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Imperfect Information and Information
Gaps
Causes of imperfect information/information gaps

Ignorance of the true costs or benefits of a product: e.g. the consequences of drug use
o Failure of producers to supply enough info
o Consumer may choose to ignore warnings
Myopic decision making ­ saving for pensions?
Problems of…

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Market Failure & Inequalities in
distribution of Income or Wealth
Sources of income ­ earned income (wages), unearned income (interest from savings, dividends),
Benefits

Sources of Wealth ­ property, investment (shares, bonds or unit trusts), inheritance, cash deposits,
other assets (e.g. business & art).

Ability to earn a high income…

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Maximum and Minimum Prices
Maximum prices

The government can set a legally imposed maximum price in a market that suppliers cannot
exceed ­ in an attempt to prevent the market price from rising above a certain level

To be effective, a maximum price has to be set below the market…

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Rationing and Black Markets
A black market (shadow market) is an illegal market in which the normal market price is
higher than a legally imposed price ceiling (maximum price)

Black markets develop where the is excess demand (shortage) for a commodity

Some consumers are prepared to pay higher prices in…

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The main adult rate for the minimum wage in the UK is now £5.80 per hour




Main justifications for the minimum wage

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The equity justification:

o That every job should offer a fair rate of pat commensurate with the skills and
experience of the employee

Labour market incentives:

o The NMW is designed to improve the incentive for people to start looking for work ­
thereby boosting the economy's available labour supply…

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Buffer Stock Schemes
Seek to stabilise the market price of agricultural products by buying up supplies of the
product when harvest are plentiful and selling stocks of the product onto the market when
supplies are low.

Designed to maintain the problems of volatile prices and incomes

With no intervention after…

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The use of a price Max and Min scheme means that governments would only intervene if the price
fluctuated outside of these targets area.

Problems with Buffer Stocks

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They need significant amount of start up capital, sine money is needed to buy up the product
when prices are low. There are also high administrative and storage costs to be considered

The success of a buffer stock scheme however ultimately depends on the ability of those
managing a scheme…

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Politicians have a tendency to look for short term solutions or "quicj fixes" to difficult
economic problems rather than making considered analysis of long term considerations

Examples?
o Pensions policy
o Source of energy generation
o Solving housing shortage
o Reducing transport congestion

`Regulatory Capture'

This is when the industries…

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