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microeconomics > section 8 > Flashcards

section 8 Flashcards

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1
Q

market failure

A

occurs when consumer welfare is not maximised

when the market fails to allocate recourses efficiently

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2
Q

complete market failure

A

market fails to function at all and there is a ‘missing market’

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3
Q

partial market failure

A

the market delivers the ‘wrong’ quantity of good, and service and a misallocation of recourses occurs

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4
Q

types of market failure

A

monopoly
factor immobility
imperfect information
public goods
consumption externalities
demerit and merit goods
production externalities
absence of property rights
inequality

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5
Q

monopoly power

A

the monopoly is able to raise the price causing an under-production of the product = partial market failure

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6
Q

immobility of factors

A

factors of production (cell) cant be moved easily in the short run

demand rises, if supply cannot expand to match then disequilibrium occurs = partial market failure

(example; labour market with occupational and geographic immobility)

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7
Q

imperfect information

A

occurs when, due to a lack of information, people make decisions that do not maximise their consumer welfare

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8
Q

asymetric information

A

when one party has more information than another - normally the supplier

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9
Q

examples of imperfect information

A

fast food, sugar, sunbeds = overconsumed

fruits, vegtables, excersise = underconsumed

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10
Q

example of asymmetric information

A

akerlofs market for lemons/2nd hand car market

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11
Q

public goods

A

goods that are non-excludable and non-rival

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12
Q

non-excludable

A

people cannot be stopped from consuming and benefiting from the good

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13
Q

non-rival

A

one persons consumption of a public good does not decrease the benefit (utility) gained by another consumer of the public good

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14
Q

examples of public goods

A

armed forces
lighthouses
streetlights
flood defence
firework displays
tv and radio broadcasts (debatable)

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15
Q

private goods

A

goods that are excludable and rival

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16
Q

quasi-public goods

A

goods that have one characteristic of a public good and one of a private good

either non-excludable and rival or non-rival and excludable

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17
Q

free rider problem

A

occurs because public goods can be consumed without paying for them

leading to no incentive to produce, providing less than what is socially optimal

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18
Q

how do public goods lead to market failure

A

free-riders problem (underproduction due to no profit incentive)

complete market failure

government has to provide public goods

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19
Q

marginal private cost

A

additional cost to the firm of producing one more unit

the supply curve

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20
Q

marginal private benefit

A

additional benefit/utility to the individual of consuming one more unit

the demand curve

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21
Q

marginal social cost

A

additional cost to society of producing one more unit

exists only when production externalities occur in a market (because no externalities = sc = pc)

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22
Q

marginal social benefit

A

additional benefit to society of consuming one more unit

exists only when consumption externalities occur in a market (because no externalities = sb = pb)

