Topic 8 - Market Failures And Government Interventions In Markets Flashcards
(19 cards)
How do price functions work step by step
First of all, when there is an excess is demand for a product, a price increase (incentive function) boosts the incentive for suppliers to produce more hence Supply is matched to which the demand for the product at that price will adjust itself (rationing function) and therefore correct the issue of excess demand.
What is a market failure?
A market failure is when the market mechanism leads to a misallocation of resources (failing to provide a good, or failing to provide the right amount of it )
What is partial/complete market failure?
Complete - a market fails to function at all resulting in a missing market.
Partial - wrong quantity of a good provided.
What are the conditions for a private/public/quasi-public goods
Private -
— Exludable (sellers can prevent individuals who have not paid for the product from using it.)
— rivalrous (usage of private goods has a limitation of party’s who can use the good due to the supply being limited)
Public -
— Non rivalrous
— Non excludable
Quasi public good is either non rivalrous or non exludable but not both.
How does imperfect information cause market failure?
Imperfect information causes irrational decisions and therefore causes market failure. Such as (Overconsumption of demerit goods)
What is the free rider problem
Some one who benefits from a good without having to pay for it as a result of non exclduability.
What is a positive/negative externality
Positive - an external (unintended) benefit that occurs when the consumption or production of a good causes a benefit to the third party
Negative - an external (unintended) costs that occurs when the consumption of a good provides negative impacts on third parties
Production / consumption externalities meaning
Externalities that are created either in consumption or production
What is the social optimum level on an externalities diagram
MSB = MSC
What is the point of private benefit maximisation on a diagram
MPC = MPB
What is the relation between social and private costs in underproduction and overproduction diagrams
Overprod - social costs are greater than private costs
Underprod - Private costs are greater than social costs
What is the relation ship between private and social benefit in overconsumption and underconsumption diagrams
When social benefit is greater than private benefit this is the underconsumption of a good market failure
How to increase usage of merit goods
- government subsidies
- government provision
- behavioural nudges
- education
What are mixed externalities
When there are both positive and negative unintended consequences on the third party.
What are the positives and negatives of privatisation of state owned enterprises?
Positives
- provides government with short term revenue
- promotion of competition — lowers prices
- promotes efficiency
Negatives
- monopoly power abuse
- selling valuable assets for short term revenue is not beneficial fo rthe government
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How can the government correct market failures?
Taxes/subsidies to reduce overproduction or increase underproduction
What is an example of a government failure:
Scottish rent cap
What does government failure bring
Unintended consequences
Give a list of types of government intervention
— Price ceilings
— Min wages
— Subsidies for merit goods to increase output
— Indirect taxes on demerit goods such as sugar
— Education provision
— Government provision of merit goods
— Nationalisation of natural monopolies
— Regulations such as ULEZ
