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PAPER 1 ECONOMICS > Market Mechanism, Market Failure, Gov intervention > Flashcards

Market Mechanism, Market Failure, Gov intervention Flashcards

1
Q

The Price Mechanism

A
  • the rationing function
  • the signalling function
  • the incentive function
  • the allocative function
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2
Q

The RAtioning FUnction

A
  • as prices rise, removes excess demand, only consumers with ability to pay can purchase goods
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3
Q

The Signalling Function

A

-prices provide important information to market participants i.e increase or decrease production

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4
Q

The Incentive function

A

increased prices strengthen incentive for firms to produce more

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5
Q

The Allocative function

A

the function of prices that acts to divert resources to where returns can be maximised

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6
Q

Market failure

A

when the free market leads to a misallocation of resources in an economy

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7
Q

complete market failure

A

ie missing market

when free market fails to create market for particular goods and services

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8
Q

public goods

A

goods that are non rival and non excludable in consumption

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9
Q

non excludable

A

can’t prevent non paying consumers from consumin

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10
Q

non rival

A

one persons enjoyment of a good does not diminish anothers enjoyment

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11
Q

the free rider problem

A

individual consumers hope to get a ‘free ride’ without paying for the benefit they enjoy
- public goods = complete market failure- free markets no incentive to provide

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12
Q

private goods

A

a good that is rival and excludable in consumption

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13
Q

quasi- public goods

A

a good that exhibits not all but some characteristics of a public good

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14
Q

externalities

A

third party affects arising from the consumption and production of goods and services

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15
Q

MSC

A

Marginal private costs + marginal external costs

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16
Q

MSB

A

marginal private benefit + marginal external benefit

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17
Q

when is social welfare optimises

A

when MSB = MSC

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18
Q

Positive Externalities in Production

A

1) MPC > MSC therefore negative marginal external costs
2) free market equilibrium: MPB = MPC
3) socially optimal equilibrium: MSB = MSC
4) welfare gain to society as MSB > MSC at fm eq as FM doesn’t account for external benefits
5) underproduction

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19
Q

Positive Externalities in Consumption

A

1) MSB > MPB therefore marginal external benefit
2) free market equilibirum: MPB = MPC
3) socially optimal equilibrium: MSB = MSC
4) welfare gain to society as MSB > MSC at fm eq as fm doesnt account for external benefits
5) underconsumption

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20
Q

Negative Externalities in Production

A

1) MSC > MPC therefore marginal external cost
2) Free market equilibrium: MPB = MPC
3) socially optimal equilibrium: MSC = MSB
4) welfare loss to society as MSC > MSB at fm eq as fm doesnt account for external costs
5) overproduction

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21
Q

Negative Externalities in Consumption

A

1) MPB > MSB therefore negative marginal external benefit
2) Free market equilbrium: MPB = MPC
3) socially optimal equilibirum: MSC > MSB at fm eq as fm doesnt account for external costs
4) overconsumption

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22
Q

tragedy of the commons

A

the overuse of natural resources such as oceans, forests or atmospheres
- can be analysed using negative externality diagrams

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23
Q

merit goods

A

a good that would be underconsumed in a free market

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24
Q

Why are merit goods under consumed?

A

1) Information failure- people unaware of the potential private benefits from consuming merit goods in the long run
2) expensive
3) society may not take into account the wider benefits to society of their use of merit goods

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25
Q

demerit goods

A

a good that would be overconsumed in a free market

26
Q

why are demerit overconsumed

A

1) information failure- people unaware of the damage to their health
2) cheap
3) society doesnt take into account wider external cost

27
Q

Market imperfections

A
  • imperfect information
  • monopoly
  • immbolility of fOp
  • occupational immobility
  • geographical immobility
28
Q

occupational immobility

A

difficult to move jobs due to lack of skills

29
Q

geographical immbolity

A

difficult moving to locations where jobs available

30
Q

government intervention

A

action taken by government that seeks to change the decisions made by individuals, groups and organisations about social and economic matters.

