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Resits > Market Failure > Flashcards

Market Failure Flashcards

1
Q

Market failure?

Solution

A

When price mech/forces of supply & demand fails to allc scarce resources efficiently & society suffers as result
Oft gov intervention

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2
Q

Types of market failure + example? (2)

A

Complete market failure = no market exists/’missing market’
National defence => gov intervenes/provides

Partial market failure - a market functions but price/quant supplied is wrong
Provision of healthcare if left to market - not all would be able to afford => govs may provide free

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3
Q

Externalities?

A

Effects that prod/consm’ing a g/s has on third parties (not involved in making/buying/selling/consmp)

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4
Q

Pos/Neg: externalities

A

External benefits/costs

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5
Q

Examples of externalities
Neg ext? (2)
Pos ext? (2)

A

Neg/producing steel: pollution
Neg/consmp choc = litter

Pos/prod of milt equp = improved tech
Pos/comsp: training to be doc = benefit to society

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6
Q

Private cost + e.g?
External cost + e.g?
Social cost?

A

Cost of doing something to consumer/firm
cost to make/buy

Externality
Littler = counci employs to sweet

Ext + priv cost = full cost to society of g/s

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7
Q

Private benefit + e.g?
Ext benefits + e.g?
Social benefit?

A

Benefit gained by cons/firm
Buying skiing holiday = enjoyment

Externality
Factory investing new equip = need less electr

Priv benefit + ext benefit = full benefit to society

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8
Q

Why does market failure occur

A

Price mech only takes into account priv costs/benfs not external

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9
Q

Externality diagram - neg externality from prod

A

pic

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10
Q

MPC:
MSC:
*?

A

Cost of producing last of unit of good
Marginal private cost + ext cost
Diff between MPC & MSC curves = neg externality/ext cost of prod

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11
Q

When MPC & MSC curves diverge

Example

A

Ext costs per unit increase with output

Pollution

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12
Q

Pos externality from consumption diagram

A

pic

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13
Q

When MPB & MPC diverge - example

A

Vaccination - more vaccinated = greater protc for unvacc

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14
Q

Curves can be seen as:

A 
MPC = supply curve
MPB = demand curve
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15
Q

Where are social optimum & equilibrium found :

Why?

A

S.O/max benf to society: MSC = MSB
Equ: MPC = MPB

Free market = cons/prod’ers only consd priv costs/benfs

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16
Q

Social optimum

A

Socially optimum level of output/price - mex benefit to society

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17
Q

Negative production externalities =>

Diagram:
Welfare loss?

A

Overproduction/underpricing

MPB=MPC (non pos ext) but MSC>MSB
Triangle area between MSC & MSB

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18
Q

Positive consumption externalities lead to

Diagram:
Welfare gain?

A

Underconsumption/underpricing
MSB > MSC
Area between math social cost & benf

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19
Q

Negative consumption externalities lead to
* Can assume

Welfare loss

A

Overconsumption/overpricing
MPC=MSB
MPB>MSB means that
For each unit of good consumed between Q1/S.O & Qe, MSC>MSB

Area between MSC & MSB

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20
Q

Positive production externalities
Diagram
Welfare gain

A

Underproduction/overpricing

MSC

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21
Q

Merit good?

Problems (2)
Examples

A

Greater social benf than private benf = positive consumption externality

Underconsumption - consumers don’t realise full benefits
Underprovided - suppliers only consider private costs/benfs = ignore positive externalities

Health care/education

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22
Q

Demerit goods
Problems (2)
Example

A

Greater social costs than benefits = neg consumption externalities

Overconsumed - consumers realise harm to themselves
Over provided - suppliers ignore negative externalities

Cigs & heroin = cost of treating diseases

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23
Q

What affects consumption of goods

A

Individuals may only take short term approach to decision-making = under consumption of merit/over consumption of demerit

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24
Q

Consumers only consider short term benefits/costs ….so…example? Why?