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23
Q

externalities

A

the spill over effects on third parties as a result of economic activity

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24
Q

third parties

A

not producer or consumer

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25
negative consumption externalities on graph
difference between sb and pb (pb > sb) = social and free market equilibrium dont match = partial market failure over-consumption (social q < private q)
26
examples of negative consumption externalities
alcohol cigarettes fast food
27
examples of positive consumption externalities
education healthcare public transport cultural activities (museums/galleries)
28
positive consumption externalities on a graph
difference between pb and sb (sb > pb) = social and free market equilibirum dont match will be consumed (social q > private q)
29
merit good
when merit goods are consumed they have a greater benefit than the consumer realises due to positive consumption externalities and imperfection information
30
examples of merit goods
education health/vaccines public transport cultural activities wifi sporting activities seatbelts
31
in a pure free market economy, what happens to merit goods
will be under-consumed and priced too high
32
demerit goods
when they are consumed they have a greater cost than consumer realises due to negative consumption externalities and imperfect information
33
demerit good examples
cigarettes alcohol fast food sugar gambling recreational drugs car journeys
34
in a pure free market economy what happens to demerit goods
will be overconsumed and priced too low
35
negative production externalities examples
air transport energy production from fossil fuels livestock farming (methane) mining for rare earth materials (battery production) use of pesticides
36
negative production externalities on a graph
difference between pc and sc (sc < pc) = social and free market equilibrium dont match over-production (social q < private q)
37
environmental market failure
negative externalities arising from the over-exploitation of environmental recourses
38
property rights
the legal rights of ownership or use of an economic recourse
39
absence of property rights
no one owns and controls a particular recourse (leads to over-exploitation)
40
examples of environmental market failure
overfishing (endangering fish species) deforestation overgrazing common land until it can no longer support livestock over polluting earths atmosphere
41
tragedy of the commons
over-exploitation of land, it becomes degraded and unusable
42
positive production externalities examples
farming
43
positive production externalities on a graph
difference between pc and sc (pc < sc) = social and free market equilibrium dont match underproduction (social q > private q)
44
income
a flow (inwards) can be wages or salaries, profit, dividends, interest and rent
45
wealth
a stock and a measure of all assets owned
46
equality
when income and wealth are the same for everyone
47
inequality
when income are not the same for everyone
48
causes of income inequality
different education, qualifications or skills
49
causes of wealth inequality
inheritance or winnings
50
equity
fair distribution of income and wealth
51
what graph to draw for equity
merit good (has macro goods of lower unemployment and higher growth)
52
arguments against/for decreasing inequalities in income and wealth
for; large inequality will create and 'underclass' that lacks opportunity + leads to market failure (equity = merit good) against; would decrease the incentive to working hard if government redistributes equally - also leads to market failure
53
methods to decreasing inequality
increasing progessive taxation decreasing regressive taxation increasing wealth taxation transfer payments/benefits raising minimum wage increase spending on education and training
54
indirect tax
(e.g. vat) a tax on expenditure, usually a percentage tax- higher on demerit goods increases cost of production and therefore decreases supply/increases price to decrease qd
55
benefits of indirect taxation
correcting market failure tax revenue for the governmnet market-based intervention
56
problems with indirect taxation
demerit goods are often necessity, addictive or lack close substitutes indirect taxes are regressive size of tax may be too small difficult to estimate size of the externality
57
regulation
involves the imposition of rules, control and constraints which restrict freedom of economic action in the market place
58
examples of regulation
smoking ban driving laws (seatbelts) advertising bans + making firms advertise neg con ext. health and safety laws maximum emissions
59
benefits of regulation
corrects market failure regulation makes certain behaviour by firms or consumers illegal
60
problems with regulation
legislation and enforcement expensive and not always effective popularity
61
subsidy and effect
a government grant given to producers/firms to decrease costs of production (shifting s to the right, decreasing p and increasing q)
62
benefits of subsidies
correct market failure market-based intervention
63
problems with subsidies
'good' products are often a necessity, so subsidies won't increase quantity enough to solve market failure subsidies have to be funded from tax revenue size of subsidy subsidy may lead to a loss of productivity difficult to estimate the size of the externality
64
government provision
government provided service as part of the public sector, financed by tax revenue and service is normally provided free at the point of consumption
65
government provision examples
armed forces police fire services the nhs state education roads
66
benefits of government provision
correcting market failure (of public goods) equity positive externalities
67
problems with government provision
has to be funded by tax revnue gov spending leads to crowding out (increasing demand for factors of production so price increases) lack of competition and profit motive if service is free at point of consumption, can be overconsumed estimating the size of the positive externality
68
nationalisation
when the gov takes over production of a service from a private firm
69
minimum price
sets a price floor that makes it illegal for a firm to trade below this price
70
minimum price examples
minimum price on alcohol per unit in scotland
71
effect of minimum price
increases price of product so demand contracts and quantity consumed decreases
72
benefits of minimum price
correcting market failure (neg externalities)
73
problems of using minimum price
leads to excess supply hard to enforce inelastic demand and poverty popularity
74
maximum price
sets a price ceiling that makes it illegal for a firm to trade above this price
75
maximum price examples
energy price gap rail fares water rates tuition fees for university
76
effect of maximum price
decreases price which increases demand which decreases quantity demanded
77
benefits of maximum price
correcting market failure (merit goods underconsumption) decrease in inequality and poverty regulating monopoly power
78
problems with maximum price
possibility of shortages the lower price decreases incentive for firms due to less profit incentive legislation and enforcement popularity
79
information provision
involves the introduction of a promotional campaign by the government to influence the behaviour of consumers
80
examples of information provision
drinking responsibility dont drink and drive campgain seatbelts smoking five a day campaigns
81
benefits of information provision
correcting market failure (demerit/merit goods) by removing information failure
82
problems with information provision
high cost of producing advertising information may not be enough to change behaviour price (merit goods still to spenny and vice versa for demerit goods)
83
pollution permits
the right to use or exploit an economic resource to a specific degree pollution permits are a form of property rights
84
benefits of pollution permits
correcting market failure (enviromental market failure + neg prod ext.) encourage firms to be more enviromentally friendly
85
problems of using pollution permits
inequity + inequality monopoly power amount of permits expensive to enforce
86
government failure
occurs when government intervention in a market reduces overall economic welfare (gov enters a market to correct market failure but makes a worse allocation of recources than the price mechanism)
87
law of unintended consequences
whenever the government intervenes in the market economy, effects will be unleashed which the policy-maker had not foreseen or intended
88
examples of gov failure
unintended consequences (hidden economies) market distortions inadequate information (over/under intervention) administration costs

microeconomics (8 decks)

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