Market Failure

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What is market failure?

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36 Terms

1

What is market failure?

Where the free market fails to allocate resources in the best interests of society as a whole.

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2

What is the misallocation of resources?

Where land, labour and capital are not used as efficiently as possible.

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3

When does market failure arise?

When externalities exist within a market

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4

What are externalities?

Costs and/or benefits to people not included in the consumption of goods/services.

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5

What is a negative externality?

A cost to third parties. These are known as external costs.

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6

What is a positive externality?

A benefit to third parties. These are known as external benefits.

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7

What are private costs and benefits?

The costs and benefits of a firm/individual that produces/consumes the good or service.

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8

What are external costs and benefits (externalities)?

The costs/benefits to a third party, who are not involved in the consumption of the good/service.

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9

What are social costs and benefits?

The costs and benefits that arise for the whole of society

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10

If there are negative externalities, is the social cost greater than the private cost?

Yes

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11

What are the negative externalities in production?

The adverse consequences to third parties arising from the manufacturing of a good or service

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12

What are the negative externalities in consumption and give an example?

The adverse consequences to third parties arising from the purchase or use of a good or service e.g. road congestion

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13

If there are positive externalities, is the social benefit greater than the private benefit?

Yes

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14

What is government intervention?

Where governments intervene to correct a market failure.

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15

What are indirect taxes?

Taxes on the consumption of goods e.g. value added tax (VAT).

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16

What are the benefits of indirect taxes?

Higher prices reduce consumption, internalise the externality (producer pays), raise money to tackle the externality

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17

What are the problems of indirect taxes?

Depends on PED, how much tax should be added, could cause unemployment, will it affect those on lower incomes more

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18

What is legislation?

Laws to control the way people and organisations behave

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19

What is regulation?

Rules, directives or government orders to control the way people and organisations behave.

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20

What are the benefits of legislation & regulation?

The government decides how much consumption is desirable, can be legally enforced, could change attitudes in the long run

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21

What are the costs of legislation & regulation?

Cost of enforcement (police), how much is necessary, could lead to an unofficial market

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22

What are the benefits of prohibition?

Government can stop consumption entirely, can legally enforced

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23

What are the costs of prohibition?

Will require effective policing, might promote illegal activity

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24

What is information provision?

The government provides information to consumers about goods and services.

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25

What are the benefits of information provision (negative)?

Reduces consumption, no cost to consumer or firm

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26

What are the costs of information provision (negative)?

Could be ignored, message might not be effective, might not work for addictive goods, cost to the government

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27

What is a subsidy?

A payment to a firm from the government to promote the supply and consumption of socially desirable goods.

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28

What are the benefits of a subsidy?

Increases production of good with positive externality, reduces inequalities of income

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29

What are the costs of a subsidy?

Requires taxpayer's money, opportunity cost, may not lead to increased usage, could lead to over-reliance and inefficiency

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30

What are the benefits of information provision (positive)?

Increases consumption, long-lasting impact

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31

What are the costs of information provision (positive)?

Could be ignored, the message might not be effective

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32

What is state provision?

Goods and services are provided directly by the government.

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33

What are the benefits of state provision?

Increased consumption of the good, benefits the entire country, government can decide how much to provide

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34

What are the costs of state provision?

Can be very expensive (opportunity cost), how much should be provided, lead to inefficiencies, pressure on government to spend more

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35

What are ways to prevent negative externalities?

Indirect taxes, legislation & regulation, prohibition, information provision

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36

What are ways to encourage positive externalities?

Subsidies, information provision, state provision

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