Market Failures Flashcards
1
Q
What is MtT Failure?
A
When Gie FreE MITT Fuits Eo allocube Scarle Resarcas ut che socially OPEimuM Level ot OutRE
Refers to a failure in market mechanisms leading to inefficient resource allocation.
2
Q
List the types of failures mentioned.
A
- Self-interest
- Reyative externalities
- Positive externalities
- InFor mubion Failure
- Free rider Problem
- Tragedy of the Commons
- Monopoly Power
These concepts relate to various economic inefficiencies.
3
Q
What are positive externalities?
A
Benefits that affect third parties and are not accounted for in free markets
Examples include education and public health improvements.
4
Q
What is a free rider problem?
A
When individuals benefit from resources or services without paying for them
This leads to under-provision of public goods.
5
Q
Fill in the blank: Free rider problems can lead to _______.
A
under-supply of public goods
6
Q
What does ‘Tragedy of the Commons’ refer to?
A
Overconsumption of shared resources due to self-interest
This concept highlights the conflict between individual interests and the common good.
7
Q
What is meant by ‘income inequality’?
A
The unequal distribution of income among individuals or groups
This can lead to various social and economic issues.
8
Q
What effects does monopoly power have on consumers?
A
Consumers are exploited and prices are higher than socially optimal
Monopolies can restrict supply and increase prices.
9
Q
Fill in the blank: Monopoly power leads to prices _______ than the socially optimal level.
A
higher
10
Q
What is the outcome of firms being motivated by self-interest?
A
There will be no supply of public goods
Firms may prioritize profit over providing public benefits.
11
Q
What is ‘InFor mubion Failure’?
A
The concept that merit goods are worse or better for you than you think
This relates to how individuals perceive the value of certain goods.
12
Q
What does ‘Factor im mobilicy’ suggest?
A
Supplies cannot produce social optimum
This implies inefficiencies in resource allocation.
13
Q
What is the relationship between externalities and parties?
A
Externalities affect the costs to parties as a result of the actions of agents.
14
Q
What does NE Production refer to?
A
NE Production refers to the costs to parties as a result of producers’ actions.
15
Q
What is the relationship between MSC and MPC?
A
MSC (Marginal Social Cost) is greater than MPC (Marginal Private Cost).
16
Q
What causes over-production and consumption?
A
Self-interest leads to over-production and consumption.
17
Q
What is the result of over-production?
A
The result is a decrease in price and a misallocation of resources.
18
Q
What is represented by DWL?
A
DWL stands for Deadweight Loss.
19
Q
What are the points of social optimum?
A
Points of social optimum are always where price equals marginal social benefit.
20
Q
What is the effect of firms ignoring full social costs?
A
Firms ignore full social costs due to self-interest, considering only private costs.
21
Q
What is the result of firms only accounting for private costs?
A
This leads to a misallocation of resources and market failure.
22
Q
What is the result of excessive consumption?
A
Over-consumption and over-production can lead to misallocation of resources.
23
Q
What does MSB < MPB indicate?
A
Marginal Social Benefit (MSB) is less than Marginal Private Benefit (MPB).
24
Q
What causes over-consumption?
A
Self-interest can lead to over-consumption and production.
25
What is the consequence of considering only private benefits?
It results in over-consumption and over-production.
26
What is the relationship between MSC and MPC?
Marginal Social Cost (MSC) equals Marginal Private Cost (MPC).
27
What does DWL stand for?
Deadweight Loss.
28
What is the implication of misallocation of resources?
It leads to too much consumption of certain goods.
29
What is the term for the failure to allocate resources efficiently?
Market Failure.
30
What are osative externalities in consumption?
They refer to benefits to third parties as a result of actions by consumers.
31
What causes osative externalities?
Self-interest, under-consumption/production, and misallocation.
32
What is the relationship between MSC, MPC, and externalities?
MSC = MPC = S, indicating that marginal social cost equals marginal private cost.
33
What happens when consumers ignore full social benefits?
It leads to misallocation of resources and underproduction, resulting in market failure.
34
What is the effect of self-interest on resource allocation?
It can result in underproduction and under-consumption, leading to inefficiency.
35
What does MS > MPC indicate?
It shows that marginal social benefits exceed marginal private costs.
36
What are the outcomes of market failure?
Resources are allocated at a sub-optimal point, leading to inefficiency.
37
What is the significance of R&D in this context?
R&D can be impacted by other firms' actions, affecting production and consumption.
38
What is the formula for deadweight loss?
DWL = MPB - MSB.
39
What are osative externalities in consumption?
They refer to benefits to third parties as a result of actions by consumers.
40
What causes osative externalities?