31
Q

reasons for gov intervention

A
  • correct market failure
  • achieve fairer distribution of income and wealth
  • achieve gov macro objectives
32
Q

indirect tax

A
  • tax on spending, sometimes used to reduce consumption
33
Q

unit taxes

A

fixed amount added per unit

34
Q

ad valorem

A

adding a percentage of the price of a good eg vat

35
Q

advantages of indirect tax

A

1) strong tax revenue, gov can spend on healthcare
2) use of price mechanism, consumers and producers decide how to adjust behaviour
3) helps internalise external costs

36
Q

disadvantages of indirect tax

A

1) if placed on inelastic goods, demand may not fall unless large tax
2) difficult to place accurate monetary value on external costs
3) tends to be regressive- larger percentage of poorer persons income

37
Q

subsidies

A

payment made to producers to encourage increased production of a good or service

38
Q

Advantages of subsidies

A

1) increase consumption of merit goods, internalise external benefit
2) reduce price of goods, more affordable for those on lower incomes

39
Q

Disadvantages of subsidies

A

1) opportunity cost
2) firms may become reliant- encourages productive inefficiency, reduces international competitiveness lr
3) little impact on inelastic goods

40
Q

minimum prices

A

a price floor placed above free market equilibirum

41
Q

Advantages of minimum price

A

1) gives producers guaranteed income (raise living standards)
2) encourage production of essential products

42
Q

Disadvantages of minimum price

A

1) consumers pay higher price, reduce disposable income
2) reduce international competitiveness if price raised above foreign competitors
3) may encourage people to seek cheaper, more harmful alternatives

43
Q

Maximum prices

A

a price ceiling above which prices are not permitted to rise

44
Q

Advantages of maximum prices

A

1) without, people may not be able to afford certain goods

2) reduce ability of firms with monopoly power to exploit

45
Q

Disadvantages of maximum prices

A

1) creation of excess demand implies queues shortages waiting list
2) may lead to the establishment of black markets

46
Q

government failure

A

when government intervention in a market reduces overall economic welfare

47
Q

Reasons for government failure

A

1) inadequate information
2) unintended consequences
3) market distortions
4) administrative costs

48
Q

inadequate information

A
  • difficult in practice to place an accurate monetary value on external costs and benefits
  • therefore unlikely to completely internalize externalities and lead to social optimum or allocative efficiency
49
Q

administrative costs

A

costs of researching and implementing any intervention may outweigh the benefit of the policy itself

50
Q

Competition Policy

A

government policy that aims to make markets more competitve

51
Q

Competition Policy focuses on four areas

A

1) monopolies
2) mergers
3) restrictive trading practices
4) promoting competition

52
Q

Methods to tackle monopolies;

A

1) Windfall taxes on snp
2) Maximum prices
3) deregulation = removing B2E = more contestable

53
Q

mergers

A

when two or more firms willingly join together

54
Q

Public ownership

A

government ownership of firms, industries or other assets

55
Q

Nationalisation

A

the transfer of assets from the private sector to public ownership

56
Q

Advantages of public ownership

A

1) more likely to take into account externalities not profit maximising
2) social welfare = allocatively efficient

57
Q

Disadvantages of public ownership

A

1) Lack of dynamic efficiency = lack of pressure to maximise profits, absence of competition
2) Lack of expertise= could be argued best managers found in private sector, where financial rewards could be higher than public

58
Q

Advantages of privatisation

A

1) Raising extra rev for gov = sale of state owned assets to private sector can generate significant short term revenue
2) promoting competition
3) promoting efficiency - profit motive cut costs

59
Q

Disadvantages of privatisation

A

1) Exploitation of monopoly power
2) Short termism = pressure from shareholders who demand annual dividends = focus on profit maximising cutting costs rather than long term investment projects
3) ignoring externalities

60
Q

privatisation

A

sale of government owned assets to the private sector

PAPER 1 ECONOMICS (5 decks)

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