Yr1 The Market Mechanism, Market Failure and Government Intervention in Markets Flashcards
(104 cards)
1
Q
PART 1
A
HOW MARKETS AND PRICES ALLOCATE RESOURCES
2
Q
What are the 3 things that determine allocation of resources + production?
A
- What to produce
- How to produce
- Who to produce for
3
Q
PART 2
A
THE MEANING OF MARKET FAILURE
4
Q
What is the definition of market failure?
A
When the market failures to deliver an efficient allocation of resources > infinite wants + finite resources
5
Q
What are the 6 types of market failure and briefly explain them
A
- Public goods
- available to all members of society - Externalities
- external effects due to a transaction - Merit and demerit goods
- pos/neg externalities - Monopolies
- dominant firm markets - Immobility of FofP
- e.g. labour availability - Equity and equality
- private/public
6
Q
PART 3
A
PUBLIC GOODS, PRIVATE GOODS AND QUASI-PUBLIC GOODS
7
Q
Definition of public good
A
A good which exhibits the characteristics of non-excludability and non-rivalry
8
Q
What do
A. Non excludability
B. Non rivalry mean?
A
A.
Everyone benefits. Not just who paid for it
B.
Once produced, everyone can take advantage of it at the same time. If it is supplied to one person, it is available to all
9
Q
Name of something that is rival and excludable?
A
Private
10
Q
Name of something that is rival and non excludable?
A
Common goods
11
Q
Name of something that is non rival and excludable?
A
Collective/club goods
12
Q
Name of something that is non-rival and non-excludable?
A
Public goods
13
Q
Key notes linked to public goods (blurt)
A
- not provided by private sector as will not make profit
- free rider problem
- gov decide appropriate output of public goods
- must estimate social benefits
14
Q
What are quasi-public goods?
A
When they are semi non rivalry and semi non excludable
Quasi-public goods have elements of both public and private goods, such as a public bridge that is available to all but loses value when it becomes congested during rush hour
15
Q
Main issue with public goods
A
Free rider problem
16
Q
PART 4
A
POSITIVE AND NEGATIVE EXTERNALITIES IN CONSUMPTION AND PRODUCTION
17
Q
What are social costs and benefits?
A
Benefits/costs of a transaction on the whole of society (3rd party outside of transaction)
18
Q
What are private benefits/costs?
A
Benefits/costs to the individual in the transaction
19
Q
What is over production and give an example of it?
A
When too much of something is made and so negative externalities are caused e.g. pesticides
20
Q
What is over consumption and give an example?
A
When people use too much of a certain good/service and so it becomes unhealthy e.g. smoking
21
Q
What are the 3 lines on a marginal private and social costs benefit diagram (2 diagrams - pos and neg externalities)
A
- Negative externalities
(MSC higher)
MSB = MPB
MSC
MPC - Positive externalities
(MSB higher)
MSC = MPC
MSB
MPB
22
Q
What are externalities?
A
Third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid
23
Q
How can negative externalities occur?
A
- Wrong Q of goods/services produced or consumed
- Spin over/spill over
- Occurs outside the markets
24
Q
PART 5
A
MERIT AND DEMERIT GOODS
25
What is a merit good?
Social benefits > private benefits
26
What is a demerit good?
Social costs > private costs
27
PART 6
MARKET IMPERFECTIONS
28
What is the definition of consumer sovereignty?
Consumers through their spending power, determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market
29
What is the definition of producer sovereignty?
Producers or firms in a market determine what is produced + what price is charged
30
What is the definition of a monopoly?
A market structure where one firm supplies all output in the industry (40-60% of market share)
31
What is the definition of a natural monopoly?
Occurs where a country/firm have complete control of a natural resource
32
What are the market characteristics of a monopoly linked to…….
1. Number of firms
2. Product type
3. Knowledge
4. Barriers to entry and exit
5. Price setting ability
6. Monopolies (legal definitions)
1. 1 dominant
2. No close substitutes
3. Imperfect (controlled)
4. High set up costs + control supply
5. Price setter (predatory pricing)
6. >25% of market share
33
Give some examples of monopoly firms?
