econ market failure and market economy

define market failure → where the market mechanism fails to allocate resources efficiently

define external costs → cost imposed on those who are not involved in the consumpttion by those who are not involved in the consumption and production activities of others directly

define private cost → private cost are costs born by those directly consuming or producing a product

define private benefits → benefits received by those directly consuming or producing a product

define social cost → the total cost to society of an economic activity

identify the two types of costs that make up socail costs → private costs and external costs

define social benefits → the total benefits to the society of an economic activity

examples of external costs → noise pollution, water , air pollution and traffic conjunction

state the causes of market failure → merit goods, demerit goods, information failure, abuse of monopoly power and immobility of resources

identify 2 reasons why market failure might occur → abuse of monopoly power. the existence of external cost

analyze the causes of market failure [6markes] explain shi please OKAYYY!!!

-market failure occurs where the market forces of demand and supply do not achieve efficiency

-abuse of monopoly power may result in output being restricted. this causes high price being charged by the monopolist

-lack of information causes consumers and producers to make inefficient choices and harmful products may be over consumed and merit goods maybe underconsumed

define merit goods → merit goods are under consumed and under produced if left to market forces

example; health, education, insurance

define demerit goods → a product which is harmful to consumers than they realize or the government considers harmful

examples; cigarettes and alcohol

define public goods → a product which is non rival and non excludable and hence needs to be financed by taxation

example; defense, the judiciary and prison service, the police service and street lighting

define private goods →a product which is both rival and excludable

define monopoly → monopoly is one firm industry or single seller for a product

what is price fixing→ when two or more firms agree to sell a product at the same price

Explain two ways a government could increase the consumption of merit goods

.provide information/education about the benefits of merit goods as consumers may be unaware of full benefits

.subsidize the production of merit goods to lower price

.subsidise the consumption of merit goods by providing vouchers etc

Explain 2 reasons why education is a merit good

.People not taking into account external benefits

.better quality products or larger quantity of products or economic growth

Explain 2 ways a government could decrease the consumption of demerit goods

.ban or reduce the availability of the products

.provide information about the harmful effects

Explain 2 reasons why government tax cigarettes

.to improve current account position which means cigarettes may be imported

.to reduce external cost, which impose a cost on third parties and causes health issues while pollution happens

Explain how subsidy can correct market failure

.subsidy is a payment to increase the production. The subsidy would lower price and this would increase consumption of merit goods. Merit goods are products with positive externalities

2 characteristics of public goods

.non rival

Non excludability

Why public goods are not provided by the market mechanism

.some people will consume the product without paying for the product or service

.private sector firms will not have an incentive to make products they cannot charge for

What is the main problem in the provision of public goods

. Free rider problem is where a person or organisation which receives benefits that others have paid without making any contribution themselves

Explain how a government might intervene to reduce mobile phone charges→ provide subsidy, competition policy, impose a maximum price and establish a publicly run firms

What are the government measure to correct the market failure caused by the abuse of monopoly power? Stop merging of firms, making proce fixing illegal, removing restrictions on the entry of new firms into the market

What are the government measure to promote occupational mobility of labor? Improve education, provide trainings in the new skills, provide investment grants to firms to make it easier for firms to change the use of land and building