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Market Failure Flashcards

(72 cards)

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1
Q

Define market failure (2)

A

failure to allocate scarce resources to maximise social welfare in the free market

inefficient allocation of resources

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2
Q

3 forms of market failure (3)

A

overallocation - too much is sold/consumed

underallocation - too little is sold/consumed

missing market - public goods

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3
Q

Define an externality (2)

A

when the actions of producers/consumers has a positive/negative impact on 3rd parties not involved

not market failure, causes market failure

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4
Q

Define marginal private costs (MPC)

A

costs to producers of producing one more unit of a good

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5
Q

Define marginal social costs (MSC)

A

costs to society of producing one more unit of a good

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6
Q

Define marginal private benefits (MPB)

A

benefits to consumers from consuming one more unit of a good

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7
Q

Define marginal social benefits (MSB)

A

benefits to society from consuming one more unit of a good

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8
Q

Define negative production externality (3)

A

production of good/service has negative impact on 3rd party not involved in production/consumption

overallocation of resources + more goods produced in relation to social optimum

e.g pollution from factories

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9
Q

Welfare loss of negative production externality

A

loss of social benefits due to overproduction of good

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10
Q

Policies to correct negative production externalities (4)

A

Indirect Taxes

Carbon Taxes

Tradeable permits

Government Legislation

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11
Q

Indirect taxes as a way to correct market failure (3)

A

tax per unit should be = externality per unit

shifts MPC leftward to MSC

lower quantity produced (social optimum) + higher price

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12
Q

Carbon Taxes as a way to correct market failure (2)

A

tax per unit of carbon emissions

incentivises firms to switch to less-polluting energy sources

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13
Q

Real world examples of carbon taxes correcting externalities (5)

A

Carbon taxes placed for UK, USA, Australia, etc

businesses opposed to carbon taxes as they raise costs

consumers opposed as they raise prices

Australia - carbon taxes repealed because it was considered to destroy jobs

raises household energy prices –> regressive tax + bad for poor

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14
Q

Tradeable permits as a way to correct market failure (5)

A

government give each firm a number of permits

permits allow firms to pollute specific amount

can be traded in a market

non-polluting firms = can sell permits + reduce costs

polluting firms = must buy permits + increase costs

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15
Q

Define negative consumption externalities (2)

A

consumption of good/services has negative impact on 3rd party unrelated

e.g gasoline in cars - pollution, secondhand smoke from cigarettes

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16
Q

Welfare loss of negative consumption externalities (3)

A

MPB > MSB –> overconsumption of good

loss of social benefits from overproduction

correcting externality = society would receive benefit of welfare loss

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17
Q

Advantages of carbon (indirect) taxes (2)

A

internalise externality - costs previously external are now internal –> paid by consumers + producers

carbon taxes > indirect taxes –> tax resources instead of output so incentivise producers to switch to less-polluting resources

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18
Q

Advantages of tradeable permits (2)

A

incentivises firms to reduce pollution + switch to more sustainable resources

does not disrupt the market equilibrium

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19
Q

Disadvantages of indirect taxes for correcting market failure (4)

A

not targeted - difficult to identify the different methods that produce different pollutants

difficult to identify “harmful” pollutants

difficult to identify monetary value of harm done

indirect taxes are regressive –> may disadvantage lower income groups

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20
Q

Disadvantage of tradeable permits for correcting market failure (2)

A

tradeable permits may be distributed unfairly - potential political favortism

difficult to identify the amount of permits to distribute –> too high = ineffective, too low = permits too costly

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21
Q

Define positive consumption externality (2)

A

production of good/service has positive impact on 3rd party not involved

e.g car factory - brings jobs + demand for other goods in surrounding areas

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22
Q

Cost of negative externalities

A

total cost to society > firms cost

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23
Q

Cost of positive externalities (2)

A

marginal social cost < marginal private costs

firms costs offset by 3rd party benefits

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24
Q

Define merit goods (2)