- National Grid
- NHS
- Royal Mail
- National Rail
- National Water Supply
- Amazon
- Facebook (meta)
- National Lottery
- Apple IOS Operating System
- British Gas
- Google (search engine) n
- BT open reach
34
Positives for firms of monopolies?
- control prices
- prevent competition
- control of market
- incr revenue + profit
- abnormal profit
- potential economies of scale
35
Negatives for firms of monopolies?
- gov intervention + regulations
- competition laws go against them
- incr taxes
36
Positives for consumers of monopolies?
- good when regulated correctly
- provides necessary goods
- future investment
- R + D innovation
- decr duplication of resources
37
Negatives for consumers of monopolies?
- lack of innovation
- no control over price
- lack of substitute
- distortion of free market
- reduction in output
- incr natural monopoly
38
How is a monopoly demonstrated on a S and D illustration?
Increases in price lead to a movement along the demand curve. Increased price but decr quantity occurs with a monopoly
39
What are the 4 key reasons to why a monopoly is considered a market failure?
- consumer choice (lack)
- producer power (too much)
- misallocation of resources
- control (price + output)
40
What do the positives and negatives of monopolies come down to?
The ethic morality of the firms involved
41
What are the two immobilities of factors of production linked to market failure?
1. Occupational immobility
2. Geographical immobility
42
What is occupational immobility?
Occurs where there are barriers to the mobility of FofP between different sectors of the economy leading to there factors being unemployed, or being used in ways that are not efficient e.g. labour immobility
43
What are the 6 key factors which cause labour immobility?
1. Lack of skills in other sectors e.g. low skilled or under skilled. (Too specific skill sets)
2. Age > too young/old + experience
3. Disabilities
4. Ethnicities/ culture/ religion
5. Economic background
6. Gender
44
What are the 6 key structural changes which have led to occupational immobility?
1. Decline in heavy manufacturing
2. Rising incomes causing shifts towards services
3. Automatic - ie robots replacing jobs
4. Foreign competition (rising imports)
5. Long term regional economic divide
6. Over-sourcing of production overseas
45
Why is unemployment viewed as market failure?
As it is a waste of scarce resources
46
What are the 7 main reasons why geographical immobility exists?
1. Family and social ties
2. Financial costs in moving home e.g. cost of selling home + removal expenses
3. Huge regional variation in house price leading to a shortage of affordable housing in many areas
4. High cost of renting property
5. Differences in the general cost of living between regions/ countries
6. Migration control e.g. a cap on inwards migration
7. Cultural and language barriers
47
Suggest some key data on housing linked to geographical immobility?
Northern Ireland
- peak dec 2007 (£200,000 average house price)
England
- aug 2022 £100,000 more than any other area
London Average
Dec 2005 (£240,000)
Aug 2022 (£580,000)
North East
- constant at £120,000
48
What is a summary phrase to describe geographical immobility within England?
Huge disparity within England
49
What does equity and equality mean when linking to market failure?
Inequality in the distribution of income and wealth
50
What is the definition of income?
A flow of money to a FofP. An individuals income may include wages and state benefits
51
What is the definition of wealth?
A stock of valuable assets
52
What are some of the factors causing income and wealth inequality?
- lack of skills + training
- level of eduction
- experience/age
- unemployment
- type of job
- ownership of financial assets
- inheritance
- pension rights
- economic background
53
What are some of the ways in which equality and equity can be more evenly distributed? - 3 main ways
- progressive taxing
- affordable housing (social) > law
- help to buy schemes > house ownership
54
PART 7
GOVERNMENT INTERVENTION IN MARKETS
55
What are the 5 key ways of correcting market failure?
1. Financial (tax or subsidy)
2. Public provision
3. Improving information
4. Legislation
5. Price controls (max and min)
56
What is the definition of a tax?
A mandatory fee charged by a government on a product, income or activity
57
What is the definition of a subsidy?
Payments by the gov to procures to encourage production of a good / service
58
What is the definition of consumer burden?
The amount of tax that the consumer will end up paying for the product
59
What is the definition of producer burden?
The amount the producer is willing to pay
60
Is taxing inelastic goods efficient or inefficient? Why?
