Econ 1 Chapter 5

Front 1

Market failure

Back 1

Supply and demand do not result in the efficient allocation of resources

Front 2

6 reasons for market failure

Back 2

1) Immobility of labour

2) public goods

3) externalities

4) price instability in commodity markets

5) asymmetric information

6) government failure

Front 3

Social Marginal Cost

Back 3

addition to total cost of producing an extra unit of output

Front 4

Social Marginal Benefit

Back 4

addition to total benefits of consuming an extra unit

Front 5

Why is it necessary for social marginal benefits and social marginal costs to be equal?

Back 5

For resources to be allocated efficiently

Front 6

2 types of immobility of labour?

Back 6

1) geographical immobility of labour

2) occupational immobility of labour

Front 7

What is the difference between Geographical immobility of labour and Occupational immobility of labour?

Back 7

GIM limits the movement of workers from one country to another whereas OIL limits from occupations

Front 8

3 causes of the OIL

Back 8

1) lack of relevant skills and qualifications

2) no relevant experience

3) wage rate - worker might move if low WR

Front 9

Measures to increase OIL

Back 9

1) training programmes

2) increase higher education provisions

3) information about opportunities in other occupations

Front 10

3 causes of the OIL

Back 10

1) lack of relevant and qualifications

2) no relevant experience

3) wage rate - worker might move if low WR

Front 11

Measures to increase OML

Back 11

1) training programmes

2) increase higher education provisions

3) information about opportunities in other occupations

Front 12

Public good

Back 12

Goods which have 2 key characteristics: 1 - non-rivalrous, 2 - non- excludable

Front 13

Non-rivalrous

Back 13

Amount doesn't fall after one persons consumption

Front 14

What is the free rider problem?

Back 14

Once a good is provided it is impossible to prevent people from using it and therefore impossible to charge for it

Front 15

Why are free riders a problem?

Back 15

Not profitable for businesses

Front 16

Policy of government to correct free rider problem?

Back 16

Taxation

Front 17

Disadvantage of taxation to solve free riding

Back 17

Determined amount of resources allocated without reference to the electorate

Front 18

Why are externalities a form of market failure and what are the two types?

Back 18

Inefficient allocation of resources, positive and negative externalities

Front 19

External costs

Back 19

Costs in excess of private costs which affect 3rd parties who aren't part of the transaction

Front 20

3 difference types of external costs

Back 20

1) air pollution

2) noise pollution

3) pollution from deforestation

Hint 20

Pollution

Front 21

The direct cost to producers and consumers for producing and consuming a product...

Back 21

Private costs

Front 22

The sum of private costs and external costs...

(Private costs + external costs)

Back 22

Social costs

Front 23

1)PMB indicates...

Back 23

1)private benefits to the consumer decrease as consumption increases

Front 24

2 Disadvantages for indirect taxation?

Back 24

1)Ineffective in reducing pollution if demand is price inelastic

2) difficult to set tax because it's difficult to quantify the external cost

Front 25

Rights to sell and buy actual or potential pollution in artificially created markets

Back 25

Tradable permits

Front 26

2 Advantages of tradable permits?

Back 26

1) incentive for firms to reduce pollution

2) cost of administrating scheme is relatively low

Front 27

2 disadvantages of tradable permits?

Back 27

1) pollution will continue despite being lower

2) large firms might buy up the permits and continue to pollute

Front 28

Property rights

Back 28

Exclusive authority to determine how a resource

used whether that resource is owned by the government, collective bodies or individuals

Front 29

3 advantages of property rights

Back 29

1) incentive to firms to take into account private and external costs

2) firms compensate

3) costs of administrating scheme relatively low

Front 30

3 disadvantages of property rights?

Back 30

1) assigning property rights

2) breach of property rights, who should be compensated?

3) difficult agree on the monetary value of the external cost

Front 31

What will a leftward shift in the supply curve do?

Back 31

Cause consumption and output to fall to 0Y the socially optimal level

Front 32

what is the issue with legal restrictions?

Back 32

May require expense of enforcements e.g. inspectors

Front 33

1)PMB indicates...

Back 33

1)private benefits to the consumer decrease as consumption increases

Front 34

External benefits

Back 34

Benefits in excess of private

benefits which affects third parties who are not part of the transaction

Front 35

Example of external benefits?

Back 35

Commercially owned bees pollinating fruit trees of local farmers

Front 36

Direct benefits to producers and consumers in a transaction

Back 36

Private benefits

Front 37

Private benefit to a producer?

Back 37

Revenue

Front 38

Private Benefit to the consumer?

Back 38

Utility of product/service

Front 39

Social benefits

Back 39

Sum of private benefits and external benefits

(Private benefits + external benefits)

Front 40

External benefits =

Back 40

Social benefits - private benefits

Front 41

When will PMB be the same as SMB?

