Micro 2.Interrelated markets and market failure

Question 1

Joint demand?

Answer 1

Demand for Complimentry goods.

Question 2

Composite demand?

Answer 2

A good is demanded for multiple separate uses

E.g. milk for cheese and cream

Outward shift in demand of of one = inward shift of supply of others

Question 3

Derived demand?

Answer 3

Demand for a factor of production used to produce a good

Question 4

Joint supply?

Answer 4

Supply of one good increases the supply of a by-product e.g. Cow and leather, Chicken and eggs

Question 5

Competitive demand?

Answer 5

Demand for substitute goods

You can derive equal satisfaction from either product

Question 6

Market failure?

Answer 6

When the price mechanism leads to a misallocation of resources and inefficiency

Question 7

Causes of market failure?

Answer 7

Externalities (POS / NEG)
Public goods
Information gaps

Question 8

Positive externality?

Answer 8

When a benefits affecting third parties outside the price mechanism

Question 9

Negative externality?

Answer 9

When a cost affecting third parties outside the price mechanism

Question 10

Social costs?

Answer 10

Private costs + external costs

Question 11

Social Benefits?

Answer 11

Private Benefits + external Benefits

Question 12

How do we further classify externalities?

Answer 12

Production or consumption

Question 13

How to counter negative externalities?

Answer 13

Set up a minimum price for goods
Increase indirect tax
Tradeable pollution permits
Regulation

Question 14

Define regulation

Answer 14

When the govt makes changes to the law to counter market failure

Question 15

How to fix Positive positive consumption externality?

Answer 15

Set a max price below equilibrium

Question 16

How to fix Positive positive production externality?

Answer 16

Subsidies

Question 17

Subsidy?

Answer 17

A grant from the govt to a firm to increase supply and extend Qd

Question 18

Value of per unit subsidy from a graph?

Answer 18

The vertical distance between the supply curves shows the value of the subsidy per unit.

Question 19

Total cost of subsidy from graph?

Answer 19

Rectangle with a height equal to the per-unit subsidy and a width equal to the equilibrium quantity

Question 20

How does a subsidy counter a PPE

Answer 20

Increases and shifts supply

Question 21

Public good?

Answer 21

A non-excludable and non-rivalrous good

Question 22

What does it mean to be non-rivalrous?

Answer 22

A persons consumption of the good does not prevent anyone else from using it

Question 23

Private good?

Answer 23

A rivalrous and excludable good

Question 24

Quasi-Public goods?

Answer 24

Goods that are sometimes non-excludable and non-rivalrous and sometimes the polar opposite

Question 25

Free-Rider Problem?

Answer 25

Consumers wait for others to buy a public good so that they can use it for free Causing no one to ever demand the good, as they are all waiting for another to make the purchase Hence, producers don't supply resulting in market failure, in the form of underproduction by the market

Question 26

How can we solve the free-rider problem?

Answer 26

The government providing state provision of public goods, funded by it's tax revenue

Question 27

What are commons?

Answer 27

Goods available to all, providing a disincentive to conserve that good If consumed sustainably, it can be non-rivalrous Resulting in SR private benefits and LR social costs

Question 28

Tragedy of commons?

Answer 28

The tendency of any resource that is non-excludable to be overused and under-maintained

Question 29

Solutions to tragedy of commons?

Answer 29

Enforcing property rights- providing incentives to private owners to manage the resource Voluntary agreements- volunteers maintain the resource Government regulation- prevents over-usage

Question 30

Information gaps?

Answer 30

When consumers or producers lack the info needed to make an informed decision

Question 31

Types of info gaps?

Answer 31

Incomplete information Asymmetric Information

Question 32

Incomplete Information?

Answer 32

When one doesn't have full information about the externalities resulting from their consumption Causing under or over-consumption

Question 33

What are the solutions to incomplete information (over/underconsumption)?

Answer 33

Regulation Subsidies Advertisement Indirect taxes

Question 34

Asymmetric Information?

Answer 34

When one party knows more than another within a transaction Causing consumers to purchase a misleading product (over consumption)

Question 35

Solutions to Asymmetric Information?

Answer 35

Regulation in the form of: Refunds Replacements Repairs

Question 36

Merit goods?

Answer 36

Goods that are under-consumed due to consumers not considering positive externalities or being affected by info gaps

Question 37

Demerit goods?

Answer 37

Goods that are over consumed due to negative externalities or info gaps

Question 38

How do you decide what's a merit/demerit good

Answer 38

You base it off of your value judgement, because all goods have both positive and negative externalities

Question 39

What is a monopoly?

Answer 39

A price maker/setter within a market- that sets the price above the market's equilibrium Causing market failure, as demand will have to contract to meet the new price Monopolies exploit consumers to generate profit, as they can't sustainably afford the new prices

Question 40

Monopoly power?

Answer 40

The power a firm has to set prices

Question 41

How do monopolies benefit the economy?

Answer 41

When they set new prices, they maximize their profit If they invest their new profit into innovations, these can produce benefits for consumers in the LR Hence, no market failure

Question 42

Labour markets?

Answer 42

The market for workers Firms demand labor to produce goods Households supply labor to earn wages

Question 43

What causes labour market failure?

Answer 43

Geographical or occupational immobility

Question 44

Geographical Immobility?

Answer 44

When a worker remains unemployed due to his location

Question 45

Occupational immobility?

Answer 45

When a worker remains unemployed due to lacking the needed skillset

Question 46

What type of unemployment does factor immobility cause?

Answer 46

Structural

Question 47

How to solve geographical immobility?

Answer 47

Reallocation subsidies Improving transport

Question 48

How to solve occupational immobility?

Answer 48

Education investments Training Apprenticeships

Question 49

Inequitable distribution?

Answer 49

When income and wealth are distributed unfairly, usually due to profit-maximizing companies who keep wages low and prices high.

Question 50

How does inequitable distribution cause market failure?

Answer 50

Consumers have low income but are surrounded by high prices So they turn to crime OR They fall ill (can't afford food) OR Low living standards arise

Question 51

Income?

Answer 51

A measurement of the flow of money a person receives each year

Question 52

Wealth?

Answer 52

The sum of all your assets (things you own) added up

Question 53

Progressive tax?

Answer 53

The higher your income, the higher % of your income is paid in tax It ensures wealth is redistributed from rich to poor Reducing inequality

Question 54

Pros of progressive tax?

Answer 54

Increased Govt revenue = more spending on benefits / services More equitable income distribution (DEBATABLE)

Question 55

Why is equitable income distribution normative regarding progressive tax?

Answer 55

PRO: Wealth is redistributed from the rich to the poor, decreasing inequity CON: The rich work hard + get punished for it, increasing inequity

Question 56

Cons of progressive tax?

Answer 56

The rich work hard + get punished for it, increasing inequity FISCAL DRAG Requires increasingly high tax rates- causes lower consumption by higher earners (negative multiplier effect) Overly generous benefits systems create dependency in the LR