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Economics Aqa A Level > Chapter 8 > Flashcards

Chapter 8 Flashcards

(72 cards)

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1
Q

Market failure

A

Free market leads to misallocation of resources

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2
Q

Complete market failure (missing market)

A

Free market fails to create a market for a good or service

example: street lighting

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3
Q

Rationing function

A

Increase price limits to demand to who can afford a good or service

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4
Q

Signalling function

A

Prices provide important information to market participants

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5
Q

Incentive function

A

Prices create incentives for market participants to change their actions

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6
Q

Allocative function

A

acts to divert resources to where what’s gained in return can be maximised

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7
Q

Partial market failure

A

When a market for a good/service exist but it’s consumed or produced in quantities that don’t maximise economic welfare

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8
Q

Public good

A

Non excludable and non rivalrous in competition

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9
Q

Non excludable

A

Not possible to prevent non-paying customers from consuming a good

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10
Q

Non rivalrous

A

One persons enjoyment of a good doesn’t diminish another person’s enjoyment of the good

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11
Q

Free rider problem

A

Consumers not needing to pay/contribute to the production of the good to recieve the benefit from that good

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12
Q

Private goods

A

Excludable and rivalrous in consumption

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13
Q

Quasi-public good

A

Shows some but not all characteristics of a public good (can be excludable and rivalrous but also not)

Example: libraries and parks

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14
Q

Externalities

A

Knock on effect (consequence) ,on third parties, of an economic transaction

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15
Q

Marginal social cost (MSC)

A

Marginal private cost (MPC) + Marginal external cost (MEC)

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16
Q

Marginal social benefit (MSB)

A

Marginal private benefit (MPB) + Marginal external benefit (MEB)

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17
Q

Where’s social welfare optimised?

A

MSB = MSC

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18
Q

Positive externality

A

Positive knock on effect of an economic transaction on third parties (external benefit)

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19
Q

Private cost

A

Cost to an individual producer in a market transaction

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20
Q

Social benefit

A

Private benefit + external benefit

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21
Q

Private benefit

A

Benefit to an individual consumer involved in a market transaction

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22
Q

Negative externality

A

Negative knock on effect of an economic transaction on third parties (external cost)

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23
Q

Social cost

A

Private cost + external cost

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24
Q

Information failure

A

Source of market failure where market participants don’t have enough information to make effective judgements about the correct levels of consumption and production

(People smoke, unaware of the health problems)