Back 41

When it's assumed there's no marginal benefits

Front 42

PMC curve indicates private cost if borrowing the product rises as...

Back 42

Output rises

Front 43

Socially optimal level of output is determined from the equilibrium point at which...

Back 43

SMC=SMB (0Y)

Front 44

What does the triangle represent and why is it present?

Back 44

Welfare triangle,

Over production and over consumption of XY

Front 45

Give an example of an external cost of consumption

Back 45

Smoking and health risks

Front 46

External costs and sustainability- environmental damage in the use of nonrenewable resources, however...

Back 46

There is an increase in renewable resources in production

Front 47

What are the three policies to correct market failure?

Back 47

1) indirect taxation

2) tradable permits

3extension of property rights

Front 48

What will a leftward shift in the supply curve do?

Back 48

Cause consumption and output to fall to 0Y the socially optimal level

Front 49

Front (Term)

1) PMB indicates...

Back 49

1) private benefits to consumer decrease as consumption increases

Front 50

When the social marginal benefit is greater than the social marginal cost...

Back 50

Welfare gain

Front 51

When a social optimum is produced there will be a...

Back 51

Welfare gain

Front 52

External benefits: 3 policies to correct market failure

Back 52

1) provision of the state (funded by taxes e.g. NHS)

2) subsidies (to reach optimal level)

3) encouraging changes in consumer behaviour (adverts)

Front 53

Example of a benefit of production

Back 53

Bees produce honey but also pollinate fruit trees of local farmers

Front 54

Main cause of commodity price instability?

Back 54

Price inelasticity of supply and demand

Front 55

Supply inelastic for soft commodities e.g. agriculture...

Back 55

because a long growing period is needed while for hard

commodities e.g. diamonds time is required for developing new mines

Front 56

Demand price in elastic for commodities because…

Back 56

Price inelastic and required for production of other goods

Front 57

2 more examples of price volatility

Back 57

1) weather

2) speculators betting on future price changes

Front 58

What would any shift in the supply curve cause?

Back 58

Sharp change in price

Front 59

3 reasons demand may have increased?

Back 59

1.increasing world population 2.increase in real incomes 3.increasing demand for grain to be used for fuel

Front 60

Buffer stock scheme

Back 60

Designed to reduce price fluctuations involving setting the ceiling and the floor price

and buying and selling stocks to maintain price within these limits

Front 61

4 criticisms of buffer stock schemes

Back 61

1) floor price too high surpluses each year

2) ceiling price to low insufficient stocks available in years of shortage

3) costs to society, such as building costs

4) depends of all major producers agreeing to the scheme and not cheating e.g. selling to consumers at reduced price

Front 62

1) Minimum guaranteed prices

2) what does Q1 to Q2 show?

Back 62

1) Minimum price from particular commodity guaranteed to producers

2) surplus

Front 63

2 advantages of minimum guarantee prices

Back 63

1) produces know amount they will receive in advance

2) allows them to plan investment and output

Front 64

3 disadvantages of minimum guaranteed prices

Back 64

1) if minimum guaranteed price set to high surpluses each year

2) costs of storage and disposal burdened by taxpayers

3) encourages overproduction may therefore result in inefficient allocation of resources

Front 65

2 advantages of minimum guarantee prices

Back 65

1) produces know amount they will receive in advance

2) allows them to plan investment and output

Front 66

3 disadvantages of minimum guaranteed prices

Back 66

1) if minimum guaranteed price set to high surpluses each year

2) costs of storage and disposal burdened by taxpayers

3) encourages overproduction may therefore result in inefficient allocation of resources

Front 67

Situation in which one party in a transaction has more or superior information compared to another

Back 67

Asymmetrical information

Front 68

3 examples of asymmetrical information

Back 68

1) housing markets – estate agents may know more than potential buyer

2) life-insurance – consumers may withhold aspects of health profile

3) Financial services – bank may be unaware of likelihood of default by borrower

Front 69

3 methods of dealing with asymmetrical information

Back 69

1) State provision

2) public information /advertisements

3) private sector organisations, the media and the Internet: information which informs consumers

Front 70

Government intervention results in net welfare loss…

Back 70

Government failure

Front 71

Why agricultural stabilisation schemes might be an example of government failure

Back 71

Schemes could result in surpluses

involving huge storage costs, surpluses imply resources may not be an allocated efficiently

Front 72

Why housing policies might be an example of government failure

Back 72

Although state provisions of housing desirable for those on low income, housing substitutes prevent market from working

efficiently, little incentive for people so limits geographical mobility of labour

Front 73

And example of why an

environmental policy might be an example of government failure

Back 73

Windfarms – expensive, environmental problem in itself (eyesore)

Front 74

Why the labour market might be an example of government failure

Back 74

Could result in unemployment if wages set above free-market wage, rate of unemployment depends on whether minimum wage is above equilibrium wage and on price elasticity of demand and price elasticity of supply of labour