Unit 8 - The Market Mechanism, Market Failure And Government Intervention In Markets

Question 1

Signalling function of prices

Answer 1

Prices provide information to buyers and sellers.

Question 2

Incentive function of prices

Answer 2

Prices create incentives for people to alter their economic behaviour, e.g. a higher price creates an incentive for firms to supply more of a good or service.

Question 3

Rationing function of prices

Answer 3

Rising prices ration demand for a product.

Question 4

Allocative function of prices

Answer 4

Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand.

Question 5

Market failure

Answer 5

When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity.

Question 6

Complete market failure

Answer 6

A market fails to function at all and a ‘missing market’ results.

Question 7

Partial market failure

Answer 7

A market does function, but it delivers the ‘wrong’ quantity of a good or service, which results in resource misallocation.

Question 8

Missing market

Answer 8

A situation in which there is no market because the functions of prices have broken down.

Question 9

Private good

Answer 9

A good,such as an orange, that is excludable and rival.

Question 10

Excludable good

Answer 10

People who are unprepared to pay can be excluded from benefiting from the good.

Question 11

Rival good

Answer 11

When one person consumes a private good, the quantity available to others diminishes

Question 12

Public good

Answer 12

A good, such as a radio programme, that is non excludable and non rival.

Question 13

Quasi public good

Answer 13

A good which is not fully non rival and/or where it is possible to exclude people from consuming the product.

Question 14

Externality

Answer 14

A public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is dumped on third pasrties outside the market.

Question 15

Positive externality

Answer 15

An external benefit that occurs when the consumption or production of a good causes a benefit to a third party, where the social benefit is greater than the private benefit.

Question 16

Negative externality

Answer 16

An external cost that occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost.

Question 17

Property right

Answer 17

The exclusive authority to determine how a resource is used.

Question 18

Free-rider problem

Answer 18

A free rider is someone who benefits without paying as a result of non excitability. Customers may choose not to pay for a good, preferring instead to free ride, with the result that the incentive to provide the good through the market disappears.

Question 19

Production externality

Answer 19

An externality ( Which may be + or - ) generated in the course of producing a Good or service.

Question 20

Consumption externality

Answer 20

An externality ( Which may be + or - ) generated in the course of consuming a Good or service.

Question 21

Merit good

Answer 21

A good, such as healthcare, for which the social benefits of consumption exceed the private benefits. Value judgements are involved in deciding that a good is a merit good.

Question 22

Information failure

Answer 22

Occurs when people make wiring decisions because they do not possess or they ignore relevant information. Very often they are myopic (short-sighted) about the future.

Question 23

Social benefit

Answer 23

The total benefit of an activity, including the external benefits as well as the private benefit. Expressed as an equation: social benefit = private benefit + external benefit.

Question 24

Subsidy

Answer 24

A payment made by government or other authority, usually to producers, for each unit of the subsidised goods that they produce. Consumers can also be subsidised: for example, bus passes given to children to enable them to travel on bussess free or at a reduced price.

Question 25

Demerit goods

Answer 25

Goods, such as tobacco, for which the social costs of consumption exceed the private costs. Value judgements are involved in deciding that a good is a demerit good.

Question 26

Social cost

Answer 26

The total cost of an activity, including the external cost as well as the private cost. Expressed as an equation: social cost = private cost + external cost.

Question 27

Moral hazard

Answer 27

The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely.

Question 28

Immobility of labour

Answer 28

The inability of labour to move from one job to another, either for occupational reasons (e.g. the cost of moving to another part of the country).

Question 29

Competition policy

Answer 29

The part of the government’s microeconomic policy which aims to make goods markets more competitive. It comprises policy toward monopoly, mergers and restrictive trading practices.

Question 30

Competition and markets authority

Answer 30

Government agency responsible for advising on and implementing uk competition policy.

Question 31

Public ownership

Answer 31

Ownerships of industries, firms and other assets such as social housing by central government. The state’s acquisition of such assets is called nationalism.

Question 32

Privatisation

Answer 32

The transfer of assets from the public sector to the private sector.

Question 33

Regulation

Answer 33

The imposition of rules and other constraints which restrict freedom of economic action.

Question 34

Deregulation

Answer 34

The removal of previously imposed regulations.

Question 35

Regulatory capture

Answer 35

Occurs when regulatory agencies act in the interest of regulated firms on behalf of the consumers they are supposed to protect.

Question 36

Tax

Answer 36

A compulsory levy imposed by the government to pay for its activities. Taxes can also be used to achieve other objectives, such as reduced consumption of demerit goods.

Question 37

Price ceiling

Answer 37

A price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets creating excess demand.

Question 38

Price floor

Answer 38

A price below which it is illegal to trade. Price floors l, or minimum legal prices, can distort markets by creating excess supply.

Question 39

Government failure

Answer 39

Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome.