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Economics units 3&4 > UNIT 1 AOS 1 - PART 2 (market failure) > Flashcards

UNIT 1 AOS 1 - PART 2 (market failure) Flashcards

1
Q

Market Failure| def

A

= ↓ allocation of resources (MISALLOCATIONS)
= ↓ production
= ↓LS (or economic welfare)

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2
Q

Unregulated market| what happens

A
  • over allocate some g/s and under allocate others (because of self interest)*
  • Thus market failure = intervention required
  • rebalance productionand consumption to reach allocative efficiency (max benefit to society)* HOW DOES REALLOCATION AND BALANCE OCCUR?
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3
Q

Elasticity| def & explanation

A
  • Elasticity - the responsiveness of quantity supplied or demanded to a change of price The more elastic the more it bends (changes)*

| less responsive = less change

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4
Q

Elasticity| domino

A
  • Define PED/PES
  • LOW (INELASTIC) /HIGH (ELASTIC)
  • WHY - factor? Relevant
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5
Q

Factors of Elasticity Demand

A
  • !!degree of necessity - nessary goods and services = inelastic
    (e.g., change in tesla price = greater change in quantity demanded
  • !!Availability of substitutes – no substitutes = inelastic
    (e.g., change in iPhone price = not that much change in quantity demanded (assuming Apple holds some kind of Monopoly))
  • Proportion of income – more expensive (↑take income) = more elastic
    (e.g., pen is cheap so increase in price won’t impact demand that much)
    (car = expensive = people wait to buy the car = more elastic)
  • Time – need now = inelastic, wait = more elastic.
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6
Q

Factors of Elasticity Supply

A
  • !!!Spare Capacity: have spare resources = more elastic
    (can respond to change in price)
    (e.g., increase demand in headphones = if firm has spare capacity can respond to an increase in demand)
  • Production Period: long time to create = more inelastic for a change in price (e.g fruit, veg etc) visa versa
  • !!!Durability: goods stored longer (non-perish goods) = more elastic (can respond quickly to market mech) such as tech
    Perishable goods = limited window which they can be sold for (e.g., fruit)

The ability to be DE depends on PES

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7
Q

Public goods| def

A
  • non-depletable (everyone enjoy the same consumption - non-depletable = cannot be used up)
  • non-excludable (cannot exclude the benefits from a person)
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8
Q

Free rider problem| meaning

A
  • Free rider problem - profit oriented firms = no supply of public goods (as no profit is being made)
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9
Q

Market failure - Government interventionPublic good

A
  • Short term (government subsidies):
    • OVERALL: LOWER COP
    • increase allocation of resources to the g/s
    • gov gives incomes to offer free to public
    • subsidies to cover cop
  • Long term (govt provision):
    • govt full provide (provision) of public goods
    • govt will employ defense, invest, allocate resources
    • incentive to attract labour
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10
Q

Externalities| def

A
  • 3rd party is impacted by a person’s transactions that is often referred to as spillovers
    • consumers and producers both act in self interest = do not care about effects (externalities)
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11
Q

Private benefit| def

A

marginal utility (happiness) that a person receives from consumption

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12
Q

Social benefit:| def

A

consumption leads to some 3rd party benefit may lead to a social benefit

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13
Q

Negative externalities in a free market

A

Ø negative externality = over allocation of resources
* Smokes = cost of 3rd parts = ↑health costs
* producers: profit motive = allocate resources to max profit = doesn’t care about third part impact (self interest)
* consumer: private benefit > social benefit

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14
Q

Positive externalities in a free market

A

Positive externality = under allocation of resources
* Education = less crime = more life = more cohesive society
* Producers: private cost (COP) > social costs
* consumer: act in self interest

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15
Q

Government intervention

Externalities

market failure

A

Consumers
* shift DC right (for g/s with positive externalities) = increase in social benefit = increase in allocative efficiency
* laws ban (production or consumption) certain activies
* advertise g/s that has positive externalities
Producers
* subsidies to reduce cop (of positive externalities g/s)
* NEGATIVE: indirect tax = shift SC to left

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16
Q

Asymmetric info| DEF

A

one party has more information than the other in an exchange)

17
Q

Asymmetric info - market failure

information: Seller > buyers

A

Adverse selection

  • hiding of info (quality)
  • misleading info (health products)
  • consumers don’t understand data (only experts know)

Short term
* seller - more information short run
* overallocation of resources
Long run
* buyers know they’re getting ripped off
overallocation of resources

adverse

18
Q

Information: buyers > sellers

Asymmetric info - market failure

A
  • personal info (holidays, insurance)
  • (moral hazards) changing behaviour once transaction has been made
19
Q

Asymmetric info - market failureGovernment interventions

Government interventions

A
  • regulations - protect from misleading inform (aust consumer law)
  • consumer confidence behaviour = buy more + increase ls = efficient allocation of resources (good package labels)
  • gov can inform public
  • gov subsidies firms provide consumers with useful info
20
Q

Common Access Resources| def

A
  • not owned by anyone
  • no market** price**
  • avaliable to everyone
  • are depletable, rivalrous (like nature), non-excludable
  • (overconsumption of good) -> why
21
Q

unsustainable use of common resources| what happens

A

unsustainable use of common resources = environmental problems
* lack of excludability and no prices = excessive production and consumption = use common resources
* overconsumption of good
* inter-temporal efficiency is compromised

22
Q

CAR Government interventions

A
  • regulations: ban the use of certain CARs (e.g., fishing restrictions)
  • regulations: need permit to do things

legislation

23
Q

Government Failure| def

A
  • intervention leads to a imbalance allocation of resources
  • AE worse and misallocation of resources because of it
24
Q

Government Failure (eg)Cigarettes| interventions + unintended consequences

Cigarettes

A

Government intervention
* indirect tax producers
* ↑ cost of cigarettes

Unintended consequences
* chepaer illegal sustitutes
* black market = use of police resources
*
* resources not allocated to max living standards - AE BAD (as cig = negative externalities)

All allocative efficiency not achinved

25
Q

Government Failure (eg)Min Wages

Min Wages

A

Government intervention
* ↑ min wages level = higher COP = bus move overseas to reduce cost
* lower job opp domestically

Unintended consequences
↑ wages
= ↑ COP in aust
= resources used overseas
= outsourcing
= ↓ unemployment opp domestically
= ↓ AE (misallocation of labour resources)

All allocative efficiency not achinved

26
Q

talk aboout what for matket failure

A
  • over or under allocation of resources without gov

Economics units 3&4 (9 decks)

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