Market failure Flashcards
(52 cards)
types of market failure
PUMPIN
Public goods
Unequal distribution of income & wealth
Monopolies
Positive externalities
Immobility
Negative externalities
Three characteristics of public goods
non excludable
non rival
non rejectable
the free rider problem
as public goods are non excludable, it is difficult to charge people for benefitting once a product is available, leading to the under provision of a good and thus causing market failure
quasi public goods
near public goods as they have some of the characteristics of public goods. they are semi-non-excludable and semi-non-rival
income
a flow of money going to factors of production (wages from jobs, rental income from property, interest from savings, profits flowing to shareholders)
wealth
the current value of a stock of assets owned by someone or society as a whole (savings in bank accounts, ownership of property, shares/stocks in businesses, wealth held in pension schemes)
the 45° line on a lorenz curve represents
perfect equality
the further the lorenz curve is from the 45° line…
the more unequal the distribution of wealth and income
Gini coefficient- definition + equation
a measure of statistical dispersion intended to represent the income or wealth distribution of a country’s residents
Gini coefficient = A / A+B
if Gini coefficient is 0
perfect equality
if Gini coefficient is 1
maximal inequality
UKs gini coefficient
0.34
underlying causes of inequality
-education & qualifications
-impact of state (nmw, tax etc)
-inheritance
-virtuous cycle of W & Y inequality
-luck
policies to lower inequality
-higher minimum wage
-improved education services
-more progressive income tax
-increase benefits
-increase personal allowance
what does the laffer curve show
the relationship between tax rates and the amount of tax revenue collected by governments
why might total tax revenues fall if tax rate increases
-increased rates of tax avoidance
-greater incentive to evade taxes
-possible disincentive effects in labour market
-possible brain drain effects
absolute poverty
when a household doesn’t have sufficient income to sustain a basic acceptable standard of living. less than $1.90 a day
relative poverty
a household income that is considerably lower than the median level of income within a country. household disposable income of less than 60% of medians
inequality can lead to
-social unrest, tensions & civil disobedience
-a self-perpetuating poverty cycle can become embedded
-a loss of allocative efficiency
pros of inequality
-incentive effect
-entrepreneurs require rewards
-trickle down effect
-fairness
information failure
when people have inaccurate or incomplete data and so make potentially wrong decisions
causes of information failure
-long term consequences
-complexity
-asymmetric information
-price information
moral hazard
when the party with superior information alters their behaviour in such a way that benefits them while imposing costs on those with inferior information
policies for addressing information failure
-compulsory labelling
-improved nutritional information
-campaigns to raise awareness
-consumer protection laws
-industry standards/guarantees for selling used products