Inefficient because people will still keep the same purchasing habits
61
What burden increases when a good is elastic?
Producer
62
What burden increases when the good is inelastic?
Consumer
63
What are the key aspects when illustrating an indirect tax?
- supply curve = costs
- MPC = S1
- MSC = S + tax = S2
- both S curves have the same gradient
64
What are the key aspects when illustrating an Ad Valorem tax?
And how is ad velorem tax calculated
- S + tax has a steeper gradient
It is a % of the total costs
65
What are the key aspects when illustrating an Specific tax?
And how is Specific tax calculated
S + tax has the same gradient
The tax per unit is a fixed amount
66
Facts and information about the implementation of the Sugar Tax (Fri 6th April 2018)
- up to 24p per litre
- due to tackle obesity and related illnesses
- expected £500,000 revenue, 2017 target = £365,000
- Hungry > decr 40% of sugar due to legislation
- consumers change in needs > more healthy
- 4,000 jobs at risk + £130,000,000 reduction in profits
- >45,000 tonnes of sugar removed since 2018
- prevent 5,000 cases of obesity in Yr6 girls
- target of 20% sugar intake by 2020 not met
67
Positives of tax
- provides incentives to reduce demand
- social efficiency
- taxes raise revenue for the gov
68
Cons of tax
- which is the most important for a 25 market evaluation
- DIFFICULT TO MEASURE THE LEVEL OF NEGATIVE EXTERNALITY
- if demand inelastic, then higher tax will not reduce demand much
- taxes will cause inequality
- possibility of evasion
69
How can subsidies be illustrated?
- positive externality diagram
- incr in S
- incr in D
Moves demand and price and quantity to the social optimal output point
70
What is needed for a merit good?
Higher quantity but lower price
71
SUBSIDIES CASE STUDIES
1. Fact for biofuel subsidies for farmers
2. Fact for child care
1. Reduced co2 emissions by 75% and in 2016 firms received £891 mil in UK for producing electricity
2. £2000 yearly for each child and £8 you pay, gov pays £2
72
Pros of subsidies
- helps poor families
- encourage output and investment on fledging sectors
- protect jobs in loss - making industries
- make some health care treatments more affordable
- reduce cost of training and employing workers
- achieve a more equitable income distribution
- reduce external costs
- encourage use of services e.g. art and culture
73
Cons of subsidies
- subsidies distort market prices
- decisions on who receives it can be arbitrary, based on political aims
- expensive in the long run (opportunity cost)
- final cost of subsidy falls on tax payers (who them themselves may not have benefited)
- can artificially protect inefficient firms that need to restructure
- risk of fraud when allocating subsidy payments
- may be possible to achieve objectives of subsidies by alternative means
74
The impact of a tax depends on…. (Evaluation) (4)
1. How effective
2. How much the tax revenue raised? How was it used?
3. Impact on businesses / competitiveness
4. Consequences for equity / the distribution of income
75
The impact of a subsidy depends on…. (Evaluation)(4)
1. Are successful in meeting aims
2. Cost of subsidy + who does it benefit
3. Will it affect productivity/ efficiency
4. Does it help to correct market failure
76
Definition of a law?
A rule, usually made by the government, that is used to order the way in which a society behaves
77
Definition of legislation?
A law or set of laws suggested by government and made official by parliament
78
Definition of regulation?
Involves the imposition of rules, controls or constraints which restrict freedom of economic actions in the market place
79
What are 3 examples of law and legislation + a small amount of info about each?
