Unit 2B market failure and government intervention

Question 1

What are advantages of a market system

Answer 1

it automatically adjusts to peoples wants

there’s a wide variety of g/s to create market power and meet consumer needs

competition forces businesses to be efficients

government doesn’t have to solve basic economic problem

Question 2

what are the disadvantages of market system

Answer 2

FOP’s aren’t employed if not profitable

certain g/s like public goods and services may not be produced

demerit goods can be introduced

production leaves to negative externalities

Question 3

what is market failure

Answer 3

when the outcome of a free market differs from a socially optimal outcome

Question 4

what can price mechanisms fail to acount for

Answer 4

all costs and benefits of consuming or producign a good which leads to overproduction of demerit goods and underproduct of merit goods

Question 5

types of market failure

Answer 5

monopolies

lack of provision of public goods

externalities

factor immobility

underprovision and underconsumption of merit goods

over provision and over consumption of demerit goods

Question 6

how does market failure occur

Answer 6

when free markets do not operate efficiently the inefficiency in the allocation of resources hinder and reduce the production of some essential goods and services

Question 7

how is consumption of merit goods increased

Answer 7

by advertising, subsidies or tax reductions, and most commonly government provisions

Question 7

What is a public good

Answer 7

extreme examples of merit goods that are provided by the government

Question 8

what is a merit good

Answer 8

goods for which the social benefits of consumption outweigh private benefits

Question 9

What are properties of merite goods

Answer 9

they create positive benefits and are under-produced by the free market and under consumed by consumers

Question 10

what is the solutions to public goods

Answer 10

direct provision is when government provides public goods

contracting out where governments fund public services that are provided by the private sector

Question 11

define externalities

Answer 11

the consequences of the actions of consumer and producer that affect a 3rd party

Question 12

what’s private cost

Answer 12

costs for consumers or firms

Question 13

what’s external cost

Answer 13

costs affecting people not involved in the buying and producing of g/s

Question 14

what’s private benefit

Answer 14

advantages for a consumer or firm after purchase

Question 14

what’s social benefit

Answer 14

the full advantages for society as a result of the consumption or production of g/s

Question 14

whats social cost

Answer 14

societal impact by economic actions of consumers and producers

Question 14

whats external benefit

Answer 14

advantages for theose who didn’t produce or consume the g/s

Question 15

what does a negative externality allow us to infer about a g/s

Answer 15

when social costs are greater than private costs so there’s the overproduction of a good, private benefits are greater than social benefit causing over consumption

Question 16

what do positive externalities show us

Answer 16

that social benefit is greater than private benefit thus under consumption of it and private costs are greater than social costs meaning that goods are underproduced

Question 17

how to decrease consumption of demerit good and solve over production of demerit good

Answer 17

by taxation, banning of good, regulation, e.t.c

Question 18

what are main reasons that government intervenes in markets

Answer 18

equity and efficiency

Question 19

what’s direct tax and who is it paid by

Answer 19

tax that is paid directly to the government and it’s paid by households and firms

Question 20

What are the 2 types of tax

Answer 20

direct and indirect ax

Question 21

what is incidence tax for g/s with elastic demand

Answer 21

supplier will carry more of the tax as they want profit maximisation

Question 21

what is tax incidence

Answer 21

the division of tax between producers and consumers

Question 21

what's specfic tax

Answer 21

a fixed amount of tax placed on a particular good

Question 21

what's indirect tax and who pays it

Answer 21

its tax money collected by a producer of a g/s then to government and it's paid by households

Question 22

how is specific tax carried out

Answer 22

cost that is paid by the porducer of the g/s then the cost of it will be passed onto the customar by the increasing the price of the g/s

Question 23

what is incidence tax for g/s with inelastic demand

Answer 23

buyers will carry a higher amount of the tax then the supplier.

Question 24

reasons that government impose indirect taxes

Answer 24

good source of tax revenue if g/s is inelastic in demand and supply discourages demerit good consumption and correct negative externalities

Question 25

what occurs to the supply curve once a tax is introduced

Answer 25

it shifts to the left as tax can be a additional cost for production

Question 26

what's the impact of a specific tax on consumers

Answer 26

specific tax will raise prices of g/s and they opt for substitues of the g/s

Question 27

what's the impact of a specfic tax on producers

Answer 27

increased cost of production thus a shift to the left for quantity supplied

Question 28

what's the impact of a specific tax for government

Answer 28

increase in revenue

Question 29

impact of indirect tax on consumers

Answer 29

g/s price increase, less disposable income

Question 30

impact of indirect tax on producers

Answer 30

increase production costs, leading to a shift in the supply curve to the left.

