Theme 1.3 Flashcards
(20 cards)
What occurs when the free market fails to allocate resources to the best interests of society?
Market failure occurs, leading to inefficient allocation of scarce resources.
Economic and social welfare is not maximised where there is market failure.
What is an externality?
An externality is the cost or benefit a third party receives from an economic transaction outside of the market mechanism.
It is the spill-over effect of the production or consumption of a good or service.
What are public goods?
Public goods are non-excludable and non-rival, and they are underprovided in a free market due to the free-rider problem.
Examples include national defense and public parks.
What leads to misallocation of resources in economic decisions?
Information gaps lead to misallocation of resources due to imperfect information.
Consumers and producers rarely have perfect information.
What are private costs?
Private costs are the costs to economic agents involved directly in an economic transaction.
Examples include rent, machinery, labor, insurance, and raw materials.
How is social cost calculated?
Social cost is calculated by private costs plus external costs.
It reflects the cost to society as a whole.
What is the difference between private benefit and social benefit?
Private benefit is what consumers derive from consumption, while social benefit includes private benefits plus external benefits.
Social benefits account for the wider impact on society.
What is the social optimum position?
The social optimum position is where MSC = MSB, representing the point of maximum welfare.
It indicates that social costs equal social benefits.
What are external costs of production?
External costs occur when a good is produced or consumed, such as pollution, leading to MSC > MPC.
They result in over-provision and under-pricing in the market.
What is the area of deadweight welfare loss?
The area of deadweight welfare loss is where social costs exceed private benefits, shown by a triangle in a diagram.
This area indicates inefficiency in resource allocation.
What is an example of an external benefit of consumption?
An example is the decline of diseases due to vaccination programs.
This benefit is often not accounted for, leading to underconsumption.
What is an indirect tax?
An indirect tax is imposed to reduce the quantity of demerit goods consumed by increasing their price.
It aims to internalise external costs.
What role do subsidies play in market failure?
Subsidies encourage the consumption of merit goods by including the full social benefit in the market price.
They help correct underconsumption in free markets.
What is the free-rider problem?
The free-rider problem occurs when individuals benefit from a good without paying for it, leading to underprovision of public goods.
This is due to the non-excludable nature of public goods.
What distinguishes private goods from public goods?
Private goods are rival and excludable, while public goods are non-rival and non-excludable.
A chocolate bar is an example of a private good.
What are quasi public goods?
Quasi public goods have characteristics of both public and private goods, partially provided by the market.
Examples include roads, which can be semi-excludable through tolls.
What is symmetric information?
Symmetric information means consumers and producers have perfect market information for decision-making.
This leads to efficient allocation of resources.
What is asymmetric information?
Asymmetric information is when there is unequal knowledge between consumers and producers, leading to market failure.
It can result in issues like the principal-agent problem.
What is moral hazard?
Moral hazard occurs when a party with superior knowledge alters behavior to benefit themselves at the expense of another party.
This is often seen in insurance markets.
What is imperfect information?
Imperfect information occurs when information is missing, preventing informed economic decisions.
This can lead to consumers overpaying or firms producing incorrect amounts.
