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Flashcards in Market Failure Deck (17)
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1
Q

Market failure definition

A

A market fails when it does not allocate resources efficiently

2
Q

Why might there be market failure (3)

A

~ production is inefficient
- not maximising output

~ consumers do not get the goods they pay for
- prices don’t reflect true costs

~ bad effect on society

 - people operating for selfish reasons 
 - negative externality
3
Q

Examples of market failure (5)

A
Air/ noise pollution
Monopoly power
Lack of control of demerit goods
Unstable equilibrium 
Inequality/ distribution of income
4
Q

How might the government intervene for demerit goods

A

Increase the price of demerit goods through taxation

Encourage good behaviour through advertising

5
Q

If the government does not intervene with the market of cigarettes, what happens to the market, why

A

It fails

Prices will be too low so QD is too high. Equilibrium is an inefficient allocation of resources

6
Q

How does the market for cigarettes fail without government intervention (3)

A

Smokers and passive smokers need smoking related treatment (huge opportunity cost)

Lost output from ill workers unable to work (need benefits which cost money)

Inequality to those who suffer due to passive smoking

7
Q

Equation that relates social costs, private costs and external costs

A

Social costs = private costs + external costs

8
Q

Equation that relates social benefits, private benefits and external benefits

A

Social benefits = private benefits + external benefits

9
Q

Who do private costs affect

A

Firms/ producers

Costs of production

10
Q

Who do external costs affect

A
Third parties
(People who don't use the good but incur a cost, negative externalities, demerit goods)
11
Q

Who do the private benefits affect

A

Consumers

12
Q

Who do external benefits affect

A
Third parties
(Positive externalities, merit goods)
13
Q

Why might firms be operating inefficiently (2)

A

Firm has a monopoly so doesn’t need to (abuse of monopoly power)

Production is inefficient, not allocating resources efficiently

14
Q

What is a public good (examples)

A

A good which a market would not provide because the consumer would not be willing to pay
So the government has to provide the good
Eg streetlights, army, police

15
Q

What is the free rider problem… What does the government do

A

Someone taking advantage of someone who is willing to pay

The government provided the public goods because of the free rider problem

16
Q

What is a merit good (examples)

A

Goods which the consumer does not value very highly so they are not willing to pay much but are good for society so generates a positive externality

Eg education, healthcare

17
Q

What does the government do to merit goods

A

They help reduce the cost so more consumers but the good