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Microeconomics > Market Failure > Flashcards

Market Failure Flashcards

1
Q

What is market failure?

A

Market failure occurs when the forces of supply and demand (market forces) do not result in an efficient allocation of resources.

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2
Q

What is geographical immobility of labour?

A

Geographical immobility of labour involves factors which limit the movement of workers from one region of the country to the other.

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3
Q

What is occupational immobility of labour?

A

Occupational immobility of labour involves factors which limit the movement of workers from one occupation to another.

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4
Q

What are causes of geographical immobility of labour?

A
  • Differences in house prices in different regions.
  • Costs of moving house.
  • Social and family ties.
  • Disruption of children’s education.
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5
Q

What are ways to improve geographical mobility of labour?

A
  • Housing subsidies.
  • Providing more affordable housing.
  • Reduction in planning restrictions and bureaucracy.
  • Improvement of information about job availability in other parts of the country.
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6
Q

What are causes of occupational immobility of labour?

A
  • Lack of relevant skills.
  • Lack of appropriate qualifications.
  • No relevant experience.
  • Wage rates.
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7
Q

What are actions to reduce occupational immobility of labour?

A
  • Training programmes.
  • Increase higher education provision.
  • Information about opportunities in other occupations.
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8
Q

Define a public good.

A

A public good is characterised by being both non-rivalrous and non-excludable.

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9
Q

What is non-rivalry?

A

A good is non-rivalrous if consumption by one person does not impede another persons consumption.

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10
Q

What is non-excludability?

A

A good is non-excludable if being available for one person means it is available for everyone.

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11
Q

What is the free rider problem?

A

The problem that once a public good is provided it is impossible to prevent people from using it and it is, therefore, impossible to charge for it.

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12
Q

What are examples of public goods?

A

It is arguable if they are true public goods but similar goods given are street lighting and national parks.

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13
Q

How does a government correct market failure caused by public goods?

A

Generally governments try to finance the public goods through indirect taxation.

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14
Q

What is an externality?

A

An externality is a cost or benefit to third parties who are not directly part of a transaction between producers and consumers.

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15
Q

What are negative externalities?

A

These are costs to third parties not involved in a transaction between producers and consumers which are not taken into account by the price mechanism.

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16
Q

On an externality diagram, which curves represent supply and which represent demand?

A

Private Marginal Benefits and Social Marginal Benefits are demand curves, and Private Marginal Costs and Social Marginal Costs are supply curves.

17
Q

What formula concerns private, social, and external costs?

A

Social Costs = Private Costs + External Costs

18
Q

On an externality diagram, where is the free market output?

A

Where PMC = PMB.

19
Q

On an externality diagram, where is the socially optimal level of output?

A

Where SMB = SMC.

20
Q

How might a government try to correct a negative externality?

A
  • Indirect Taxation - This method gives an incentive to cut out externalities and is a source of revenue for the government. However, if demand is price inelastic it may be ineffective and it is difficult to judge how much Tax is needed.
  • Tradable Permits - There are few costs associated with this, however pollution will still take place and efficient firms may not cut pollution at all.
  • Extension of Property Rights - This has low admin costs and the fines on polluters can be used to recompense people affected. However, it can be difficult to take big firms to court and it is hard to give a monetary value to externalities.
21
Q

What are positive externalities?

A

These are benefits to third parties other than producers and consumers involved in a transaction.

22
Q

What formula concerns private, social, and external benefits?

A

Social Benefits = Private Benefits + External Benefits

23
Q

What policies can a government enact to combat positive externalities?

A
  • Provision by the State - This means the government ensures the socially optimal level of output is provided.
  • Subsidies - These subsidies to firms will encourage increased output and may heighten it to the socially optimal level of output.
  • Advertising to change consumer behaviour e.g. informational broadcasts about vaccinations.
24
Q

Why are some commodity prices unstable?

A

Usually supply of and demand for these commodities are price inelastic, so any shift in either curve will cause a sharp change in price.

25
Q

Explain how buffer stocks schemes may help to solve unstable commodity prices.

A

The government or a government funded agency set a minimum and maximum price for the commodity (floor and ceiling). Then the government creates a buffer stock wherein they purchase and store stock or release extra stock to artificially affect supply. So if price is too high, more stock would be released from the buffer stock to increase supply and lower price. Conversely, if price is too low, stock will be removed from the market and stored in the buffer stock, causing a decrease in supply and a rise in price.

26
Q

What are some critiques of buffer stock schemes?

A
  • If the floor price is too high then there will be surpluses each year.
  • If the ceiling price is too low there may be insufficient stocks available in years of shortage.
  • There is a cost to store so much of a commodity.
  • All major producers have to agree to be part of the scheme and not cheat by selling to major consumers at a reduced price.
27
Q

Explain how Minimum Guaranteed Prices may solve unstable commodity prices.

A

The government decides on a minimum guaranteed price so that a producer is sure to get that amount for any sale. If the MGP is higher than the equilibrium price then there will be surplus which is bought and stored by the government for years where there is a shortage.

28
Q

What are critiques of Minimum Guaranteed Prices?

A
  • If MGP is set too high there will be surpluses each year.
  • These schemes involve costs of stored which are payed for by taxpayers.
  • These schemes encourage over-production and may therefore be argued to cause inefficient allocation of resources.
29
Q

Define Asymmetric information.

A

Asymmetric information is a situation in which one party in a transaction has more or superior knowledge compared to another.

30
Q

Why does asymmetric information cause market failure?

A

Because one party in a transaction has an innate advantage in knowledge they can more easily dictate price, and the other party cannot be expected to make fully rational decisions. Therefore resources are misallocated and as such market failure has occurred.

31
Q

What are some examples of markets in which asymmetric information appears?

A
  • The housing market.
  • Life insurance.
  • Second-hand car sales.
  • Financial services.
  • High-tech products.
32
Q

How can one deal with asymmetric information?

A
  • State provision.
  • Public information/advertisements designed to close the information gap.
  • Private sector organisations, the media and the internet may provide extra information to help protect consumers.
33
Q

Define government failure.

A

Government failure is when government intervention as an attempt to correct market failure results in a net welfare loss.

34
Q

Give 5 examples of potential government failure.

A
  • Agricultural stabilisation schemes like buffer stocks needing to be funded by tax and protecting inefficient industry
  • Housing policies like low rent state provision.
  • Environmental policies like wind farms creating externalities or not giving value for investment money (Taken from tax)
  • The labour market by setting a too high minimum wage causing unemployment
  • High taxes on tobacco and alcohol which may cause tax evasion and smuggling.
35
Q

Give examples of ways that net welfare decreases as a result of government intervention

A
  • Increase in Taxes
  • Uncertain outcomes
  • Causing Negative Externalities
  • Decreasing efficiency
36
Q

How does increased taxes lead to government failure?

A

Either artificially increases prices decreasing demand for those goods or decreases incomes, creating a disincentive effect for working

Microeconomics (5 decks)

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