Market mechanism MARKET FAILURE and government intervention

Question 1

Rationing function of price

Answer 1

Prices act to ration scare resources

(allocative function)

Question 2

Incentive function of prices

Answer 2

incentive to supply for producers

incentivises amount of demand from consumers

Question 3

Signalling function of prices

Answer 3

acts as signal for producers and consumers

Question 4

Advantage of price mechanism

Answer 4

consumers have power to determine what is bought and sold in market

Question 5

Market failure

Answer 5

occurs when market economy does not achieve efficient allocation of resources (misallocation of resources)

Question 6

Complete market failure

Answer 6

good or service is wanted but no firm supplies it

eg national defense

Question 7

Partial market failure

Answer 7

quantity of product produced does not reach efficient allocation of resources

often due to imperfect information

Question 8

Excludability

Answer 8

people that wont pay for good are excluded from benefitting from that good

Question 9

Rivalry

Answer 9

when one person consumes it, quantity available diminishes

Question 10

Public good

Answer 10

good thats has non excludability and non rivalry

eg street lights

Question 11

Private good

Answer 11

has excludability and rivalry

eg pizza

Question 12

Quasi public good

Answer 12

good which is not fully rival and/or possible to exclude people from consuming

Question 13

Free rider problem

Answer 13

someone who benefits from good or service without paying

Question 14

Tragedy of the commons

Answer 14

situation where individuals acting in own self interest deplete a shared resource

Question 15

Technological change of public goods

Answer 15

TV now excludable

New clothes could have trackers to avoid free rider

Question 16

Externalities

Answer 16

are the effects of economic activity on third parties

exist when there is a divergence between social benefits and costs

Question 17

Social costs =

Answer 17

Private costs + external costs

Question 18

Social benefits =

Answer 18

Private benefits + external benefits

Question 19

Positive externalities in production

Answer 19

where the social costs of production are greater than the private costs

eg companies develop tech that benefits others
underproduction

Question 20

Negative externalities in production

Answer 20

when the social costs of production are less than the private costs

eg pollution
overproduction

Question 21

Positive externalities in consumption

Answer 21

where the social benefits of consumption are greater than the private benefits

underconsumption

Question 22

Negative externalities in consumption

Answer 22

where the social benefits of consumption are less than the private benefits

overconsumption

Question 23

Merit goods

Answer 23

carry positive externalities

under consumed and under produced due to imperfect information

Question 24

Demerit goods

Answer 24

Carry negative externalities

Over consumed and over produced due to imperfect information

Question 25

How does lack of property rights lead to marker failure

Answer 25

eg factory pollutes river as there are no property rights leading to overproduction

Question 26

How can imperfect information lead to market failure

Answer 26

person making decision cant act rational if not in full possession of facts failure to recognise externalities leads to market failure

Question 27

How monopoly and monopoly power can lead to market failure

Answer 27

firm can restrict output to force up price

Question 28

How asymmetric information can lead to market failure

Answer 28

either buyer or seller has more info than other in transaction (usually the seller) quantity purchased does not relate to value of the good

Question 29

How immobility of factors of production can lead to market failure

Answer 29

factors of production do not transfer to other uses so the marked does not produce desired equilibrium leading to market failure

Question 30

Government intervention

Answer 30

government actions that affect economics activity and allocation or resources

Question 31

Public expenditure

Answer 31

spending by the government on provision of goods and services eg benefits, advertising (improve info), subsidies

Question 32

Direct taxation

Answer 32

levied on income or wealth progressive burden falls on tax payer

Question 33

Indirect taxation

Answer 33

taxes on spending

Question 34

Ad valorem tax

Answer 34

according to value eg vat

Question 35

Specific tax

Answer 35

adds certain amount regardless of price

Question 36

Incidence of taxation

Answer 36

who suffers the burden of indirect taxation

Question 37

Evaluate the incidence of taxation

Answer 37

firms will try to rise the price to cover tax HOWEVER their ability to do this depends on the price elasticity of demand of the good

Question 38

Subsidies

Answer 38

payments to producers to encourage production of good or service

Question 39

Incidence of subsidy

Answer 39

who benefits from subsidy

Question 40

Evaluate incidence of subsidy

Answer 40

depends on the price elasticity of demand for the product

Question 41

Price controls

Answer 41

when government takes action to affect the price paid for good

Question 42

Examples of regulation

Answer 42

consumer protection legislation health and safety banning products labelling property rights pollution permits

Question 43

Pollution permits

Answer 43

gives firms right to create certain level of pollution

Question 44

How can pollution permits be effective

Answer 44

when the number of them are restricted

Question 45

Evaluate the use of property rights

Answer 45

can reduce pollution in rivers However it can be difficult to decide who to give them to and externalities can affect more than one country

Question 46

Government failure

Answer 46

occurs when government intervention leads to a misallocation of resources and a net loss in welfare

Question 47

Reasons for government failure

Answer 47

ICAUSES Inadequate information Cost and opportunity cost Administrative failure Unintended consequences Self interest Expertise Short termism