A

Old age pension

Individuals fail to see need to make provision for changes in future/potential changes in circums

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25
Q

Why are merit goods under- & demerit over- what affects consumption of goods? (4) 2 examples

A

Only consider short term

Long term private benefits/costs of merit/demerit are better
Short term benefits of pension are less than long term
Short term costs of cigs are less than long term/illness

Imperfect info = under precision of merit goods/over provision of demerit

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26
Q

Effect of imperfect info

2 examples

A

Demand for merit lower than should be = under provided
Not knowing how serious health problem is = low demand for healthcare/underproduced
Unaware of health problems linked to high alcohol consumption = over consumed

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27
Q

Why do govs intervene

A

Failure of free market to supply S.O levels of merit/demerit

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28
Q

Types of Gov intervention to correct market failure

A

Directly provide g/s using taxes/subs to decrease/increase consumption of g/s to socially optimum level

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29
Q

Why is better for gov to correct

A

Lot of info about costs/benefits of g/s to indvs & society as a whole = can use info to make beneficial decisions

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30
Q

Public good characteristics (2)

A 
Non-excludable = can't stop people from consulting even if they haven't paid
Non-rivalrous = 1 person benefitting doesn't stop others from benefitting
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31
Q

Private goods are (3)

A

Excludable & rivalrous

+ Choice whether to consume private goods

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32
Q

Problem with public goods (2)

A

Underprovided by market

Non-excludable => free rider problem

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33
Q

Free rider problem

A

Once provided, impossible to stop someone from benefitting even if they haven’t paid towards

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34
Q

How is market failure for public goods caused

Pg. 50

A

Free riders = price mechanism won’t work (consumers won’t choose to pay for public good if they can get for free through other consumers)
So no one will provide
+ Difficult to set out price/can’t work out value

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35
Q

Monopoly disadvantages (4)

A

Restrict consumer choice = less to choose from
Fewer incentives to innovate - don’t have to improve/beat competitors
No incentive to cut costs (no comp = they’re the price makers
Power = exploit suppliers/buyers e.g. demand low price from suppliers/threaten to use another

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36
Q

Monopoly benefits

A

Can be most efficient way of allocating = 1 producer that’s able to exploit ecos of scale/prod efficiency (unlike lots of small prods)
Profits => research into new prod methods/products => inv & better prods for custs
Large firms = large ecos of scale = low prices + invt companies

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37
Q

Immobile/can’t move FOPs

Example

A

Land

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38
Q

Labour immobility - geo immobility reasons (5)

A

Large house prices/rent/cost of living diffs between areas
High costs involved in moving houses
Reluctance to leave fam
Dislike of change
Imperfect info about jobs avb in diff areas

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39
Q

Reasons for occ immobility? (3)

A

Lack of training/edc/skills to do diff job
Lack of req’d quals/memb’ship (docs register with Gen Med Council)
Lack of workforce

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40
Q

Immobile FOPs ===> Market failure - how

Prob with gov intv?

A

Immobile FOPs = inefficent use of resources (unused/underused) = inefficency in allocation of resources
Diffc to tackle - Gov can’t move land/force workers to relocate

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41
Q

Improve labour immobility - gov? (4)

2 big factors + specific examples

A

Could improve geo mobility:
Relocation subsidies/Mortg relief = more affdable for workers
Incentives to encg construction of housing in those areas needing homes for workers
Improve occup mob govs, could provd more training progs to incr skills

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42
Q

Imperfect info

Competitive market?

A

Should have perfect info = buyers/sellers have full knowledge of prices/costs/benfs/avb of prods

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43
Q

Imperfect info

Symmetric info? Allows? *But?

