Market Failure And Government Intervention

Front 1

Market failure

Back 1

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.

Front 2

Complete market failure

Back 2

A market that fails to function at all and a 'missing market' results.

Front 3

Partial market failure

Back 3

A market does function but delivers the 'wrong' quantity of a good or service, which results in resource misallocation.

Front 4

Missing market

Back 4

The absence of a market for a good or service, most commonly in the case of public goods and externalities.

Front 5

Private good

Back 5

A good which exhibits characteristics of excludability and rivalry.

Front 6

Property rights

Back 6

The exclusive authority to determine how a resource is used. In the case of a private property right, the owner of private property such as a bar of chocolate in a sweet shop has the right to prevent other people from consuming the bar unless they are prepared to pay the price to the owner. Property rights can be exercised on private goods.

Front 7

Public good

Back 7

A good which exhibits the characteristics of non-excludability and non-rivalry.

Front 8

Non-excludability

Back 8

Means that if it provided for one person it is provided for all. A feature of public goods.

Front 9

Non-rivalry

Back 9

When a good is consumed by one person it does not reduce the amount available for others. A feature of public goods.

Front 10

Non-rejectability

Back 10

If the good is provided it is impossible to opt out and not gain its benefits. A feature of public goods.

Front 11

Free-rider problem

Back 11

Occurs when non-excludability leads to a situation in which not enough customers chose to pay for a good, preferring instead to free ride, with the result that the incentive to provide the good through the market disappears and a missing market may result.

Front 12

Quasi-public good

Back 12

A good which has characteristics of both a public and private good, e.g. it might be non-excludable and rival or vice versa.

Front 13

Public goods and allocative efficiency

Back 13

-Allocative efficiency is at P=MC.

-However, in public goods, the MC=0, because non-rival, and therefore the P=0.

-public goods are allocatively efficient.

Front 14

Public bad

Back 14

The opposite to public goods, provide dissatisfaction and disutility. Overconsumed in a free market (too much of doing the bad thing).

E.g. The disposal of household waste, people are willing to pay for its disposal through taxes, but if it was charged by amount then people would dump their rubbish (free rider). Another example is air pollution.

Front 15

Externality

Back 15

Occurs when production or consumption of goods or services imposes an external cost or benefit on third parties outside of the market without these being reflected in market prices. When an externality is generated, there is a divergence between private and social costs and benefits.

Front 16

Negative externality

Back 16

A cost that is suffered by a third party, as a result of an economic transaction. In the transaction, the producer and consumer are first and second parties, and third parties include any other people or firms that are affected by the transaction. Pollution is a negative externality when unwillingly consumed by third parties.

Front 17

Positive externality

Back 17

A benefit that is enjoyed by a third party as a result of an economic transaction, e.g. a beautiful garden, visible to third parties.

Front 18

Which line is benefits on an externality diagram?

Back 18

Demand

Front 19

Which line is costs on an externality diagram?

Back 19

Supply

Front 20

When does private benefit maximisation occur?

Back 20

MPB=MPC, maximises the benefit for a private economic agent.

Front 21

When does social benefit maximisation occur?

Back 21

MSB=MSC, maximises the benefit for society as a whole.

Front 22

MSB=?

Back 22

MSB=MPB+Marginal External Benefits

Front 23

MSC=?

Back 23

MSC=MPC+Marginal External Cost

Front 24

Negative externalities and allocative inefficiency

Back 24

For a market to be allocatively efficient it would have to have P=MC and for that to occur it would require no externalities. MPC=MC so P=MPC and if there are no externalities then MPC=MSC so P=MSC, but externalities exist making P<MSC and allocatively inefficient.

Front 25

When are externalities created?

Back 25

Production and consumption

Front 26

Effect of externalities on the market?

Back 26

Positive and negative externalities result in market failure due to over/under consumption and inefficiency in the market.

Front 27

Positive consumption externality

Back 27

Front 28

Positive production externality

Back 28

Front 29

Negative consumption externality

Back 29

Front 30

Negative production externality

Back 30

Front 31

Merit good

Back 31

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 private benefit.

Involves value judgement.

Front 32

Demerit good

Back 32

A good for which the private benefits of consumption exceed the social benefits and for which the long-term private benefits of consumption are less than the short-term private benefit.

Involves value judgement.

Front 33

Moral hazard

Back 33

The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely.

Front 34

Adverse selection

Back 34

A situation in which people who buy insurance often have a better knowledge of the risks they face than do the sellers of the insurance. People who know they face large risks are more likely to buy insurance than people who face small risks.

Front 35

Government failure

Back 35

Occurs when government intervention in the economy makes the allocation of resources worse. The intervention may be ineffectual, wasteful and/or damaging.

Front 36

Competition policy

Back 36

The part of 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.

Front 37

CMA

Back 37

Competitions and markets authority.

Government agency responsible for advising on and implementing UK competition policy.

Front 38

Powers of the CMA

Back 38

-Monopoly busting

-Price control to restrict monopoly abuse

-Taxing monopoly profit

-Rate of return regulation

-State ownership of monopoly

-Privatising monopolies

-Deregulation/Removal of barriers to entry

Front 39

Public ownership

Back 39

Ownership of industries, firms and other assets such as social housing by the central government or local government. The state's acquisition of such assets is called nationalisation.

Front 40

Privatisation

Back 40

The transfer of assets from the public sector to the private sector.

Front 41

Advantages of Privatisation

Back 41

-Revenue raising

-Reducing public spending

-Promotion of competition

-Promotion of efficiency

-Popular capitalism

Front 42

Disadvantages of Privatisation

Back 42

-Monopoly abuse

-Short-term gain can be long-term loss

-Selling the family silver

-Free lunch syndrome (sold cheap)

Front 43

Regulation

Back 43

The imposition of rules and other constraints which restrict the freedom of economic action.

Front 44

Deregulation

Back 44

The removal of previously imposed regualtions.

Front 45

Regulatory capture

Back 45

Occurs when regulatory firms act in the interest of the firms they are regulating rather than on the behalf of the consumers they are supposed to protect.