Unit One Economics Notes part 2 complete

Notes for the second half of micro economics, market failure and government failure included

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Economics notes part two: Market Failure
Private Goods and Public Goods
Private Goods
Consumers of private goods can be excluded from consuming the
product by the seller if they are not willing or able to pay for it.
Excludability gives the provider the chance to make a profit.
When goods are excludable the owners can exercise property rights.
One person's consumption of the good will reduce the amount left for
others to consume and benefit from.
Because scarce resources are used in the process of producing and
supplying the good or service.
Example: A BA ticket purchased by one person will prevent another person
from buying the same ticket.
Public Goods
The benefits derived from provision of public goods can not be limited
to only those who paid for it.
In this sense, nonpayers can enjoy the benefits of consumption at no
financial cost to themselves.
This is called the `Free Rider Problem'.
A free rider is someone who receives the benefits of a good but allows
others to pay for it.
For example, citizens receive benefits of the defence policy but could
maximise their own welfare by not paying for it.
If left to the market mechanism nobody would want to pay for defence
therefore the government must provide it and force people to pay for it
through taxation.
Consumption of the good by one person does not reduce the availability
of a good to everyone else.
Examples of public goods:
Flood control systems
Street Lighting
National Defence Services
Semi non rival

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Up to a point, extra consumers using a park, beach or road do not reduce the
amount of the same product available to other consumers.
Eventually additional consumers reduce the benefits to other users.
Example: Parks can get overcrowded
Semi non excludable
It is possible but often quite difficult to exclude non paying customers.
Example: Toll booths for road usage on congested routes. Another example of
this is television subscriptions if consumers do not pay for the subscription they
will be unable to watch TV.…read more

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Merit goods will be UNDERPROVIDED as people will be unaware of the
full benefits and will therefore demand less. This will mean that less is
Demerit goods will be OVERPROVIDED as people will demand more of
a good as they do not understand how bad it is for them.
Positive and Negative Externalities
These are third party spill over effects arising from production or
consumption of goods or services.…read more

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Market Failure
SPEC: Candidates should understand that market failure occurs whenever a
market leads to a misallocation of resources. They should appreciate the
difference between complete market failure (resulting in a missing market), and
partial market failure, where a market exists but contributes to resource
misallocation. Candidates should understand how public goods, positive and
negative externalities, merit and demerit goods, monopoly and other market
imperfections, and inequalities in the distribution of income and wealth can lead
to market failure.…read more

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Missing Markets
o The market can sometimes fail to provide certain goods and
o Merit goods can be under provided such as healthcare and
o This is because the market mechanism can be poor at dealing
with risk and providing information to agents in the market.
Information failure
o In efficient market information both buyers and sellers should have
good knowledge of the product.
o Products that are bought often, such as soft drinks are normally
well known by the consumer.…read more

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Monopoly and the Allocation of Resources
SPEC: Candidates should understand that monopolies have market power and
that the basic model of monopoly suggests that higher prices and profits and
inefficiency may result in a misallocation of resources compared to the outcome
in a competitive market. Candidates should understand that monopoly can
provide an example of market failure.…read more

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Natural Cost advantages
Some firms are so big that they can produce on a mass scale and
gain huge economies of scale.
Their average costs fall to a very low level and that means it is
impossible for others to compete.
5. Patents
The exclusive right granted by a government to an inventor or
manufacturer to use or sell an invention for a certain number of years.
6. Merging
A merger refers to when two firms join together in one.…read more

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CONSUMER'S perspective: Originally the consumer was paying price p*
and demanding 0q* however, with the introduction of the Pmax, the
prices have fallen this signals to customers to demand more, the incentive
function suggests the lower prices help to maximise consumer welfare.
This leads to an extension of demand.
These movements happen simultaneously and create disequilibrium. There is
now EXCESS DEMAND.…read more

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PRODUCER'S perspective: If the NMW rises the cost of production for
firms can also rise. These signals to firms to decrease their demand for
labour. Firms will have less incentive to employ as many workers because
it will reduce their profits. This will lead to a contraction in demand.
WORKER'S perspective: There will be an extension in supply this is
because higher wages signal to workers to work more as they can
maximise their income. These movements will happen simultaneously
and create disequilibrium.…read more


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