A

Perfect info - equally avb to all partcpants
Efficient allocation of resources in/betw markets (assuming rational behaviour)
Rarely exists e.g. buyers dont have time/resources to find full info on prices before buying

44
Q

Assymetric info
2 examples

Sometimes, assym info caused by:

A

When 1 has more info than other
Seller can have more info - used car salesman/car history
Buyer can have more info - antiques collector about value
Lack of info caused by unpredictable services e.g. health serv providers

45
Q

Info failure –> Market failure:

How (4)

A

Imperfect info = merit underconsumed/demerit overconsumed

Consumers may not know full personal benfs of merit good - might not realise that good edc = better earnings
Lack info to decide which uni course/med treatment is right
How harmful demerit is
Advertising might withhold health dangers for demerit

46
Q

Info failure - underproviding/overproviding is?

A

Misallocation of resources & market failure

47
Q

Why/how does imperfect info affect provision of merit/demerit goods
2 Examples:

A

Doctors/Pension providers = more knowledge of medicine/pension schemes avb = may persuade client to buy more expv than needed/req’d
Info may be too complex to understand e.g. diff betw computers = don’t know which ones best for needs

48
Q

Income & Wealth definitions/examples

A

Income = amount of money received over set period time
Can come from sources/wages/interest on accs/dividends from shares/rents from props

Wealth = value in money of assets held/property/land/money/shares

49
Q

Some economists argue:
Solution?
Argument?

A

Inequitable distrbrs of income/wealth is market failure
Redistrb of income/wealth = better allc of resources/incr benf to society
Benefit to poor person from add. £1 income = bigger than loss to rich from paying extra £1 tax

50
Q

Gov solution to inequality: (2)

Type of solution?

A

Redistrb income/wealth through taxation = benefit/subsidies to poor/unempl/eld/sick
+ free provision of services helps
= poltc decision based on value judgement

51
Q

Arguments against restrib of income/wealth?

A

Reduces incentive for indvs/firms to work hard - needed to encourage efficiency = may lead to greater market failure

52
Q

How does gov influence supply of certain s-s policies?

A

Indirect taxes

53
Q

Types of indirect taxes (2)

A

Specific taxes = fixed amount charged per unit of partc good

Ad valorem = proportion/% of price

54
Q

How do indirect taxes affect supply?

A

Increase cost for producers = supple curve to left

55
Q

Specific taxes - diagram

A

Parallel shift

Tax =same regardless of price

56
Q

Ad valorem tax - diagram?

A

Non-parallel shift

Bigger impact on higher price goods

57
Q

What do govs tax more

Sometimes*?

A

Indirect tax on neg ext goods e.g. petrol/alco

Multiple taxes on 1 item e.g. cigs = excise duty/specific tax + ad valorem on retail price

58
Q

Aim of high taxes

A

Internalise externality of good (producer/consumers cover extra cost) = revenue can be used to offset effects of exts

59
Q

Example of specific tax?

A

Landfill tax: local auths charged env tax to reflect full social costs = encourages recycling

60
Q

Tax paid - diagram

Who pays tax

A

draw graph pg. 59

61
Q

Amount of tax paid/passed onto consumer…

A

Depends on PED

Price inelastic = most extra passed onto consumer

62
Q

Advg to indirect taxes (2)

A

Cost of neg ext is internalised in price of good = demand down/production = neg ext effect reduced
Even if demand isnt reduced, tax revenue can be used to offset exts e.g cigs/services to help stop smoking

63
Q

Diasdvgs to indirect taxes (5)

A

Diffc to put monetary value on “cost” of neg exts
Price inelastic demand = demand noy reduced by extra cost
Usually increases cost of production = reduces int competitiveness
Firms many relocate/sell goods abroad to avoid tax = removes contrbs to eco (tax/employment)
Tax revenue may not be spent on reducing exts

64
Q

How are buffer stocks used to do

A

Stabilise commodity prices/unstable price in markets

65
Q

buffer stocks aim

only work with?