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25
Environmental market failure
Negative externalities arising from the over exploitation of environmental resources
26
Property rights
Legal rights of ownership or use of an economic resource
27
Tragedy of the commons
The overuse or exploitation of resources (oceans, forests or atmosphere) that are not owned by individuals or organisations
28
Merit hood
Good that would be under consumed in a free market but government believes it’ll benefit society (Education)
29
Demerit good
A good that would be over consumed in a free market but the government considers bad for society Example: smoking
30
Perfect market features
Perfect information No barriers to entry or exit Homogenous products and FOP Large number of buyers and sellers Perfect mobility of FOP
31
Occupational immobility
Workers find it difficult to move between occupation due to the lack of desirable skills
32
Geographical immobility
Workers have difficulty in moving to locations where jobs are avaliable for reasons such as lack of affordable housing or family commitments
33
Market imperfections features
Imperfect/asymmetrical info Monopolies Immobility of FOP
34
Equity
Notion of fairness in society
35
Inequitable distribution of income and wealth
The way Income and wealth are distributed in society is considered unfair
36
Reasons for government intervention in markets
Correct market failure Achieve equitable distribution of I + W achieve governments macroeconomic objectives
37
Indirect tax
Tax on spending, sometimes used to reduce consumption of demerit goods
38
Advantages of indirect tax
Strong tax revenues (if placed on inelastic demand goods) Use of price mechanism (consumers + producers can choose how to adjust) Assuming governments applied correct rate, tax helps to internalise external cost (include externalities to price mechanism)
39
Disadvantages of indirect tax
Often placed on inelastic goods, so quantity demanded may not fall as much Difficult to place monetary value on external costs (impossible to internalise) Indirect tax is regressive in nature, take a larger % of poorer persons income (inequitable) Uk firms international competitiveness may be reduced, increasing their production costs
40
Subsidies
Payment made to producers to encourage increased production of a good or service
41
Advantage of subsidies
Increase consumption, closer to social optimum, helps internalise external benefits Reduce prices, making it more affordable, so reduces effects of relative poverty
42
Disadvantages of subsidies
Difficult to measure external benefits Opportunity cost, money could’ve been used on hospitals Firms may become reliant on subsides, encourage productive inefficiency/laziness, reducing international competitiveness Subsides for Uk firms may be viewed as artificial trade protection, encouraging them to retaliate making their own forms of protection Subsidies placed on inelastic goods may reduce price but not significantly increase consumption
43
Minimum prices
Price floor above the free market equilibrium price
44
Advantage of minimum prices
Give producers guaranteed minimum price and income, helps standard of living (farmers) Encourage production of essential products Excess supply may be bought up and stored, to be released in times of future shortage
45
Disadvantage of minimum prices
Consumers pay higher price, reducing disposable income Encourage over production, inefficient use of resources If governments purchase excess supply, leads to opportunity cost Reduce international competitiveness if price is raised above foreign competitors Reducing affordability of demerit goods, may encourage people to seek more harmful alternatives (gov failure)
46
Maxmimum price
Price ceiling above which prices aren’t aloud to rise
47
Adv of maximum prices
Increases affordability for certain goods and services (medication) promoting equity Reduce the ability of firms with monopoly power to exploit by charging higher prices
48
Disadvantages of maximum prices
Potential excess demand implies queues, shortages or waiting lists (healthcare) May lead to black markets for goods and services (ticket events/music) Due to excess demand, some who may want the good/service may feel frustration because they can’t obtain it, dissatisfaction
49
Regulation
Rules or laws used to control or restrict the actions of economic agents in order to reduce market failure
50
Examples of regulations
Banning smoking in public places Minimum legal age to drink Maximum emissions levels on new cars Noise thresholds on aeroplanes Setting up regulatory bodies (OFGEM) on dominant forms Establishing green belt lands
51
Examples of attempt to correct information failure
Compulsory labelling on food (traffic lighting on levels of fats, salts, etc Strong health warning on packs of cigarettes Tv advertising campaigns
52
Direct provision
Governments may say that provision of a good or service can’t be left to the free market as it may be provided in insufficient or excessive quantities. So they’ll provide it
53
Pollution permit
Right to use or exploit an economic resource to a specific degree (fishing permit/ carbon dioxide release)
54
Advantages of pollution permits
Provides incentives for firms to reduce carbon emissions Revenues raised from selling permits can be used to fund green technologies and environmental schemes
55
Disadvantages of pollution permits
Governments may suffer from imperfect information about the full social costs of CO2 emissions (gov failure) If price of permits is set too low firms won’t be incentivised to cut their C02 emissions
56
Competition policy
Government policy that aims to make markets more competitive
57
Competition policy examples
Legislation Privatisation Deregulation Prevention of mergers Uk competition policy is overseen by CMA (competition and markets authority)
58
UK competition policy focus
Monopolies Mergers Restrictive trading practices Promoting competition
59
CMA tackle monopolised by
Compulsory break-up (so efficiency and consumer sovereignty are maximised when competition is encourages) Windfall taxes on supernormal profits Price controls (max prices) Public ownership (nationalisation, so it targets allocatively efficient) Privatisation (opposing view, held by conservatives, may lead to greater dynamic efficiency in terms of innovation + stock market discipline) Deregulation (removing barriers to entry making monopolies more contestable)
60
Merger
When two or more firms willingly join together
61
Takeover
When two or more firms unwillingly join together
62
Restrictive trading practices
Forming a cartel to fix the price of a good or service Refusal to supply a specific retailer Full line forcing (obliging a retailer to stock all products in the firms current range) Charging discriminatory prices (bulk orders)
63
Public ownership
Government ownership of firms, industries or other assets
64
Nationalisation
Transfer of assets from the private sector to public ownership
65
Advantages of public ownership
Taking into account of externalities Social welfare (allocatively efficient) Strategic importance (rail,energy, steel and water are too important to the economy) (argument used to support the partial nationalisation of several Uk banks)
66
Privatisation
Sale of government owned assets to the private sector
67
Advantages of privatisation
Raising extra revenue for the government ( short term) Promoting competition Promoting efficiency (cut production costs to remain competitive) Popular capitalism (encourages greater share of ownership by the general public putting greater pressure on firms to act in the public interest)
68
Disadvantages of privatisation
Exploitation of monopoly power Ignores externalities
69
Regulatory capture
When regulatory bodies (OFGEM for gas + electricity suppliers) become too influenced by the companies they’re meant to oversee
70
Deregulation
Removal of rules and regulations to increase the efficiency of markets
71
Government failure
Government intervention in a market creates a problem elsewhere and reduces overall economic welfare
72
Reasons for government failure
Inadequate information (Difficult to place a monetary value on external costs and benefits) Unintended consequences (Create a problem elsewhere, taxes on alcohol may lead to hard drugs becoming cheap and encouraging consumption in them) Market distortions (May lead to inefficiencies such as shortages or surpluses) Administrative costs (Intervening costs to regulate maybe higher) Regulatory capture

Economics Aqa A Level (15 decks)

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