Micro Book 3 Flashcards
(54 cards)
private good
excludable and rivalrous e.g. a box of chocolates
public good
non-excludable, non-rivalrous and have no marginal cost e.g. lighthouses
free rider problem
if no one can be prevented from the benefit, no one has an incentive to pay. Therefore, no incentive for firms to provide the good so must be provided by the government
market failure
when theres a misallocation of resources
3 price functions
- signalling function (signals to traders allowing them to plan their economic activity ie. what customers must pay and what producers will receive)
- incentive function (rewards those who respond to changes in the market)
- allocative function (decides how resources are used)
complete market failure
when a market fails to come into existence or disappears completely
partial market failure
when a market provides a good but in an allocatively inefficient way
tragedy of the commons
effect of indivuals acting in a way where their own self-interest is contrary to what’s best for society
merit goods
goods that are more benficial to consumers than they realise and are underconsumed in a free market
demerit goods
goods that are more harmful to consumers than they realise and are overconsumed in a free market
information failure
when the information available to a decision maker is incomplete, inaccurate or otherwise unreliable leading to market failure
asymetric information
one knows more than the other
externality
a cost or benefit to a third party who isn’t directly involved in an economic transaction
government failure
when government intervention in the economy or a market leads to a misallocation of resources therefore the cost of intervention outweighs the benefits
net loss of welfare
- society as a whole is worse off
- marginal cost of intervention > marginal social benefit of intervention
law of unintended consequences
- when actions result in reactions that weren’t intended
- can be a form of government failure
causes of government failure (5)
- distortion of price signals
- conflicting objectives
- information gaps
- excessive administrative costs
- unintended consequences
distortion of price signals
type of government failure where the government artificially alters supply, demand or both leading to market inefficiencies e.g. subsidies, taxes
conflicting objectives
type of government failure where achieving one objective comes at the expense of another e.g. stimulating economic growth but causing inflation
information gaps
type of government failure where either the buyer or seller doesnt have access to the information needed to them to be able to make an informed decision e.g. cigarette manufacturers not warning customers of risk
excessive costs
type of government failure where the administrative/regulatory costs of intervention are extremely high e.g subsidies, state provision
government policies to correct market failure (7)
- indirect taxes
- subsidies
- price controls (min/max)
- tradeable pollution permits
- state provision
- information provision
- regulation
indirect tax
- tax on goods and services
- reduces profitability for suppliers so can correct failure
evaluative points for indirect taxes (5)
- difficult to put a value on externalities ie. size of tax
- (opportunity) cost of monitoring and risk of black markets
- regressive: higher proportion of low earners’ income
- effectiveness depends on PED
- potentially inflationary