A

stabilise prices & prevent shortages in supply

storable commodities e.g. wheat

66
Q

How do buffer stocks work (3)

A

Max/min price for commodity is set by gov
Price goes below price floor/min = gov buys & stockpiles = demand increases = brings price up
Price above price ceiling/max = gov sells from stockpiles = supply increases = price brought up to acceptable

67
Q

Buffer stock schemes - diagram

A

graph

68
Q
  • Do buffer stocks work:
A

In theory should be suc’ful because selling at max price should pay for purchs at min

69
Q

Why arent buffer stocks successful (5)

A

If min price is too high, scheme will spend excessively purchasing stocks/maintain min prices
Good/bad harvests = scheme may buy excessively/run out of stock
Storage/security = expv
Some commodity will deteriorate/waste overtime = losses for scheme
Producers may overprod knowing they’ll get guara min price = massive stockpiles/waste of resources

70
Q

Gov intervention - state provision is:

A

Solution to overcome market failure - directly provd some g/s

71
Q

State provision?

Examples

A

Use tax revenue to pay for certain g/s = free when consumed + public goods
NHS, state edc, police

72
Q

How does state provision work: 2 ways

A

Gov directly provide
Gov purch’s g/s from private sector/proivde for free
e.g. comm health servs from priv. - prov’d free to NHS patients

73
Q

How can gov failure lead to misallc of resources/example (2)

So effect was:

A

Local auths charging for waste disposal/DIY waste///attempt to internalise exts of waste disposal
But leads to incr in fly-tipping = neg ext for locals/visual pollution = resources need to be allocated to clear up fly-tipping

Intervention => other unintended neg exts

74
Q

Market distortions examples (3)

A

Income taxes = disincentive to working hard - (pay more tax)
Governmental price fixing => surpluses (min prices)
Subsidies = ineffcient - no incentive

75
Q

gov bureaucracy consequence

A

lack of investment/prevents eco from operating at full capacity

76
Q

free healthcare drawbacks (4)

A

free at point of use = excess demand = waiting lists
waste resources - unused prescriptions
reduce patients’ self-reliance - little things
may not respond to wants/needs of patient e.g. local NHS offcs may relocate just for costs against pop wishes

77
Q

Subsidies:

A

Paid to producers by gov

78
Q

causes of gov failure (2+2)

A

inadequate info
admv costs

time
‘external shocks’

79
Q

Result of subsidy:

Diagram:

A

Price of good falling = qd increases

80
Q

causes of gov failure - admv costs? (2)

A

large amounts of resources used = high costs e.g. lrge maintnc costs to offer farmers min price
policing = expv

81
Q

other causes of gov failure (2)

A

takes times for govs to work out where there’s market failure + policy = prob may change
external shocks

82
Q

Disadvgs of subsidies (5)

A

Diffc to put monetary value on benfs of pos exts
Opp cost = money could be spent on something else
Might make producers inefficient/reliant on subsds - less incentive to inov/reduce costs
Effectivness dpeends on elasticity of demand - inelastic=no sigf increase in demand
Subsidised g/s may not be as good as one being replaced/more expv e.g might be more expv to produce elctrcityy using wind power than fossil fuels

83
Q

Gov reg aims (3)

A

Reducing use of demerit goods e.g. by banning/limiting sale
Reducing power of monopoly e.g. price cap
Protection for consms/prods from probs such as asymmetric info e.g. Sale of Goods Act protects consumers against firms supplying substandard goods

84
Q

How/where should max price be set (2)

*?

