Government Intervention in the Market Flashcards
(11 cards)
When is social efficiency achieved?
When marginal social benefit = marginal social cost
It is not possible to make anyone better off without one person being worse off
What is the outcome when the marginal social benefit and the marginal social cost are unbalanced?
When MSB> MSC more is produced and more is consumed
when msb<msc less is produced and less in consumed
What is equity?
concept of fairness/fair distribution of societys resources
What are the types of market failure?
- Market Power
- Deadweight loss under a monopoly
- Externalities
- Public goods
Expand on market power
Market power can lead to a lack of social efficiency
- The market has a consumer and producer surplus
What is deadweight welfare loss under monopoly?
The loss of total consumer and producer surplus compared to perfect competition
- social efficiency is not maximised
This causes a decrease in a monopoly’s total surplus (consumer + producer)
What are externalities
They are an add on to the transaction (not affecting the pure transaction)
They can be positive or negative
Can have external costs of production and external costs in consumption
When are social optimums reached in regards to externalities
Suggest ways the government may intervene with the market
- Taxes and subsidies used to correct externalities e.g. windfall taxes and per unit subsidies
- Laws prohibiting behaviour that imposes external costs
- Have regulatory bodies
- May out in price controls
What are the advantages of a free market
- Automatic adjustment
- dynamic advantages in capitalism
- high degree of competition even under monopoly/oligopoly (via possible market contest ability, competition from other closely related industries, threat of competition from abroad, countervailing powers and competition from corporate control
