Economics Unit 3 - Government intervention in the market

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What are the 7 causes of market failure?
Public goods, Merit goods, Demerit goods, Income inequality, Imperfect knowledge, Monopolies, Immobility of factors of production
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What are the characteristics of a public good?
Non-rivalry and Non-excludable
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What is a merit good?
Under consumed and over priced in a free market
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What is a demerit good?
Over consumer and under priced in a free market
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What is income inequality?
An unfair distribution of income among a population
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What is imperfect knowledge?
When consumers do not know the full benefits/costs of the product they are consuming
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What is a monopoly?
A firm that has 25% or more market share
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What is the immobility of factors of production?
There is a loss of productive potential
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What are the solutions to market failure?
Regulation, Taxation, Information provision, Subsidies, Permits
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What is regulation?
A firm will be fined for breaking the rules.
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Why are regulations effective?
The firm has to take into account external costs
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What is taxation?
Internalises the externality
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Why is taxation effective?
Polluter pays the true cost of their decision
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What is information provision
Makes consumers aware of the full benefit/cost
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Why is information provision effective?
Takes the information into account when making decisions
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What are subsidies?
A sum of money granted by the government in order to encourage supply by lowering the cost of production
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Why are subsidies effective?
A lower cost of production can be passed on to the consumer, so the consumer pays lower prices
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What are permits?
Firms are only allowed to pollute a certain amount
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Why are permits effective?
Incentive to reduce pollution
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What is government failure?
When government intervention leads to a misallocation of resources
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What are the sources of government failure?
Inadequate information, Conflicting objectives, Administration costs, Regulatory capture
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What are the 3 associations involved with competition policy? (CC, DTI, OFT)
Competition commision, Department of trade and industry, Office of fair trading
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What 2 policies may be used by the competition policy?
Monopoly policy and Merger policy
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What is monopoly policy?
Break up the monopoly by price control and taxing profits
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What are the 2 methods of price control?
Marginal cost pricing (MC=AR). Average cost pricing (ATC=AR)
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What is privatisation?
Involves the transfer of publicly owned assets to the private sector
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What are the advantages of privatisation?
Revenue raising, Promotes competition, Promotes efficiency
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What are the disadvantages of privatisation?
Monopoly abuse, Focus on dividends, Loses out on potential profit
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What is nationalisation?
When the government take control of an industry previously owned by the private sector
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What are the advantages of nationalisation?
Lower cost of production, Economies of scale, Better control
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What are the disadvantages of nationalisation?
Lack of competition and Lowe performance
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What is regulation?
Used to limit and deter monopoly exploitation of consumers
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What is deregulation?
Removal of any previously imposed regulation that have restricted competition and freedom of market activity
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What is a public-private partnership? (PPP)
Is a public/private service that is funded through a partnership of public and private sector firms
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What is a private finance initiative? (PFI)
The government becomes an enabler rather than a provider
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What is equality?
How equal something is
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What is equity?
How fair something is
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What is horizontal equity?
Same treatment to everyone
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What is vertical equity?
Unequal treatment of unequals
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What is relative poverty?
When the income is less than the average by a certain amount
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What is absolute poverty?
When the income is below a certain level necessary to maintain a minimum standard of living
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What is the poverty trap?
When low income households have disincentives to work because of the tax/benefit system
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What are the causes of poverty?
Income inequality, Inheritance, Falling value of state benefits
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What are the effects of poverty?
Poor education, Poor health, Low living standards
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What are some of the policies the government may use to try and reduce poverty?
Reduce unemployment, Progressive taxes, Increase the national minimum wage
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What is cost benefit analysis?
A method of decision making that takes into account of external as well as private costs and benefits
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Card 2


What are the characteristics of a public good?


Non-rivalry and Non-excludable

Card 3


What is a merit good?


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Card 4


What is a demerit good?


Preview of the front of card 4

Card 5


What is income inequality?


Preview of the front of card 5
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