A

goods deemed beneficial for consumer/society

generally under-consumed on free markets

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25
Why are merit goods under-consumed on the free market (4)
generate positive externalities which are ignored consumers unaware of benefits --> no demand benefits felt in longer term and so are discounted affordability prevent people from being able to consume good
26
Define demerit goods (3)
goods generally deemed harmful for consumer/society over-consumed in free market may occur due to consumer ignorance of negative effects
27
Indirect taxes to correct negative consumption externalities
leftward shift in supply curve so that equilibrium is at social optimum
28
Real world example of indirect taxes correcting negative consumption externalities (3)
indirect taxes on sugary food + drinks reduce obesity + health problems caused by sugar some producers create products with less/no sugar to reduce costs
29
Indirect taxes as an advantage of negative consumption externalities
increase prices --> incentivise consumers to change their consumption
30
Indirect taxes as a disadvantage of negative consumption externalities (2)
difficult to measure value of external costs --> hard to identify who specifically is affected most of these goods have inelastic demand --> more tax revenue required to discourage consumption
31
Government legislation/regulation as a method to correct negative consumption externalities (2)
prevent/limits consumer activities that cause externalities shifts MPB towards MSB
32
Education campaigns as a method to correct negative consumption externalities (2)
persuade consumers to purchase less of goods with negative externalities e.g discourage consumption of unhealthy goods
33
Real world examples of education campaigns reducing negative consumption externalities
34
Advantages of education campaigns as a method to correct negative consumption externalities
simpler
35
Disadvantages of education campaigns as a method to correct negative consumption externalities (4)
government cost of campaigns use tax funds not everyone will receive info. education campaigns are a long term solution not strong enough incentives
36
Nudges as a method to correct negative consumption externalities (3)
behavioural economics to encourage consumers to buy less goods with negative externalities e.g dangers of smoking on cigarette packages can also be used to encourage desirable behaviour
37
Disadvantages of Nudges as a method to correct negative consumption externalities (2)
difficult to design effective nudges - not much is known how consumers respond to nudges may not have same effects across different income/culture groups
38
Indirect taxes to correct negative production externalities (2)
increases producer's private costs --> shifts the S(MPC) curve inwards towards MSC ideally per unit tax is = to per unit externality
39
Examples of government restrictions on production externality situations (3)
issuing liscences/permits for particular activities banning use of harmful substnaces prohibiting constiruction in industry/agriculutre portected areas
40
Real world examples of governments using regulation to reduce externalities (3)
use of sulfoxaflor (pesitiside) was banned due to it being potentially harmful to bees in US eventually approved for use, excluded crops attractive to bees allowed use for "emergency" basis
41
Advantages of government legislation + restriction to solve market failure (2)
easier to implement than market-based policies force firms to comply + reduce harmful activities
42
Disadvantagrs of government legislation + regulation to solve market failure (4)
do not incentivise firms to switch to more sustainable FOPs cannot distinguish between firms with lower or higher costs of reducing pollution potentially lack technical information - may only be partially effective in reducing externality costs of supervision lead to opportunity costs
43
Define collective self-governance (3)
users in community take control of resources + use them sustainably must have good methods of communication must be boundaries of the area with the common pool resource
44
Advantages of collective self-governance (2)
people are able to work cooperatively, ignoring their self-interests can occur in absence of private ownership of resources + government-owned resources
45
Disadvantages of common pool resources
boundary of common pool resources is difficult to establish in reality
46
Characteristics of common pool resources (2)
rivalrous - consumption by one person limits availability for others non-excludable : not possible to prevent consumers from free-riding
47
Define the "tragedy of the commons" (3)
users consuming the resource in competition with other users without considering the sustainability of the good ultimately depletes it
48
Define maximum sustainable yield (2)
maximum use of resource while ensuring that it is sustainable/able to reproduce itself
49
Education + awareness campaigns as a solution to externalities (2)
