Part 1.6: Revisiting market failure and government intervention in markets

Alex Maas
Flashcards by Alex Maas, updated more than 1 year ago
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A2 Economics Flashcards on Part 1.6: Revisiting market failure and government intervention in markets, created by Alex Maas on 03/01/2017.
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Market failure Occurs when the price mechanism fails to allocate scarce resources in a productively efficient way and when the operation of market forces leads to an allocatively inefficient outcome.
Complete market failure A market fails to function at all and a missing market results.
Partial market failure A market does function, but it delivers the wrong quantity of a good or service, which results in resource misallocation.
Missing market The absence of a market for a good or service, most commonly in the case of public goods and externalities.
Private good A good which exhibits the characteristics of excludability and rivalry.
Property rights The exclusive authority to determine how a resource is used. In the case of a private property right, the owner of private property has the right to prevent other people from consuming an item unless they are prepared to pay a price to the owner.
Public good A good which exhibits the characteristics of non-excludability and non-rivalry.
Non-excludability A property of a public good which means that if it is provided for one person it is provided for all.
Non-rivalry A property of a public good which means that when a good is consumed by one person, it does not reduce the amount available for others.
Non-rejectability A property of a public good which means that if the good is provided, it is impossible for a person to opt out and not gain its benefits.
Free-rider problem Occurs when non-excludability leads to a situation in which not enough customers choose to pay for a good, with the result that the incentive to produce the good through the market disappears and a missing market may result.
Quasi-public good A good which has characteristics of both a public and a private good.
Externality Occurs when production or consumption of goods or services imposes external costs or benefits on third parties outside of the market, without this being reflected in price. Divergence between private and social costs and benefits.
Negative externality A cost that is suffered by a third party as a result of an economic transaction. Pollution is a negative externality when unwillingly consumed by third parties.
Positive externality A benefit that is enjoyed by a third party as a result of an economic transaction.
Production externality When production of a good or a services imposes external costs or benefits on third parties outside the market without these being reflected in market prices.
Consumption externality When consumption of a good or a service imposes external costs or benefits on third parties outside the market without these being reflected in market prices.
Demerit good A good for which the private benefits of consumption are greater than the social benefits and for which the long-term private benefits are less than the short-term benefits.
Merit good A good for which the social benefits of consumption exceed the private benefits and for which the long-term private benefits of consumption are greater than the short-term benefits.
Moral hazard The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely.
Adverse selection A situation in which people who buy insurance often have a better idea of the risks they face than do the sellers of insurance. People who know they face large risks are more likely to buy insurance than those with small risks.
Government failure Occurs when government intervention in the economy makes the allocation of resources worse. The intervention may be ineffective, wasteful or damaging.
Competition policy The part of the government's microeconomic policy and industrial policy which aims to make goods markets more competitive. It comprises policy towards monopoly, mergers and restrictive trading practices.
Competition and Markets Authority The government agency responsible for advising on and implementing UK competition policy.
Public ownership Ownership of industries, firms and other assets such as social housing by central government or local government. The state's acquisition of such assets is called nationalisation.
Privatisation The transfer of assets from the public sector to the private sector.
Contractualisation Services which were previously provided by the public sector, such as refuse collection, are put to private sector tender and then provided by private sector firms.
Marketisation The provision of goods and service is shifted from the non-market sector into the market sector of the economy. AKA commercialisation.
Public-private partnership Partnership between the private and public sectors to provide public services.
Private finance initiative The government seeks tenders from the private sector for designing, building, financing and running infrastructure projects.
Regulation The imposition of rules and other constraints which restrict freedom of economic action.
Deregulation The removal of previously imposed regulations.
Regulatory capture Occurs when regulatory agencies act in the interest of regulated firms rather than on behalf of the consumers they are supposed to protect.
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