Market Failure & Buffer Stock Schemes

Imperfect Information and Information Gaps

Market Failure & Inequalities in distribution of Income or Wealth

Maximum and Minimum Prices

Buffer Stock Schemes

Government Failure

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  • Created on: 28-03-10 10:09
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Imperfect Information and Information
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 using complex information e.g. choosing between makes of computers requires
specialist knowledge
Inaccurate or misleading information
Addiction e.g. drug addicts may be unable to stop consumption of harmful substances
Pension crisis ­ a case of information failure?
According to the pension commissions, twelve million people over the age of 25 are not
saving enough
All people face a trade-off between current and future consumer expenditure
Are young people ignoring the pensions time-bomb by not saving enough now?
Should the government force people to save more for their retirement. Compulsory pension
saving, as in Australia is gaining popularity
Bottle water ­ rip-offs and information failure
Consumers in Britain spend £1 billion a year on bottled water is which is over 1,000 times
more expensive than tap water.
2003 UK water met 99.88% if required standards, which cannot be said of all bottled waters
Are consumers suffering from information failure?
Seduce by advertising?
90% is sold from non-renewable containers (negative externality)
Asymmetric information
Occurs when somebody knows more than somebody else in the market. Such as asymmetric
information can make it difficult for the two people to do business together
Examples include the following:
o A mortgage lender down now know how likely a borrower is to repay their loan in
future years
o A used-car seller knows more about the quality of the car being sold than do buyers
Private insurance
Moral hazard ­ the tendency of people who feel as though they are protected to be less
careful about their health. Others pick up the bill if you have insurance
Adverse selection ­ those with the greatest health rick are most likely to take out health
insurance. How does that affect the price of insurance for everyone? Do insurance
companies reject those who have the greatest need?
Public collective provision? ­ private sector provision but guaranteed by the state, funded by
compulsory insurance

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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),
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 ­ education, family background/expectations, natural talent,
experience, level of wealth
Causes of market failure in income distribution ­ distortions caused by discrimination (gender,
race, sexual orientation, age, disability).…read more

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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 clearing price (free market
One example of a maximum price might be for foodstuffs when a shortage of essential
foodstuffs threatens a very large rise in the free market price
Other examples include rent…read more

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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 black markets in order to get the
goods or services they desire
When there is a shortage, higher prices act as a rationing device
Minimum prices
A minimum price is a legally imposed price floor…read more

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The main adult rate for the minimum wage in the UK is now £5.…read more

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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
Labour market discrimination:
o NMW is a tool designed to offset some of the effects of persistent discrimination of
many low-paid female workers and younger employees
Disadvantages of a minimum wage
Competitiveness and jobs:
o…read more

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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 a good harvest (S2) the quantity supplied would increase and the price
would fall to P2. In this situation the government would intervene to buy up excess supply to maintain
the price at P1.…read more

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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.…read more

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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 to correctly estimate the average price if the product over a period of
With agricultural products the output is perishable which may cause storage problems.…read more

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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
o Pensions policy
o Source of energy generation
o Solving housing shortage
o Reducing transport congestion
`Regulatory Capture'
This is when the industries under the control of a government agency appear to operate in
favour of the vested interest of producers rather than consumers
Disincentive effects
Where policy interventions led to a loss of incentives either form consumers…read more


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