Economics - Unit 3 - Goods

Amardeep Kumar
Flashcards by Amardeep Kumar, updated more than 1 year ago
Amardeep Kumar
Created by Amardeep Kumar over 6 years ago
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A levels Economics (Module 1: Markets and Market Failure) Flashcards on Economics - Unit 3 - Goods, created by Amardeep Kumar on 01/06/2015.

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Question Answer
What is the reason for a market supplying goods? A market will only supply goods if the private benefit outweighs the private cost, so that a profit is made.
What are the 2 characteristics of a private good? Rivalry - consumption by one reduces supply available to another. Excludability - Only paying consumers can enjoy the benefits - free riders are excluded.
What are the 2 characteristics of a public good? Non-rivalry - consumption by one does not limit supply for another - provision for one means provision for all. Non-excludability - Nobody can be excluded from enjoying the benefits, in particular free-riders.
Why are most public goods known as quasi? Because they have ways and means to exclude free-riders if necessary e.g. toll bridges.
Why is a public good also known as a missing market? Because in the absence of government intervention, they would not be provided.
Why would the market want to supply a merit good? Because it has the characteristics of a private good (rivalry and excludabilty), and therefore the market can charge consumers for it and generate a profit. Because of this incentive, a merit good will be under-provided by the market from society's point of view.
Why would the state want to provide a merit good? The state will provide a merit good because it generates external benefits in its consumption for society, implying the marginal social benefits exceed the marginal private benefits e.g. education. MSB > MPB
Why are merit goods different to private goods? A merit good is different to a private good because it generates significantly greater positive externalities for society and is therefore considered desirable for human consumption. e.g. education.
Give examples of merit goods. Education / Healthcare / Pensions / Housing / Television / Transport / Lawyers.
What are the 3 types of pension? 1. State pension - Paid for by national insurance contributions. 2. Occupational pension - Paid for by employer, based on time spent and money earned during occupation. 3. Private pension - Paid for by your private insurance company or with a bank.
Why are demerit goods deemed undesirable for human consumption by the state? Because they generate negative externalities in consumption. Unfortunately, the market ignores the external costs when setting the price of demerit goods, which is why private benefits exceed social benefits implying external costs exist.
What is the consequence of the market ignoring the external costs of demerit goods? From society's point of view, a demerit good will be over-produced and consequently over-consumed.
What are the external costs of smoking? -bad health -poor hygiene -social undesirability -passivity -premature death
How can the state reduce consumption of demerit goods? The government will attempt to reduce the consumption of demerit goods, on the basis that producers and consumers lack the information to realise the external costs and benefits. The government will use methods such as taxes, legislation and negative advertising.
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