Market Mechanism, Market Failure and Government Intervention in Markets Flashcards
(24 cards)
Name the three functions of price and how they allocate resources
Rationing - When resources are scarce, price increases. The increase in price discourages demand, and consequently rations resources
Incentive - Encourages a change in behaviour from a producer or consumer, e.g a high price encourages firms to supply more to make more profit
Signalling - Price changes to indicate where resources are needed in the market.
What is market failure
A misallocation of resources within a free market
What are the types of market failures (5)
Overconsumption of Negative Externalities
Underconsumption of Positive Externalities
Under-Provision of Public Goods
Information Gaps
Monopolies
Define complete and partial market failure
Complete - occurs when there is a missing market
Partial - occurs when the market produces a good but it is at the wrong price or quantity
What are Public Goods, and define non rivalrous and non excludable
a good or service that is made available to all of society and is non excludable and non rivalrous
non-excludable - by consuming the good, someone else is not prevented from consuming the good as well
non-rivalrous - the benefit other people get from the good does not diminish if more people consume the good.
What is the free rider problem, and what it does to the provision of public goods
people who do not pay for the good still receive benefits from it, in the same way people who pay for the good do.
This causes there to be an under-provision of public goods as there is little/no incentive to provide them
What are private goods.
Private goods are goods that are rivalrous and excludable
What are Quasi-Public Goods
goods that have characteristics of both public and private
goods
They are semi-excludable and semi-rivalrous e.g Roads, pay tolls on roads, you cannot fully use it in rush hour for example
What is an externality
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism. In other words, it is the spill over effect of the production or consumption of a good or service.
Define Merit and De-Merit goods
Merit Good - Goods that are considered socially desirable and are under-consumed if left to the free market because individuals may underestimate their benefits or lack full information.
De-Merit Good - Goods that are considered socially undesirable and are over-consumed if left to the free market because individuals may underestimate the negative externalities or fail to consider long-term effects.
What is Symmetric Information
When consumers and producers have perfect market information to make choices
What is Asymmetric Information
When there is unequal knowledge between consumers and producers
What do monopolies cause for consumers and why do monopolies have no incentive to become more efficient
Monopolies cause consumers to have their needs and wants not fulfilled. They have no incentive to become more efficient as they have little or no competitors that will punish them for this
What is income and what concept is it
Income is a flow concept which refers to the money earnt by a person
What is wealth and what concept is it
Wealth is a stock concept referring to assets held by someone
What are indirect taxes
Taxes on expenditure
What are subsidies
A payment from the government to a producer to lower their costs of production and to encourage them to produce more
What is maximum pricing, and where should they be set to be effective
When a price is set to where a good cannot be sold at a higher price.
They must be set below market equilibrium to be effective
What is minimum pricing and where should they be set to be effective
A price set to where a good cannot be sold at any lower than that price
Must be set above the market equilibrium
What are tradeable pollution permits
A limit set on the amount that a firm/industry can pollute in terms of CO2 emissions
What are Advantages of pollution permits (3)
This should benefit the environment in the long run, by encouraging firms to use green production methods.
The government could raise revenue from the permits, because they can sell them to
firms. This revenue could then be reinvested in green technology.
If firms exceed their permit, they will have to purchase more permits from firms which did not use their whole permit. This raises revenue for greener firms, who might then invest in green production methods.
What are disadvantages of pollution permits (4)
However, it could lead to some firms relocating to where they can pollute without limits, which will reduce their production costs.
Firms might pass the higher costs of production onto the consumer.
Competition could be restricted in the market, if the permits create a barrier to entry for potential firms.
It could be expensive for governments to monitor emissions.
What is Government failure and what does it cause
Governments can fail when they intervene in markets. They could worsen the market failure already present or a new failure might occur.
This results in a net welfare loss to society.
What are the causes of government failure and explain them (4)
Distortion of Price Signals -Government subsidies could distort price signals by distorting the free market
mechanism. A free market economist would argue that this could lead to government failure. There could be an inefficient allocation of resources because the market mechanism is not able to act freely.
Unintended Consequences - This is when the actions of producers and consumers have unexpected, or unintended, consequences.
Excessive Administration Costs - The social benefits of a policy might not be worth the financial cost of administering the policy. It might cost more than the government anticipated. The government has to consider whether the policy is good value for money.
Information gaps - Some policies might be decided without perfect information. This might require a full
cost-benefit analysis, and it could be time-consuming and expensive.