Self-interest, under-consumption/production, and misallocation.
41
What is the relationship between MSC, MPC, and externalities?
MSC = MPC = S, indicating that marginal social cost equals marginal private cost.
42
What happens when consumers ignore full social benefits?
It leads to misallocation of resources and underproduction, resulting in market failure.
43
What is the effect of self-interest on resource allocation?
It can result in underproduction and under-consumption, leading to inefficiency.
44
What does MS > MPC indicate?
It shows that marginal social benefits exceed marginal private costs.
45
What are the outcomes of market failure?
Resources are allocated at a sub-optimal point, leading to inefficiency.
46
What is the significance of R&D in this context?
R&D can be impacted by other firms' actions, affecting production and consumption.
47
What is the formula for deadweight loss?
DWL = MPB - MSB.
48
What are public goods?
Public goods are goods which are both non-excludable and non-rival.
49
What is an example of a non-excludable public good?
Road signs and street lights are examples of non-excludable public goods.
50
What does non-excludability mean?
Non-excludability means that no price can be charged for the goods consumed from collective consumption.
51
What is the free rider problem?
The free rider problem occurs when individuals have the incentive not to contribute to the provision of public goods because they can benefit without paying.
52
What are the characteristics of public goods?
Public goods are characterized by non-excludability and non-rivalry.
53
What does non-rivalry mean?
Non-rivalry means that consumption does not diminish the quantity of the good available for others.
54
What happens when no one pays for public goods?
If no one pays, there is no private incentive for firms to supply them, leading to a missing market and complete market failure.
55
Can public goods be provided through taxation?
Public goods can be provided through taxation, as no one can free ride on taxes.
56
What are some characteristics of pure public goods?
Pure public goods are either non-excludable and non-rival or non-rival and excludable, like toll roads.
57
How has technology affected the provision of public goods?
Technology has made it easier to collect fees for public goods, such as cameras at toll booths.
58
What are Common Access Resources?
Natural resources over which no private ownership has been established.
59
What is the Tragedy of the Commons?
Private producers act in their self-interest, leading to unsustainable exploitation of common access resources.
60
What causes the Tragedy of the Commons?
1. No property rights
2. Self-interest
3. Incentive to maximize production
4. Resource depletion
5. Future generations face scarcity
6. Complete market failure
7. Creates negative externality.
61
What is a negative externality in production?
A cost incurred by third parties not involved in the production process.
62
What happens due to overproduction?
Encourages overproduction and leads to resource depletion.
63
What is Government Failure?
Government Failure refers to the cost of intervention outweighing social welfare, leading to worsening outcomes and misallocation of scarce resources.
64
What is Information Failure?
Information Failure occurs when necessary information is not available to make informed decisions, often due to externalities.
65
What are the costs associated with correct policy levels?
The costs include high enforcement costs and the need for reduction in intervention if policies are ineffective.
66
What are subsidies?
Subsidies are financial aids that can lead to high costs and unintended consequences.
67
What are Price Controls?
Price Controls are interventions like buffer stock schemes that can lead to unintended consequences.
68
What are some examples of unintended consequences?
Examples include market distortions in commodities like fuel, TV, and cigarettes, leading to inequality.
69
What is a Progressive Tax?
A Progressive Tax is designed to impact income distribution, potentially affecting employment.
70
What is Overregulation?
Overregulation can increase production costs and reduce supply, leading to decreased incentives for firms.
71
What is the impact of firms relying on subsidies?
Firms may become reliant on subsidies, which can lead to unemployment and reduced competition.
72
What is the role of lobbying in policy decisions?
Lobbying involves firms influencing policy makers to make decisions that benefit them.
73
What is the purpose of solving market failures?
To address overconsumption and overproduction issues.
74
What does MPC stand for?
Marginal Private Cost.
75
What does MSC represent?
Marginal Social Cost.
76
What is the relationship between MSC and MPC?
MSC = MPC + Tax.
77
What is a potential solution to overproduction/consumption?
Implementing taxes to correct market failures.
78
What are some alternative policies to solve market failure?
Subsidies for goods and regulation of harmful products.
79
What is the effect of indirect tax?
It works only if demand is elastic.
80
What is the risk of overtaxing?
It may lead to black markets and business shutdowns.
81
What happens if there is under-taxation?
It does not solve market failure and can lead to income inequality.
82
What is an example of a good that may require regulation?
Alcohol and sugary drinks.
83
What is the impact of taxation on personal choice?
It can infringe on personal liberty.
84
What is a subsidy?
Money given to producers by the government to support production.
85
What does 'Dicy' refer to?
Subsidy on consumption.
86
What are solar panels related to?
