Must Knows Flashcards
(42 cards)
Advantages of Competitive Markets
Efficiency: contestable markets force firms to reduce costs, thus increasing allocative and productive efficiency.
Disadvantages Of Competitive Markets
Barriers to Entry- It’s hard to remove the barriers to entry as they may require firms to have specialized knowledge and technology.
Reducing monopoly power: monopoly can help the market to achieve significant economies of scale. With monopoly power reduced, the market may struggle to achieve productive efficiency.
Brand loyalty: customers may be resistant to switching when a lot of firms enter the market.
Reasons for Government Intervention Good
Correcting Market Failures: Governments intervene to address market failures, such as externalities (positive or negative), public goods provision, and asymmetric information. Intervention can ensure resources are allocated efficiently and fairly.
Promoting Competition: Antitrust laws and regulations prevent monopolies and promote competition, leading to lower prices, higher quality, and innovation in markets.
Reasons for Government Intervention Bad
Government Failure - information failure
Reducing Incentives: Excessive regulation and taxation can reduce incentives for entrepreneurship, investment, and innovation, stifling economic dynamism and growth.
Crowding Out Private Sector: Heavy government involvement in the economy can crowd out private investment, innovation, and entrepreneurship, limiting economic dynamism and competitiveness.
Positives of Taxes to correct market failure
Revenue Generation: Taxes provide governments with funds to finance public goods and services, such as education, healthcare, and infrastructure.
**Correcting Negative Externalities: **Taxes on goods with negative externalities (e.g., carbon taxes on fossil fuels) can internalize external costs and encourage more socially responsible behavior.
Negatives of Taxes to Correct Market Failure
Elasticities
Tax Incidence: Taxes may not always fall solely on the intended target (e.g., consumers or producers) and can lead to unintended consequences such as price increases or reduced output.
Inequality
Advantages of Subsidies to Correct Market Failure
Encouraging Positive Externalities: Subsidies on goods or services with positive externalities (e.g., education, renewable energy) can promote their consumption and production, leading to societal benefits.
Support for Industries: Subsidies can help infant industries or those facing international competition to survive and grow, contributing to economic development and employment.
Income Support: Subsidies targeted at low-income individuals or specific groups (e.g., farmers) can alleviate poverty and improve standards of living.
Disadvantages of Subsidies to Correct Market Failure
Budgetary Costs: Subsidies represent a direct cost to the government budget, diverting resources away from other public priorities and potentially leading to fiscal deficits.
Dependency: Prolonged or excessive subsidies can create dependency among recipients, discouraging innovation, efficiency improvements, and self-sustainability.
Advantages of Price Controls to Correct Market Failure
Affordability: Price controls, such as price ceilings, can make essential goods and services more affordable for consumers, particularly in times of crisis or inflation.
Consumer Protection: Price controls can protect consumers from price gouging and exploitation by monopolistic or oligopolistic firms.
Disadvantages Of Price Controls to Correct Market Failure
Shortages and Surpluses: Price controls can lead to shortages (under price ceilings) or surpluses (over price floors) as they disrupt the equilibrium between supply and demand.
Black Markets: Price controls may incentivize the emergence of black markets where goods are traded at prices above or below the controlled price, leading to inefficiencies and illegal activities.
Reduced Investment and Innovation: Price controls can deter investment and innovation in affected industries by limiting potential profits and returns on investment.
Positives of Regulation to Correct Market Failure
Consumer Protection: Regulations ensure product safety, quality standards, and accurate information, protecting consumers from harm and fraud.
**Fix externality **
Negatives of Regulation to Correct Market Failure
Adminsitrative Costs: Regulations impose compliance costs on businesses, including administrative expenses, compliance monitoring, and potential fines, which can hinder innovation and competitiveness.
Regulatory Capture: Regulatory capture occurs when regulated industries exert undue influence over regulatory agencies, leading to lax enforcement or regulations that favor industry interests over public welfare.
Market Entry Barriers: Excessive or poorly designed regulations can create barriers to entry for new firms, reducing competition and innovation in the market.
Black Market
Perfectly Competitive Markets Positives
No Barriers to Entry: There are no barriers to entry or exit, allowing new firms to enter the market easily, leading to increased competition
Allocative Efficiency: Resources are allocated according to consumer preferences, maximizing consumer and producer surplus.
