Distribution Of Income And Wealth, Poverty And Inequality Part 1

Question 1

What do the price mechanisms do?

Answer 1

Determine the market price
Allocate resources in a free market economy

Question 2

What are the 3 main function to allocate resources used by the price mechanism?

Answer 2

Rationing
Incentive
Signalling

Question 3

Explain the function of the price mechanism: rationing?

Answer 3

An increase in price will discourage demand and consequently rations resources (because demand decreased)

Question 4

Explain the function of the price mechanism: incentive?

Answer 4

The price will encourage a change in behaviour in. Producers and consumers. Eg profit acts as an incentive and high prices act as an disincentive

Question 5

Explain the function of the price mechanism: signalling

Answer 5

It shows where the resources need to be allocated. A high price tells firms that there is profit to be made

Question 6

How is the basic economic problem solved?

Answer 6

The price mechanisms

Question 7

What are the advantages of price mechanisms?

Answer 7

It is unbiased
It can be useful to consumers and producers
It gives consumers sovereignty in the market so they will have a “spending vote”
This is generally works well

Question 8

What are the disadvantages of the price mechanisms?

Answer 8

It doesn’t consider what the distribution of income is the free market and the price mechanism ignores equality
In the free market merit goods and public goods are underproduced, which require government intervention

Question 9

When does market failure occur?

Answer 9

Whenever a market leads to the misallocation of resources

Question 10

What is a misallocation of resources?

Answer 10

This is when resources are not allocated to the best interests of society. There could be more output in the form of goods or services if the resources were used in a different way

Question 11

Why should we care about market failure?

Answer 11

Economic and social welfare is not maximised

Question 12

What are the different types of market failure?

Answer 12

Externalities
The under provision of public goods
Information gaps
Monopolies
Inequality in the distribution of income and wealth

Question 13

Explain the type of market failure externality?

Answer 13

If there are negative externalities then social welfare is not maximised as there will therefore be marginal social costs as well as marginal private cost

Question 14

Define externality?

Answer 14

The cost or benefit that a third party received from an economic transaction

Question 15

Explain the market failure the under provision of public goods

Answer 15

Public goods are non excludable and non rival, and they are underproduced in a free market because of the free rider problem

Question 16

Explain the market failure: information gaps?

Answer 16

It is assumed that the consumers and producers have perfect information when making decisions. This is not true. This imperfect information leads to a misallocation of resources

Question 17

Explain the market failure: monopolies

Answer 17

In this marker structure consumers are often overcharged. This leads to underconsumption of the good or service. This leads to a misallocation of the resources as consumers’ needs and wants aren’t fully met

Question 18

Explain the market failure: Inequalities in the distribution of income and wealth

Answer 18

Wealth is not distributed equitably. This can lead to negative externalities such as social unrest

Question 19

Define income?

Answer 19

A flow of money

??.?.?.?.??.

Question 20

Define wealth?

Answer 20

The value of assets some on owns

??????

Question 21

What are the 2 variations of market failure?

Answer 21

Complete and partial market failure

Question 22

When does complete market failure occur?

Answer 22

When there is a missing market (the good is not being sold)

Question 23

When does partial market failure occur?

Answer 23

When the market produces the good but at the wrong quantity or the wrong price or both

This shows resource misallocation

Question 24

Where are public goods missing?

Why is this bad?

Answer 24

The free market
They provide positive externalities

Question 25

What are the characteristics of public goods?

Answer 25

They are non excludable and non rival and they are non reject-able

Question 26

What does non excludable mean?

Answer 26

You can’t prevent someone from using it

Question 27

What does non rival mean?

Answer 27

The benefit of someone else from the good doesn’t decrease when someone else is using it

Question 28

Why are public goods under provided in the private sector?

Answer 28

They are non excludable meaning that you have the free rider problem - people won’t buy the good if they think someone else will buy it

As a result people won’t buy public goods and as a result there is little profit to be made so private firms won’t sell them

It is also difficult to give them a value because it is difficult to value what the consumer gets from the good.
Generally consumers also undervalue the benefits of public goods

Question 29

How are public goods provided?

Answer 29

By the government who use tax revenue to provide them. However the quantity provided will likely be less than the socially optimum quantity

The government needs to estimate the the social benefit of the good when deciding what output to produce

Question 30

Describe a private good?

Answer 30

These goods are rival, excludable and rejectable