They are a form of subsidy in energy production.
87
What does mSC equal?
MPC (Marginal Propensity to Consume).
88
What is the formula involving MPC and subsidy?
MPC + Subsidy.
89
What does MSB equal?
MPB (Marginal Private Benefit).
90
What are the outcomes of production?
They affect welfare and consumption.
91
What are some issues related to subsidies?
Buyer costs, opportunity costs, and failures.
92
What can borrowing lead to?
Increased financial strain.
93
What can tax rises impact?
Spending capacity.
94
What does 'Price inelastic' mean?
Demand does not change significantly with price changes.
95
What is a potential issue with subsidies?
Reliance on government support.
96
What is a regulation?
A rule or law enacted to be followed by economic agents.
97
What are the types of regulations?
Bans, limits, caps, compulsory, and innovative regulations.
98
What is necessary for regulations to be effective?
They need to be enforced.
99
What is the purpose of enforcement in regulations?
To provide an incentive to change behavior and solve issues in free markets.
100
What are the potential consequences of inadequate enforcement?
Failure to enforce can lead to market failures and lack of incentives.
101
What can firms do in response to regulations?
Firms may find loopholes or unintended consequences.
102
What is equity in the context of regulations?
Equity refers to the fairness of regulations, which can be inequitable for some firms.
103
Why do we need pollution permits?
Pollution is a negative externality of production, causing pollution and climate change. Governments are committed to meeting pollution reduction targets.
104
How do pollution permits operate?
They allow firms to produce a certain amount of pollution and incentivize reduction to sell on the permit market. The company that finds it cheapest to reduce pollution is encouraged to do so.
105
What is the Kyoto Agreement?
The Kyoto Agreement facilitated the trading of emissions permits between countries.
106
What are tradable permits?
Tradable permits are issued to countries, incentivizing those able to reduce emissions cheaply to do so.
107
What issues arise with pollution permits?
Challenges include determining how much to issue, the need to qualify, the expense of measurement, and administration costs.
108
How to describe the rewards for firms?
Firms that never incur excess emissions are rewarded, but the system may be too restrictive.
109
Why do we need pollution permits?
Pollution is a negative externality of production, causing pollution and climate change. Governments are committed to meeting pollution reduction targets.
110
How do pollution permits operate?
They allow firms to produce a certain amount of pollution and incentivize reduction to sell on the permit market. The company that finds it cheapest to reduce pollution is encouraged to do so.
111
What is the Kyoto Agreement?
The Kyoto Agreement facilitated the trading of emissions permits between countries.
112
What are tradable permits?
Tradable permits are issued to countries, incentivizing those able to reduce emissions cheaply to do so.
113
What issues arise with pollution permits?
Challenges include determining how much to issue, the need to qualify, the expense of measurement, and administration costs.
114
How to describe the rewards for firms?
Firms that never incur excess emissions are rewarded, but the system may be too restrictive.
115
What is state provision?
Direct provision of goods and services by government free at point of consumption.
116
What are merit goods?
Goods that are underconsumed, such as healthcare and education.
117
What is the role of public goods?
They solve the market failure of free riders in merit good markets through provision.
118
How does government allocation work?
Assumes the government has perfect information and considers full social cost/benefit to allocate resources at Q1.
119
What issues does government provision solve?
It addresses underconsumption and inequality, leading to allocative efficiency and welfare maximization.
120
What is a challenge in allocating public goods?
Determining who to allocate public goods to, whether based on need or ability to pay, is opinion-based.
121
What is a cost of state provision?
It requires long-term funding, leading to increased taxes, budget cuts, or government debt.
122
What is a risk of government information?
The government does not have perfect information, which can lead to over or under production.
123
What is a drawback of government organizations?
They are often inefficient due to the lack of profit incentive, leading to wastefulness and lower productivity.
124
What is information provision in the context of market failure?
Information provision equals government funded information provision/advertisement/education to discourage or encourage consumption.
125
What are examples of information provision?
Examples would be five a day and anti-smoking campaigns.
126
How does information provision address market failure?
It solves information failure and asymmetric information without being interventionist.
127
What is the effect of information provision on consumer behavior?
It leads to a demand shift, allowing consumers to make rational decisions based on true marginal private benefit.
128
What is the outcome of effective information provision?
It solves under/over consumption, resulting in allocative efficiency and resolving market failure.
129
What are the costs associated with information provision?
Information provision can be very expensive, and there is no guarantee of success.
130
What are the potential issues with advertisement campaigns in information provision?
The campaign could be poorly targeted or of poor quality, and consumers may not listen.
131
Is information provision a short-term or long-term approach?
This is a long run approach, not a short run.
