microeconomic objectives and policies Flashcards
what are the governments microeconomic objectives
efficiency and equity
when does dwl occur and what is it
occurs when social optimum is not achieved
can be explained as the reduction in net benefit to society when output level is not at the social optimum
when does efficiency in markets occur
when social optimum is achieved where MSB = MSC, maximising society’s welfare
efficient resource allocation may not result in?
equitable outcomes
when does equity occur ? is it a source of mf?
when there is fairness in the distribution of essential goods and services
no
define market failure
when the free market is unable to allocate resources efficiently
source of mf
- public good
- externalities
- information failure: perceived vs actual benefit
- asymmetric info: moral hazard and adverse selection
- factor immobility
- market dominance
explain how positive externalities result in mf + define positive externality
Positive externality in production/consumption exists when there are benefits enjoyed by third parties due to the production/consum of a good or service
explain how negative externalities result in mf + define
Negative externalities in consumption/prod occur when there are costs borne by third parties due to the consumption/prod of the good.
explain how public good results in mf
explain how imperfect info or info failure leads to mf and define it
Information failure or imperfect information arises when economic agents lack critical information to make rational decisions on choices and resource allocation.
explain how asymmetric information results in mf. define asym info, moral hazard, and adverse selection
Asymmetric information is a special case of imperfect information, and describes a situation where economic agents involved in the transaction do not have the same amount of knowledge, resulting in a distortion of incentives and inefficient market outcomes. → may result in the problems of (1) moral hazard (2) adverse selection
moral hazard:
refers to a situation where an economic agent behaves in a way that is detrimental to society as they do not bear the full costs/enjoy the full benefits of their actions, known as hidden action problem
adverse selection:
a situation where one party in a transaction knows something about its own characteristic that the other party does not know and is often known as the hidden-characteristic problem
define occupational immobility of factor inputs and explain how it leads to mf
Due to the mismatch between skills of fop and those required by producers seeking fop, resulting in inability of fop to move from one sector to another
define geographical immobility of factor in puts and expln how it leads to mf
Due to inability or lack of willingness of fop to move geographical locations
policies for public good
direct/joint provision
policy for positive externalities
- subsidy (production)
- moral suasion
- direct provision
- legislation and regulation (make it compulsory)
policy for negative externalities
- tax
- moral suasion
- legislation and regulation (quota, ban)
- tradeable permits (for pollution) such as EUETS (EU emissions trading scheme)
policy for asymmetric info
Adverse selection (informed sellers, uninformed buyers)
Legislation
AIM: restrict ability of informed party from taking advantage of hidden information and equalise info among parties
IM: product liability laws (if product is defected, can get compensation or replacement)
Obligatory warranties = improves transparency and accountability of producer = reduce asym
LIM: cost of monitoring: cost of violation must be hefty to deter violations
provision of information via standards and certifications
AIM: reduce asym info
IM: provide buyers with info and reduce adverse selection as consumers who desire high quality products will be able to confidently purchase them with credible info given
adverse selection (informed buyers, uninformed sellers)
direct provision
AIM: ensure there is no missing market
IM: Make the good compulsory
Spreads risk, can make insurance premiums lower and more affordable
LIM: gov expenditure
moral hazard
legislation and regulation
AIM: Remove incentive to behave in a detrimental way and bear more of the benefits or costs of their actions
IML implement law where buyers pay a share of the costs through co-payments (percentage paid by the insured) and deductibles ( individual must pay before being compensated)
LIM: imperfect info, little data on how to optimally set level of these parameters
policy for imperfect info
Information failure 1 policies
legislation and regulation
AIM: correct perceived to actual to eliminate dwl from under/over consumption
IM: use specific examples and contextualise to show how information failure is corrected
End point: Qs reached, dwl eliminated = ae = mf corrected
LIM: time lag, budget
taxes/subsidies
Same thing
public education (moral suasion)
Same thing
policy for each type of factor immobility
occupational immobility of labour
retraining and upgrading
AIM: greater productivity, workers remain relevant in globalised world
moral suasion
Encourage skills upgrading
grants and subsidies for new industries
Help to develop new industries to channel unemployed labour = more productive
reduce information gap in job matching
Reduce info gap through providing job matching or information service for factor owners
LIM: depends on receptivity and learning attitude
Expenditure on subsidies
geographical immobility of labour
improve transport infrastructure
Workers can easily move from one place to another e.g. rural to urban
LIM: takes long time to develop, does not address short term issues
Cost is high, opp cost incurred
improve housing market at destination
Directly provide/incentivise private firms to supply housing at destination → improve willingness to move where they are needed
LIM: high cost, opp cost
Takes time
occupational immobility of capital
incentivise firms to purchase capital
Provide incentives like tax relief to buy capital goods
Does not tackle root cause, which is to smoothen out the capital goods’ transition from one use to another → replacement of an entire industry’s worth of capital goods incurs high opp cost
geographical immobility of capital
subsidies/grants
Tax rebates, advanced infra, skilled workforce to attract FDI
Compensates transport costs
LIM: strain on gov expenditure