Question 31

impacts of indirect tax on government

Answer 31

Indirect taxes generate revenue for the government, helping to finance public goods and services.

Question 32

what is a grant/subsidy

Answer 32

money given by the government to encourage the production of a g/s

Question 33

how subsidies help society

Answer 33

it can lower FOP prices thus encouraging production, such as new technologies or discoveries.

Question 33

how can subsidies negatively impact society

Answer 33

creates a dependance on subsidies perhaps, inefficient resource allocation, e.t.c

Question 34

why do governments offer subsidies

Answer 34

to increase revenues of firms to make products more affordable to encourage production and consumption of merit goods

Question 35

what are consequences of subsidies

Answer 35

competing foreign firms suffer as they may not be price competitive anymore society is worse off due to an over allocation of resources to the good more workers are likely to be hired increasing employment producers gain a higher price or income and make a higher quantity of products quantity demanded increased due to fall of price in subsidized good

Question 35

what effect would subsidies have on inelastic demand

Answer 35

there would be a small increase in quantity demanded The subsidy will cause a small reduction in price, but the effect on quantity demanded will be limited

Question 36

what effect would subsidies have on elastic demand

Answer 36

they would increase quantity demanded by a lot price reduction would be sighnificant

Question 36

what effect would subsidies have on consumers

Answer 36

their g/s would be lower in price, higher availability

Question 37

what effect would subsidies have on producers

Answer 37

helps increase demand for their product helps them stay competitive but can be disadvantaging firms without government support Subsidies can reduce incentives for producers to innovate and improve efficiency. making them ore dependent on government support

Question 38

what effect do subsidies have on governments

Answer 38

significant government funding tax money could cause market inefficiencies helps achieve social and economic policy goals by supporting merit good production help stabilize prices and reduce inflation, especially in essential sectors like food and energy.

Question 39

whats a price floor

Answer 39

a legal minimum price for the market

Question 40

why are price floors imposed

Answer 40

they're imposed bc. governments beleive market price is too low

Question 41

where do price floors need to be set for it to be effective

Answer 41

above the market equilibrium

Question 42

who does the price floor protect

Answer 42

producers,

Question 43

what are sellers protected from in price floors

Answer 43

a market equillibrium that's too low for producers to cover costs and keep the producers competitve and in business

Question 44

common businesses that recieve price floors

Answer 44

agricultre or food as they're essential for domestic food supply

Question 45

Result of price floor for markets

Answer 45

a surplus of g/s occurs

Question 46

what are price ceilings

Answer 46

a maximum legal price for the market of a g/s

Question 47

who and why does a price ceiling protect

Answer 47

households, they protect households from high prices

Question 48

What g/s is price ceilings put at

Answer 48

neccesiity goods, housing, energy

Question 49

implications of price ceiling

Answer 49

shortages, now many consumers are happy to buy but producers only want to give a lesser ammount giving rise to black markets, rationing, and longer wait for g/s

Question 50

what's nationalisation

Answer 50

the process of moving ownership of private sector firms to the public sector

Question 51

benefits of nationalisation

Answer 51

increased control over key industries, allowing better management of the countries economy they will be better equipped to provide esential services also allows access to key services for low income households

Question 52

what are the drawbacks of nationalisation

Answer 52

there could be a lack of competion that results in high prices and low quality products. there's a opportunity cost heavily associated with govrnment speding of tax money as it could've been used to make another school

Question 53

what's privatisaiotn

Answer 53

when process is moving firms from the public sector to the private sector

Question 54

what's benefits of privatisatioin

Answer 54

increased efficency as private sector companies aim to have the highest profit meaning greater efficency and cost savings better decision making with this focus on profit which lead to better outcomes for companies and customars increased accountabulity private sector companies are accountable and improve accountability and transparency

Question 55

what are draw backs of privatisation

Answer 55

lack. ofcontrol as key industries like water can be privatised with possibilities of them becoming monopolies and exploiting the public by charging unreasonable high prices privatising merit goods as they will be interested in porfit maximisation than providing essential services to all

Question 56

why are monopolies restricted by government

Answer 56

to promote competition, increase consumer choice and decrease prices, and therefore achieve efficiency in production and the allocation of resources'

Question 57

what's direct provsion

Answer 57

government providing merit goods and public goods with their public sector companies

Question 58

what's indirect provision

Answer 58

when the government pays or invests private sector firms to provide merit goods at a reasonable price to the public