pay you don’t get)

- Rival (one person can eat to stop you from eating for eg)

Question 9

Define public good

Answer 9

• Non rival (cant stop from having)

- Non excludable (limitless)

Question 10

Example of public and private good

Answer 10

Public: beam from lighthouse
Private: apple

Question 11

Define quasi public good

Answer 11

Good that is not fully non rival and not fully non excludable

Question 12

Significance of technological change with public goods

Answer 12

Roads having to pay now charge, congestion charge

Question 13

Define positive and negative consumption and production externalities

Answer 13

Positive
Benefit for third party from production or consumption
Negative
Cost for third party from production or consumption

Question 14

Example of the externalities

Answer 14

PP - Clean water from factory
PC - Pretty view
NP - Pollution
NC - Second hand smoking

Question 15

Define externalities

Answer 15

Public good or bad of an external cost or benefit dumped onto a third party outside of the market

Question 16

Explain the free rider problem

Answer 16

Someone benefitting without paying as a result of non excludability such as a pretty view

Question 17

Why do externalities lead to the wrong quantity produced

Answer 17

Not true cost as dumped onto the third party
Negative : too cheap
Positive : too expensive

Question 18

How is pollution controlled

Answer 18

Pollution permits

Question 19

Private benefit maximisation

Answer 19

MPB=MPC

Question 20

Social benefit maximisation

Answer 20

MSB=MSC

Question 21

Equation for social benefit

Answer 21

Marginal social benefit= marginal private benefit + marginal external benefit

Question 22

Equation for social cost

Answer 22

Marginal social cost = marginal private cost + marginal external cost

Question 23

Draw all the externality graphs

Answer 23

…

Question 24

What does the deadweight welfare loss show

Answer 24

Loss of welfare at free market price

Question 25

Why can allocative efficiency not occur when there are negative externalities

Answer 25

Because MC is not correctly represented. Market mechanism fails to achieve an allocativyly efficient outcome

Question 26

Define merit good

Answer 26

Under provided due to incorrect information, social benefits exceed private benefit. Example is NHS

Question 27

Define social cost

Answer 27

Social cost= private cost + external cost

Question 28

Deadweight welfare loss in merit goods

Answer 28

Does not portray real benefit

Question 29

Define demerit good

Answer 29

Social costs exceed private cost. Over consumed. Information failure

Question 30

What is meant by merit and demerit goods and value judgements

Answer 30

Value judgements are required to understand if a good is merit or demerit

Question 31

Why existence of monopolies lead to market failure

Answer 31

Due to restricting output and raising price

Question 32

Why immobility of factors of production lead to market failure

Answer 32

Waste of scarce resources and unemployment

Question 33

Define competitive policy

Answer 33

Aims to make goods markets more competitive, towards monopolies

Question 34

monopoly control policies

Answer 34

- Compulsory breaking up of monopolies - Use of price controls to restrict monopoly abuse - Taxing monopoly profits - Rate of return regulation - State ownership of monopoly - Removal of barriers to entry

Question 35

Define public ownership

Answer 35

Ownership of industries firms and other assets by central gov or local gov

Question 36

Arguements for privatisation (Public to private)

Answer 36

- Revenue raising - Reduce gov spending - Promotion of competition - Promotion of efficiency

Question 37

Arguments against privatisation (Public to private)

Answer 37

- Monopoly abuse - Short termism over long termism (under investment) - Selling family silver - Free lunch syndrome (believing state owned assets have been sold too cheaply)

Question 38

Define regulation

Answer 38

Imposition of rules and other constraints which restrict freedoms of economic action

Question 39

Two types of regulation

Answer 39

External - | Self - self or voluntary

Question 40

Why is regulation necessary

Answer 40

Protect - Consumers from harmful products - Children and old people - People from self hard - Exploitation of labourers

Question 41

Define deregulation

Answer 41

Removing a previously imposed regulation

Question 42

Two reasons for deregulation

Answer 42

- Promotion of competition | - Removal of unnecessary costs

Question 43

Define regulatory capture

Answer 43

When regulatory agencies act in the interest of regulated firms rather than consumers

Question 44

Difference between pro free market economists and interventionists

Answer 44

Free market- no gov intervention | Interventionist- Markets and uncompetitive and gov knows better

Question 45

Ways a gov can intervene

Answer 45

``` Remove market Provide nudges (force firms to generate positive externalities and remove negative externalities) ```

Question 46

What can the gov do directly to markets

Answer 46

Subsidies | Taxation

Question 47

Draw price ceiling and what is it

Answer 47

Price above its illegal to trade | …

Question 48

Draw price floor and what is it

Answer 48

Price below which it is illegal to trade | …

Question 49

Define gov failure

Answer 49

Occurs when gov intervention reduces economic welfare leading to an allocation of resources worse than the free market outcome

Question 50

Reasons for gov failure

Answer 50

- Pursuit of conflicting policy objectives - Cost to taxpayers - Law of unintended consequences

Question 51

What could price ceiling and price floors cause due to excess demand

Answer 51

Black market(rising price)