consumers may consume less of the product if they are informed of the polluting activities of firms firms incentivised to use more sustainable resources to stay in competition
50
Advantages of education/awareness campaigns as a solution to externalities
firms are influenced by their consumers
51
Disadvantages of education/awareness campaigns as a solution to externalities (2)
may only make a small difference in solving externality broader environmental issues may not be impacted
52
International agreements as a solution to externalities (2)
co-operation between gov. can develop tech. to deal with sustainability issues global common pool resources may require co-operation between gov. bodies
53
Real world examples of international agreements as solutions to externalities (5)
European Union Emissions Trading System (ETS) covers energy industry (heat generation, oil, metal) one permit allows release of 1 tonne of CO2 permits traded in carbon market succesfully reduced CO2 but does not impact economic performance negatively
54
Define positive production externalities (3)
production of a good/service has positive impact on 3rd parties e.g firm developing new technology spreading throughout economy free market underallocates resources to this good
55
Direct government provision as a solution to positive production externalities (2)
direct provision of good/service creating positive production externality e.g provide training for workers, or research + development
56
Subsidies as a solution to positive production externalities
lowers costs for firms --> increases supply MPC shifts rightward to MSC
57
Negatives of subsidies to correct positive consumption externality (2)
not possible to subsidise all goods with positive cons. externality gov. can make decisions based on political pressure
58
Government legislation to correct positive consumption externality (2)
enforces consumption of goods with positive externalities e.g education is compulsory uptill certain age
59
Education campaigns to correct positive consumption externality (2)
persuade consumers to buy goods with positive externalities e.g encourage use of sports facilities
60
Negatives of education campaigns to correct positive consumption externality
difficult to measure externality
61
Direct government provision to correct positive consumption externality (2)
important goods are provided by governments e.g healtchare + education
62
Negatives of direct government provision to correct positive consumption externality (2)
involve the use of gov. funds cannot directly provide all goods --> must choose (difficult to measure)
63
Real world of gov. legislation + direct provision solving positive consumption ext. (4)
Bolsa Familia programme poor families receive cash if they send their children to school + get vaccinated long-term : increases human capital, short-term : reduces poverty impact : reduces crime rates
64
Define a public good (3)
non-rivalrous - consumption by one person does not reduce its availability to others non-excludable : not possible to exclude someone from using the good e.g police, national defence, lighthouse
65
Public goods and market failure (3)
free-rider problem - people can enjoy good without paying (non-excludablity) no incentive for private firms to provide good free market fails to produce public goods - no allocation of resources
66
Define quasi-public goods (3)
non-rivalrous excludable e.g fees for museums, toll roads
67
Government intervention to correct market failure of no provision of public goods (2)
ensure that public goods are provided free of charge (close to) governments must decide which public goods to produce + how many
68
Disadvantages of government intervention to provide public goods (2)
difficult for gov. to estimate benefits of public goods --> have no price as not set by free market gov. susceptible to political pressure
69
Contracting out the private sector as a way to provide public goods (3)
contract between gov. + private firm priv. firm carries out task originally done by gov. e.g gov. contracting construction to private firm to build bridge
70
Advantages of contracting out the private sector as a way to provide public goods (4)
competition of private firms ensures that most cost-efficient firm can be chosen provides access to more skills/tech. than the government may have priv. firm may be more flexible + innovative than gov. overall --> high quality + low cost
71
Disadvantages of contracting out the private sector as a way to provide public goods (3)
gov. loses control over goods its attempting to produce risk of making a poor contract wth company --> higher costs + lower quality cost of contracting > cost of producing public goods if priv. firms charge high prices
72
Real world example of governments contracting private firms to provide public goods (2)
US private firms operating prisons under government supervision/ownership to lower costs 2016 U.S Department of Justice report - priv. firms had challenges meeting regulatory standards + ensuring same level of care as gov.

Economics (17 decks)

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