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Flashcards in Market failure Deck (19):

what does social cost equal to

private cost + external cost


positive externalities: difference between under-consumption and under-production

1. under-consumption is with merit good, when MSB > MPB
2. under-production is with renewable energy, when MPC > MSC


with externalities, what is the 'supply' curve and what is the 'demand' curve

cost is supply and benefit is demand


negative externalities: difference between over production and over-consumption

1. over-production e.g. factory pollution - MSC > MPC
2. over-consumption e.g. fast food MSB < MPB


define an externality

element of transaction imposed upon an uncompensated third party


how do you combat negative production externalities?



how do you combat positive production externalities?

subsidies and grants


how do you combat positive consumption externalities?



how do you combat negative consumption externalities?

tax, information, regulation


name a key reason for under-provision of public goods

the free rider problem - there is a large incentive for individuals not to pay for the good because someone else might, which is why it may be left under provided if left to free market allocation


key reason for under/over consumption of merit/demerit goods

information failure


name reasons for market failure

1. Factor immobility
2. inequality
3. Information asymmetry
4. Lack of competition
5. Under-Provision of public goods
6. demerit and merit goods


what is ad valorem tax

a tax levied as a percentage of the value of the good/service e.g. 20% VAT


name 3 problems with imposing indirect taxes

1. difficult to target (due to information failure - not knowing extent of market failure)
2. conflict of raising revenue and correcting market failure
3. taxes are unpopular e.g. in 1990s UK had to abandon plan to raise VAT on gas


example of failure to remove subsidies

attempts to remove subsidies on food or fuel in Iran have caused riots


explain how buffer stock schemes work

this is done to stabilise price of commodities;
if min price is set, and free market price threatens to go below this, the scheme will buy commodity, increasing demand and raising prices
if max price set, then sell, increase supply, raise price


name two unintended consequences of CAP

1. in 70s and 80s most of EU budget was spent on CAP, and EU consumers had paid much higher prices than they would otherwise
2. Depressed world prices - EU bought up certain products at min price and sold below this at world markets --> farmers in rich countries suffered for lower prices for their produce, as well as producers in developing countries who wouldn't compete


name types of government failure

1. Distortion of price signals (labour market)
2. Unintended consequences (CAP)
3. Admin costs
4. Information gaps
5. Conflicting objectives
6. Politics


name two phenomenons that happen politics which ensure government failure

1. public choice theory - politicians act to maximise their own utility, regardless of whether it improves citizen welfare e.g. for re-election
2. rent-seeking behaviour - those in power manipulate distribution of resources to benefit themselves e.g. receiving bribes from companies to ensure they win govt contract