A

Above equ = no impact
Below equ = excess demand/shortage supply (excess demand cant be cleared by market forces = needs to be rationed out/ballot)
Amount of excess demand depends on PES/PED

85
Q

Minimum price aim

A

Often set to make sure suppliers get fair price (EU’s CAP/comm agri polc=gu min price for agric prods)

86
Q

How is max price set **

A

Below equ = no impact
Above equ = reduces demand/increases supply = excess supply
Gov purchases excess supply to ensure guar min prices = stockpile/destroyed
Amount of excess supply depends on PES/PED

87
Q

Max price - Gov expenditure - diagram:

A

graph

88
Q

Max price advgs: (2)

A

Increases fairness - allowing more people to purchs certain g/s
Can prevent monopolies from expoliting consumers

89
Q

Max price disadvgs: (3)

A

Demand > Supply so not all can buy
Govs may need to introd rationing scheme to allocate e.g. ballot
Excess demand = black market

90
Q

Min price advgs (2)

A

Producers = guar min price = encgs investment

Stockpiles can be used when low supply e.g bad weather/overseas aid

91
Q

Min price disadvgs (4)

A

Consumers pay higher than equ
Inefficient alloc of reosurces - excess supply resources could be used elsewhere
Gov spending on min price sceme = high opp cost
Destroying excess goods = waste of resc

92
Q

Gov failure:

A

Gov intervening => misalloc of resources

93
Q

3 examples of gov failure

A

Market distortions
Excsv bureaucracy
Conflicting policy objs

94
Q

How can gov failure lead to misallc of resources

A

Local auths charging for waste disposal/DIY waste

95
Q

Market distortions

A

Income taxes = disincentive to working hard -

96
Q

Gov bureaucracy/enforcement

Excessive bureaucracy?

A

Too many regs slowing down process unreasonably

97
Q

Gov bureaucracy/enforcement
Excessive bureaucracy?
Red tape interferes with?
Example

A

Too many regs slowing down process unreasonably = gov failure

Red tape interferes with forces of supply/demand - prevent markets from working

Planning controls => long delays in construction projs - so if delays affect housing devs. supply’s restricted

Time lags so gov cant respond quickly to needs of producers/consms = competitive disadvg (other countries resp quicker)

98
Q

source of gov failure (2)

A

conflicting policy objs
gov effort to achieve certain policy obj has neg impacts on another e.g stricter emission controls for ind = helps env objs but increases costs for firms/reduces output (uemp/eco growth)

gov oft favour short term solution - under pressure to solve issues quickly but may increase congestion in long-term

99
Q

causes of gov failure

A

inadequate info
diffc to assess extent of market failure = diffc to put value on gov intv needed e.g. may lead to taxes/subsidies being set at an ineffcient level
may not know pop’s wants

100
Q

causes of gov failure - inadq info?

A

diffc to assess extent of market failure = diffc to put value on gov intv needed e.g. may lead to taxes/subsidies being set at an ineffcient level

may not know how pop wants resources to be allocated - some may think price mech works better

govs dont know how consmers will react e.g. campgs discging under 18s drinking alcohol = may lead to alchol being viewed as desirable = increases drinking

101
Q

causes of gov failure - admv costs?

A

large amounts of resources used = high costs e.g. lrge maintnc costs to offer farmers min price
policing = expv

102
Q

other causes of gov failure (2)

A

takes times for govs to work out where there’s market failure + policy = prob may change
external shocks

103
Q

Gov intervention: gov regulation

A

Rules enforced by auths to control activities of producers & consumers & try to change undesirable behaviour

104
Q

Gov reg aims (3)

A

Reducing use of demerit goods e.g. by banning/limiting sale
Reducing power of monopoly e.g. price cap
Protection for consms/prods from probs such as asymmetric info e.g. Sale of Goods Act protects consumers against firms supplying

105
Q

Why are regs difficult to set? (5)

A

Difficult for gov to work out whats ‘correct’ e.g ‘correct’ min age for alcohol - med groups = older & producers might want reduced
Sometimes theres need for reg in some areas to be worldwide rather than 1 country e.g. regs to control greenhouse gas emissions = more effective if w’wide
Following excessive regs = expv so firms can close/move countries
Monitoring = expv
Punishment not harsh enough = waste

106
Q

Examples of gov reg

A

Encg of renw energy

107
Q

Companies reg’d in UK (type)

A

Privatised utility comps

Resits (5 decks)

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