Market Failure Flashcards Preview

Economics > Market Failure > Flashcards

Flashcards in Market Failure Deck (39)
Loading flashcards...
1

Restrictive trade practice

Any agreement or arrangement between firms to raise price

2

What are the 4 types of market failure?

Market power, externalities, public goods, common property goods

3

Characteristics of a competitive market

Large number of firms, free entry, bare differentiation,

4

Characteristics of monopolies

One firm, no competition, high prices, total market power, high barrier to entry

5

Imperfect market

At least one characteristic is not met from large number of firms, free entry/exit, little product differentiation

6

How do firms become monopolistic or oligopolistic?

Control scarce resource, government licence, patent, technological advances, restricts entry of new firms, collusive behaviour

7

Patent

Protection from competition on an invention for up to 17 years (Australia)

8

How can a firm restrict entry of new firms into the market?

Extensive product differentiation, brand proliferation, large advertising budget, controlling retail outlets

9

Collusion

Firms agreeing to share markets, fix prices or quantities, or other forms to seek more market power than they would competitively

10

Why will the socially optimal output likely not be achieved in an imperfect market?

Private interest of the firms to maximise profit clashes with society's interest

11

Why are perfect markets "perfect"?

Total surplus is maximised → efficient

12

Cartel

Firms agree to collide/act together instead of competing

13

Market sharing

A market divided into small markets all supplied by one firm, reducing competition

14

Collusive bidding

Auction bidders bid in a predetermined manner to keep prices low

15

Collusive tendering

Firms agree to set ridiculously high prices to ensure high profits and shared work between collusive members

16

Predatory pricing

A company with high market power sets prices at a low level to eliminate or damage competition

17

Resale price maintenance

Supplier sets the price that a retailer sells its product and refuses to supply to retailer that sells at a discount price

18

Exclusive dealing

An imposed restrictions on a buyers freedom to choose who, in what or where they deal

19

Collective boycott

A group of competitors agree not to buy goods from/supply to a business to damage them

20

Merger

Two or more firms join to form a larger firm, prohibited if it reduces competition substantially

21

When are most forms of collusion prohibited?

When market power is used to eliminate or damage a competitor SUBSTANTIALLY

22

Externalities

Unintended consequences of economic activity

23

Why does the existence of externalities cause market failure?

Market outcome will be inefficient

24

Negative externalities

Economic activity from production or consumption that creates an external cost

25

Positive externalities

Economic activity from production or consumption that creates an external benefit to a third party

26

Why do externalities occur?

Lack of property rights, no price to restrict use, free goods are exploited and overused, no incentive to use in socially optimal manner

27

What is the point of government intervention?

Internalise externalities, reduce production of goods causing negative/increase consumption of goods creating positive

28

Internalising externalities

Forcing the market to acknowledge external cost or benefit in their market price

29

What does the negative production externality curve show?

Government tax equal to the external cost to force polluter to pay

30

What does the positive consumption externality curve show?

Subsidy equal to the external benefit (PoP2) to decrease price paid and increase quantity supplied