Economics (Tina) > Market Failure > Flashcards

Market Failure Flashcards

(55 cards)

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1
Q

Technical Efficiency

A

When firms pursue the least cost method of production, where firms produce at minimum average cost

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2
Q

Allocative Efficiency

A

When resources are allocated to its best use

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3
Q

Define “market failure”

A

A situation when the free market under or over allocate good or services, causing over- or under-consumption and production.

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4
Q

Demerit goods

A

Goods that are not socially desirable but are over provided by the market.

e.g. smoking, porn, drugs, prostitution, alcohol

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5
Q

Merit goods

A

Goods that are desirable by the society but are under provided by the market.

e.g. education, medical care

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6
Q

How does government response to fix market failure?

A
  1. Direct provision
  2. Taxation
  3. Subsidizing
  4. Negative and positive advertising
  5. Extending property rights
  6. Legislation
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7
Q

Market failure can arise with…

A
  • lack of public goods to benefit society
  • inequality of wealth/income
  • people make decisions based on imcomplete information
  • people make decisions without considering long term
  • under supply of merit goods
  • over supply of demerit goods
  • abuse of monopoly power (firms)
  • externalities (4 types)
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8
Q

Public Goods Characteristics

A

Non-rivalrous – jointly consumed by people without reducing the amount available to others

Non-exclusive – good or service can be used by people who do not pay for them

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9
Q

Private goods characteristics

A

Rivalrous: One person’s use reduces others’ access to the same resource.

Excludable: people can be excluded from using this resource

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10
Q

What can a government do to intervene in response to a need for public goods?

A
  • Direct provision
  • Contracting out to the private sector
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11
Q

Common Access Resources (Common Pool)

A

Natural resources which are available for use for everyone, but are susceptible to overuse and depletion

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12
Q

Characteristics of Common Pool Resources

A

Rivalrous: One person’s use reduces others’ access to the same resource.

Non-excludable: no one can be excluded from using this resource

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13
Q

Possible solutions for Common Access Resources Issues

A
  • Privatization
  • Tradeable permits
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14
Q

Privatization

A
  • assigning private ownership of a resource
  • creates incentives for owners to protect and manage it sustainably
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15
Q

Tradeable permits

A
  • issuing permits to private users to allow limited amount of extraction in a period of time
  • limit exploitation and maintain sustainable usage
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16
Q

(Asymmetric) Information - HL ONLY

A

Decisions are based on incomplete information – either the buyer or the seller (usually the seller) has more information than the other party

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17
Q

Government solution for asymmetric information

A
  • Legislation
  • Regulation
  • Provision of information
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18
Q

Opportunistic Behaviour

A
  • This is when one party takes advantage of the fact the other party lacks information
  • Results in adverse selection or moral hazard
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19
Q

Adverse selection

A
  • Outcomes arising from unequal information between market participants.
  • Distorts price and quantity
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20
Q

Moral hazard

A

Increased risk-taking by informed parties who can shift costs to others.

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21
Q

Government solution to income inequality

A
  • Taxation system
  • Transfer payments
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22
Q

Taxation system

A
  • Progressive Tax = rate of tax increases the higher the income
  • Proportionate Tax = rate of tax is proportionate to income
  • Regressive Tax = rate of tax decreases the higher the income
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23
Q

Transfer payment

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A

Government redistribution of wealth to other groups through taxes and benefits.

24
Q

Externality

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A

The spillover effects on third parties, due to actions of consumer or producers.