Perfectly Competitive Markets Negatives
**Lack of Product Dynamic efficency **
No Economic Profits in the Long Run: Due to free entry and exit, firms in perfectly competitive markets only earn normal profits in the long run, discouraging investment and innovation.
Lack of Economies of Scale: Firms may not achieve economies of scale due to their small size and inability to influence market prices.
Monopoly Positives
Economies of Scale: Monopolies can benefit from economies of scale, leading to lower average costs of production and potentially lower prices for consumers.
Dynamic Efficiency: Monopolies may have the financial resources and incentives to invest in research and development, leading to innovation and the development of new products.
Ability to Internalize Externalities: Monopolies have the ability to internalize positive externalities by investing in projects that benefit society but may not be profitable in a competitive market.
Monopoly Negatives
Reduced Consumer Choice: Monopolies may offer fewer choices and lower quality products compared to competitive markets, as they face less pressure to innovate and improve.
Allocative Inefficiency - usually higher prices: Monopolies may produce less output and charge higher prices than would be socially optimal, leading to allocative inefficiency and deadweight loss.
Monopolistic Competition Positives
Product Differentiation: Firms in monopolistic competition can differentiate their products through branding, advertising, and product features, leading to greater consumer choice and diversity.
Dynamic Efficiency: Competition among firms in monopolistic competition can incentivize innovation and product development as firms seek to differentiate their products and attract customers.
Non-Price Competition: Firms can compete on factors other than price, such as quality, customer service, and branding, leading to a more diverse and dynamic marketplace.
Monopolistic Competition Negatives
Allocative Inefficiency: Firms in monopolistic competition may not produce at the lowest possible average cost, leading to allocative inefficiency and deadweight loss.
Price Rigidity: Firms may be reluctant to lower prices in response to cost reductions or increased competition due to brand loyalty and the desire to maintain profit margins.
Advertising Costs: Firms in monopolistic competition may incur significant advertising and marketing expenses to differentiate their products, leading to higher prices for consumers and potentially wasteful spending.
Ways to Manage Monopoly Power
Regulation (price caps) (profti controls/ windfall taxes)
Public Ownership and Nationalization
Promotion of Competition/contestability
Evaluate Regulation to Manage Monopoly Power
Establish regulatory agencies tasked with monitoring and regulating monopolistic industries to ensure fair competition and consumer protection.
Impose price controls or price ceilings to limit the ability of monopolies to set excessively high prices and exploit consumers.
Implement quality standards and service requirements to prevent monopolies from reducing product quality or innovation.
Evaluation : Regulatory Capture
Evaluate Public Ownership and Nationalisation to Manage Monopoly Power
Nationalize monopolistic industries or essential services to bring them under public ownership and control.
Economies of scale
Evaluation : No Dynamic Efficiency
Evaluate Promoting Competition to Manage Monopoly Power
Encourage market entry and competition by reducing barriers to entry, such as licensing requirements, patents, and regulatory hurdles.
Provide subsidies, grants, or tax incentives to new market entrants to facilitate their establishment and growth in monopolized industries.
Evaluation : N/A
Price Discrimination (effects on consumers)
Positive Effects: Price discrimination can lead to increased consumer surplus for some consumers who are able to purchase the product at a lower price than they would in a uniform pricing scenario also consumers who have a lower willingness to pay but are still willing to purchase the product at a discounted price benefit from price discrimination.
Evaluation : Price discrimination can result in decreased consumer surplus for certain consumers who are charged higher prices due to their higher willingness to pay. Consumers who are unable to qualify for discounts or preferential pricing may feel discriminated against and experience a decrease in consumer surplus.
Price Discrimination (effects on producers)
Positive Effects: Price discrimination allows firms to capture more of the consumer surplus, thereby increasing producer surplus. ii. By charging higher prices to consumers with higher willingness to pay, firms can extract more value from their product and increase their profits.
Evaluation : Implementing price discrimination strategies can require additional costs for firms, such as developing and managing different pricing tiers or implementing discriminatory practices, which may offset some of the gains in producer surplus.
