5.4 Correcting Market failure

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  • Created by: Twins 1&2
  • Created on: 15-10-13 19:18
market failure
when the market (through demand and supply) fails to allocate resources in the best interests of society as a whole.
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Externalities
an impact of an economic transaction on a party who is not directly involved. (Positive or negaetive impact)
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Production exteranlities
Third parties who are not part of the production process get effected by the producton process. Eg pollution caused by production to the enviroment
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consumption exteranlities
eg driving cars, pollutes the air. Snack consumption= increases litter - negetive externality
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positive impact = positive externality/ external benefit.
It is a benefit from production or consumption. Eg a vaccination against a contagious disease. The individual who pays to be vaccinated directly benefits, however this will also benefit others, becasue they will never pass on the didease
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negative impact = negative externality/ external cost.
It is a negative impact of economic transaction on party who is not directly involved. Eg manufacturing causes air pollution costing the whole population.
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Taxes and chrages
reduce negetice extrenalities through taxation. Eg green taxes- higher tax on petrol - puts price up - consumption should fall - reduces harful emmisions
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Laws and regulations
to reduce negetive exteralities. Eg they banned the use of lead petrol and in 2007 banned smoking in public places
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Subsidies
the gov. through subsidies encourage producers/ consumers to alter behaviour. Eg subsidies on public transport would make it cheaper, public are more likley to use it, emissions go down, less cars on the road.
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Provision of merit goods
gov. provide them to have positive externalities on the public. Eg healthcare, without it the population would be full of disease as only a few could afford it due to market forces.
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Demerit Good = rise in negative externalties
good or service whose consumption is unhealthy to consumers. Over consumed if left to market forces. Eg tabacco, alcohol, recreational drugs, gambling and junk food.
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merit goods = rise in positive externalities
good or service whose consumption is healthy to consumers.There would not be enough if left to market forces (example of market failure). Eg education and health services.
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Other cards in this set

Card 2

Front

Externalities

Back

an impact of an economic transaction on a party who is not directly involved. (Positive or negaetive impact)

Card 3

Front

Production exteranlities

Back

Preview of the front of card 3

Card 4

Front

consumption exteranlities

Back

Preview of the front of card 4

Card 5

Front

positive impact = positive externality/ external benefit.

Back

Preview of the front of card 5
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