25
Negative Externality of Production (NEOP)
A spillover in **production** that arises in **social costs** when a firm undertakes an economic activity
26
Government Solutions for NEOP
* Taxation * Fines * Legislation/Government regulations * Tradeable permits (Allocating Property Rights)
27
Taxation Evaluation for NEOP
**Effective:** * preferred by governments * generate extra revenue * cost of collecting it is relatively small **Not Effective:** * should consider the elasticity of good * inelastic - burden fall on consumer = not good * burden should fall on producer
28
Fine
A payment per unit of production to the government
29
Fine Evalution for NEOP
**Effective:** * encourages firms to cut back on production without any pressure on output **Not Effective:** * costly to the government to monitor * fine needs to be the right amount * too little = cheaper for firms to pay fine and keep producing * too much = drive firms out of business = unemployment
30
Legislation
Laws that are passed to reduce production/consumption
31
Legislation Evalutation for NEOP
**Effective:** * when law is specific and easy to enforce **Not Effective:** * difficult for govenment to balance costs and benefits * legislation too tough = too restrictive on firms output since theres no point in producing * legislation too loose = no incentive for firms to cut back
32
Allocating Property Rights
* using market forces to solve the externality * transfers ownership of a good or resource from the public to a private firm
33
Allocating Property Rights Evalution for NEOP
(e.g. forest) * No property rights = everyone chop down any tree they see * With property rights = each person has their piece of land, has to cut back production or else no more tree left = young trees could be protected, reseeding (e.g. oysters) - oyster farm * An incentive to maintain clean water * Farmers may sue firms that polute the water to protect river * Private sector responsible for monitoring, enforcing and clean up
34
Positive Externality of Production
A spillover in **production** that arises in **social benefits** when a firm undertakes an economic activity
35
Government Solutions for PEOP
* Subsidies or Vocational Training * Legislation or Government Funding or Decrease Tax * Advertising to influence behaviour * Direct provision of goods and services
36
Subsidy
payment per unit to produce
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Legislation for PEOP
* requires firm to produce extra * similar effect to subsidy * production cost would come from firm, not government
38
Government Funding or Decrease Tax
* exempt tax for producers = decrease cost of production * decrease tax paid for the good for consumers * same effect as subsidy
39
Negative Externality of Consumption
A spillover in **consumption** that arises in **social costs** when an **individual** undertakes an economic activity
40
Government Solutions for NEOC
* Taxation * Advertising * Government regulations/legislation * Nudges (HL)
41
Taxation Evaluation for NEOC
* ineffective for inelastic goods (e.g. cigarettes) * people would buy regardless the price (addictive) * cigarette price increase = more expensive, greater % of income = **harms low incomers** * good to generate extra revenue (government)
42
Advertising Evaluation for NEOC
Effective: * when cost to individuals > additional benefit to society Not Effective: * target wrong audience * cheap black market goods available
43
Legislation for NEOC
* government restrict the consumption of good (18+ for alcohol) * criminalizes the good (e.g. heroin) * fines for certain behavior (chewing gum, Singapore) * advertising in a particular way could also be legislation (health warnings on cigarette packet)
44
Advertisement for NEOC
negative advertising to inform the costs to consumers to decrease consumption
45
Legislation Evaluation for NEOC
effective when social costs of consuming > cost of putting legislation | e.g. heroin - high social cost
46
Positive Externality of Consumption
A spillover in **consumption** that arises in **social benefits** when an individual undertakes an economic activity.
47
Government Solutions for PEOC
* Subsidies * Legislation * Advertising to influence behaviour * Direct provision of goods and services * Nudges (HL)
48
Examples of Positive externalities of consumption and Merit goods
49
Examples of Negative Externalities of Consumption and Demerit goods
50
Subsidy Evaluation for PEOC
Effective: * size of subsidy = externality * if subsidy outweighs the opportunity cost of alternative uses of government funds
51
Government provision Evaluation for PEOC
if additional benefit to consume the good is high, government might supply good for free ## Footnote e.g. compulsory vaccines are often free because of high benefit to society
52
Cost
everything sacrificed or given up when a policy is implemented or a choice is made
53
Marginal Cost
The additional costs associated with a decision to do a little more or a little less of something
54
Benefit
things gained when a policy is implemented or a choice is made
55
Marginal benefit
the additional benefit from doing a little more or a little less of something
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