Flashcards
Market failure
Cards in this deck (56)
- 1What is market failure? (textbook)When a market left to its own devices does not lead to the most effective use of resources
- 2What is market failure? (textbook)When a free market produces outcomes that are not economically or socially acceptable
- 3What else is market failure (link back)When markets do not operate in the most effective way- not allocative or prod
- 4Why does market failure occur? (7)1) The existence of externalities
2) Merit and de-merit goods
3) Immobility of factors of production
4) Monopolies
5) Imperfect/asymmetric information
6) Inequality
7) Public goods - 5Why do the existence of externalities result in market failure?Effects on 3rd parties
- 6Why do merit and de-merit goods result in market failure?Better or worse than customer realises
- 7Why does the immobility of factors of production result in market failure?Labour or capital not able to move between sectors
- 8Why do monopolies result in market failure?Exploitation of competitive power due to a lack of competition
- 9Why does imperfect/ asymmetric information result in market failure?Consumers influenced by advertising/lacking knowledge
- 10What are the two main characteristics of private goods?if you provided it through a system where you had to pay would people who hadn't paid be able to benefit? 1) Excludability- don't pay don't get
2) Rivalry- one persons consumption reduces the amount for everyone else - 11What are public goods? (3)Opposite to private goods
1) Non excludability- goods cant e confined to those who pay
2) Non- rivalry- consumption by one does not stop/reduce consumption of another - 12How can you distinguish between public and private goods?if you provided it through a system where you had to pay would people who hadn't paid be able to benefit?
Yes- public
No- private - 13What is the free rider problem?Public goods not normally provided by the private sector (under provided)- market failure
Impossible to charge for it if there is someone else who will still benefit without paying- i.e. military - 14What are quasi-public goods?Only have one characteristic of public goods
Most have non-excludability but not non-rivalvry
i.e. you could make a beach excludable and rivalrous does not make it a public good - 15What are externalities?Spill-over effects arising from production and consumption for which no appropriate competition is paid
- 16Where do externalities lie?Outside the market transaction/price
- 17How do externalities cause market failure?If the price mechanism does not take into account the social costs and benefits of production and consumption
- 18What two things can externalities be?Positive or negative
- 19What are the two type of costs and benefits?Private and social
- 20What are private costs?Costs faced by the producer or consumer directly involved in a transaction
- 21What are private benefits?Benefits faced by the producer or consumer directly involved in a transaction
- 22What does the existence of externalities create?Divergence between private and social costs of production and the private and social benefits consumption
- 23What is the social cost?Private cost + External cost
- 24What is the social benefit?Private benefit + External benefit
- 25What happens when negative externalities exist?Social cost > Private cost
- 26What do negative externalities lead to?Over production and market failure if producers do not take the externalities into account
- 27What happens when positive externalities exist?Social benefit > Private benefit
- 28What is a negative externality?External cost to society (Negative external benefit)
- 29What will the market do with negative externalities?Over provide this good for society POV
(Society wants less provided as its bad so there's more than they want) - 30What are positive externalities?External benefit to society (Negative external cost)
- 31What will the market do with positive externalities?The market will under provide this good from society's POV
- 32What are merit goods?Goods and services that the government feels that people will under consumer in a free market
- 33What should merit goods be?Subsidised or provided free at the point of use by the government
- 34What is the consumption of merit goods believed to do?Generate postive externality effects
- 35What do consumers usually do with merit goods?Under estimate the benefits (both private and external) of consuming merit goods
- 36What is a merit good in society's eyes?Product that they value and judges that everyone should have regardless of whether and individual wants them
- 37What are examples of merit goods?1) Health services - primary and secondary health care and health awareness programmes
2) Education
3) Work/ business training programmes
4) Environmental improvement schemes
5) Public libraires/ museums
6) Social services / citizens advice bureaux
7) Inoculation programmes for children/students - 38What do we do when defining a merit good?Use a value judgment
- 39What do views on what is 'good' and 'bad' for consumers and producers involve?Value judgment and state paternalism
- 40What questions can arise from thisDoes the government have sufficed information to place an accurate and complete value on socially desirable goods such as health and education?
Should we give greater freedom to market forces to provide merit goods? - 41What is the equity argument?The state normally provides some merit goods free of charge because they consider it unacceptable that people on low incomes may be unable to afford them
- 42What are the private benefits of someone consuming education?Individual is accumulating more human capital
Should lead to higher expected lifetime earnings
Personal satisfaction and utility from experiencing further and higher eduction - 43What are the external benefits of providing education and training?Skilled workforces have positive impacts of high level economic aims such as raising productivity and enhancing a country's growth
Higher productivity and furthers employment will provide the government with a greater long-term flow of tax revenues - 44What is a demerit good?Product that the government believes consumers overvalue
- 45Why do the government believe this?Consumers overvalue because they have imperfect information about a product
- 46What is a demerit good for society?Socially undesirable and worse for a consumer than they realise
- 47What is an example of a demerit good?Alcohol
Smoking - 48What do demerit goods involve?Value judgment- are thought to be bad for you
- 49What can consumption of demerit goods lead to?Negative externalities- leading to less social welfare
- 50What two things do consumers do with demerit goods?1) Underestimate the long run costs to themselves of consuming demerit goods
2) Unaware of the negative externalities created- have imperfect information - 51Where does the triangle always point?Meeting of MSC and MSB- socially optimum output level
and the direction it wants to be
Right = more
Left = less - 52In a postive externality in consumption what will the MSB and MBP be like? What will the product be- why? ExamplesMSB > MPB
The product will be UNDER consumed in equilibrium because consumers underestimate the true benefits
e.g. pensions / education - 53In a negative externality in consumption what will the MSB and MBP be like? What will the product be- why? ExamplesMSB < MPB
The product will be OVER consumed in equilibrium because consumers overestimate the true benefits
e.g. tobacco / alcohol - 54In a positive externality in production what will the MSB and MBP be like? What will the product be- why? ExamplesNOTE: This does not usually arise in reality
MSC < MPC
The product will be UNDER supplied in equilibrium because consumers overestimate the true cost by only taking their private costs into account
e.g. none - 55In a negative externality in production what will the MSB and MBP be like? What will the product be- why? Examples What does this lead toMSC > MPC
The product will be OVER supplied in equilibrium because consumers underestimate the true cost by only taking their private costs into account
e.g. factory pollution
Leads to a welfare loss - 56—
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- AS - Level Micro Flashcards on Market failure , created by Maya Khangura on 15/05/2016.
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- Maya Khangura
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