1. US ban supersize drinks
- over 16oz
- to prevent obesity + save lives
- causing closure of restaurant, cinema + fast food
2. Using mobile phones while driving
- grey area
- reduction in accidents
3. Tradable pollution permits
- similar to stock exchange
- buy + sell carbon units
- rich countries buy off LICs
- difficult to monitor/ regulate
80
Positives of laws and regulations
- discourages the purchase / production of demerit goods
- encourages purchase / production of merit goods
- simple + easy to understand
- when danger is great, better to ban it altogether
- when decision has to be made quickly, tax may be too cumbersome
- a legal ban sends a clear signal it is wrong
- fairer than taxes
81
Cons of laws and legislation
- enforcement costs > benefits
- little incentive for a firm to develop more efficient mechanisms
- may be socially ineffective to ban everything
- may encourage people to break the law if difficult to enforce
- encourage the underground economy
82
Facts and figures on the FAANGs case study
- FAANGs have more wealth and power than France
- Google has more than 90% of the £7.3 bn serach advertising market in the UK
- Facebook takes more than 1/2 of the £5.5bn Uk online display advertising market
- Newspapers are reliant on Facebook and Google for nearly 40% of visits to sites
- Uk, EU countries and US want FAANGs “to pay their fair share of tax”
83
What is the definition of a maximum price?
When the market price is set to prevent it from rising above a certain level e.g. housing rent controls, energy price caps to control fuel bills, cap on mobile roaming charges, cap on CEO pay
84
How do you illustrate maximum prices?
Line below the equilibrium = shortage
85
Pros of maximum price as a means to combat market failure?
- cheap goods = incr demand
- reduces relative poverty
86
Cons of maximum price as a means to combat market failure?
- leads to lower supply
- shortages may occur
- waiting lists / queues
- encourages black market
- market will become less profitable for private firms
87
What is the definition of a minimum price?
When the market price is set to prevent it from falling below a certain level e.g. minimum wage, price of alcohol, plastic bags
88
How do you illustrate minimum prices?
Line above the equilibrium leading to a surplus
89
Pros of minimum price as a means of correcting market failure?
- reduce demand (elasticity)
90
Cons of minimum price as a means of correcting market failure?
- higher prices for consumers
- encourage oversupply + inefficiency
- can cause income divide
91
Give some key information on the plastic bag minimum price case study
- 2015 (5p), 2021 (10p)
- 206 mil generated + invested into good causes e.g. charity
- reduces consumption
- 2023 (98% reduction in large retailers e.g ASDA)
- not fully corrected as lots of exceptions and biodegradable bags still take correct conditions to break down
92
Effectiveness of price controls depends on… (5)
1. How much prices change
2. Impact on efficiency of a market
3. Importance of the market
4. Whether it results in SR or LR changes
5. The elasticity of the product or market (PES / PED)
93
Definition of direct provision
When the government provides goods or services, financing the provision out of general taxation
94
Examples of direct provision?
- eduction
- roads
- defence
- council housing
- justice system
- NHS
- BBC
- MI5
- police force
- state pension
- national rail
- benefit schemes + charities
95
What are the 2 key things direct provision helps with?
1. Helps with underconsumption and under provision
2. Provide it more efficiently potentially due to economies of scale
96
What are the 3 ways that the government can provide the free merit goods?
1. Provide it itself e.g. schools
2. Via state owned public corporations or nationalised industries
3. Paying private sector firms to provide a good/service
97
How can direct provision be illustrated?
Supply is competely inelastic (free at point of consumption > P=0)
- show area of excess demand
98
Advantages of direct provision?
1. Improves consumption of merit goods and public services
2. Improves equality
3. Lower costs due to economies of scale
99
Disadvantages of direct provision?
1. Less choice for consumers
2. Private sector have profit incentives to cut costs and offer innovative new products and services that would be desired
3. Opportunity cost
4. Services may be limited by tax revenue
5. Tax revenue may have to increase
100
What is a case study for direct provision?
UK rail industry
101
PART 8
GOVERNMENT FAILURE
102
What is the definition?
When the actions of the government to correct a market failure lead to a deepening of the market failure, or even worse, a new market failure
103
What are the 2 key examples of government failure + 1 fact for each + info?
1. Denmark high tax on high fat foods 2011 (15 months)
- 80% kept same habits
- 1,300 jobs lost
- people imported or drove to Germany so money was lost from economy + pollution
2. RHI scheme Northern Ireland 20 years
- subsidies to encourage sustainable burning resoruces
- £490 mil cost to tax payer
- £40,000 annually lost by fraud
- subsidy was more than cost of goods
104
NEED TO FINISH FLASHCARDS ON THE 9 CAUSES OF GOVERNMENT FAILURE
