Economics- Markets in Action Part 2

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  • Created by: Maddy
  • Created on: 05-05-13 12:30
What is 'market failure'?
Where the free market mechanism fails to achieve economic efficiency.
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What is 'productive efficiency'?
Achieved where production takes place using the least possible amount of scarce resources.
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What is 'allocative efficiency'?
Where scarce resources are used to provide the goods and services that consumer actually demand.
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What is 'economic efficiency'?
Where both productive and allocative efficiency are achieved.
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What is 'information failure'?
When consumers and producers make decisions based on incomplete or inaccurate information that do not therefore maximise welfare.
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What is 'asymmetric information'?
When information is not equally shared between two parties making a transaction.
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What is an 'externality'?
An effect whereby those not directly involved in taking a decision are affected by the actions of others. Those not directly involved in decision making are known as third parties.
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Who experiences private costs and benefits?
Experienced by those directly involved in the decision to take a particular action.
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What are external costs and benefits?
A consequence of externalities that arise from a particular action, falling on third parties. E.g. the residents living in the flight path.
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What are social costs and benefits?
Total costs or benefits accruing to society as a result of a particular action – private + external costs/benefits.
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When do negative externalities occur? Give an example of a negative externality
They occur when the social cost of an activity is greater than the private cost. This means there are costs imposed on a third party over and above those directly paid by those who carry out the activity. E.g. illegal dumping of waste, chewing gum.
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What effect do negative externalities have on the market?
The market fails in the case of negative externalities as producers only take the private cost of their actions into account. This results in overproduction and the market price being lower than it should be.
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When do positive externalities occur? Give an example of a positive externality
They occur when the social benefit of an activity is greater than the private benefit. The benefits received by a third party are over and above those received by those responsible for carrying out the activity. E.g. healthcare, education, training.
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What effect do positive externalities have on the market?
The market fails in the case of positive externalities as consumers only take the private benefits of their actions into account. This results in under consumption and equilibrium price and quantity being lower than it should be.
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What are 'merit goods'?
Merit goods are goods which have more private benefits than their consumers actually realise – they have positive externalities associated with their consumption.
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What are 'demerit goods'?
Demerit goods are good for which their consumption is more harmful than is actually realised – they have negative externalities arising out of their use.
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What is a 'public good'?
Public goods are consumed collectively, meaning that if left to the free market, they would not be provided.
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How is non-excludability a characteristic of public goods?
It is not possible to stop certain groups from consuming them, for example street lighting cannot be provided for some and not for others. People who enjoy the benefit of a public good without paying are known as free riders.
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How is non-rivalry a characteristic of public goods?
Consumption by one person does not affect consumption by any others. For example the fact that one person benefits from the protection of the police force does not stop others from doing so.
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What are 'quasi-public goods'?
Quasi-public goods possess some, but not all the characteristics of a public good. For example roads are non-rival to a degree, but after a certain point they become too busy and gridlock may occur.
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What are 'direct taxes'?
Direct taxes are taxes to the income of people and firms that cannot be avoided, for example income tax and corporation tax.
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What are 'indirect taxes'?
Indirect taxes are taxes levied on goods and services, such as VAT and fuel duty.
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Why is taxation usually used?
Taxation is usually used to discourage the production of demerit goods and goods and services that produce negative externalities.
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What effect does taxation have on the supply curve?
The tax leads to a leftward shift in the supply curve due to an increase in the cost of producing. Price will increase and quantity will decrease, reducing the effects of the negative externality.
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What is another method of government intervention that can reduce pollution?
Polluter pays principle – forcing the polluter to pay explicitly for the pollution caused.
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Why is taxation useful?
Taxation is useful as it generates revenue that may be spent by the government on providing merit and public goods.
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Why is it difficult to set taxes at the 'correct' level?
It is difficult to assess the extent of the negative externality and therefore setting the tax at the ‘correct’ level to achieve an optimal outcome will be almost impossible.
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How do some producers not pay all the tax?
Producers will not always pay the full amount of the tax; they will pass on some of the burden to the consumer. The more inelastic the product, the greater the burden is likely to be passed on to consumer.
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Why might demerit goods not have as much reduced consumption as they could?
PED for demerit goods is often inelastic (cigarettes, alcohol); meaning consumption may not be reduced by as much as intended.
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What is a subsidy?
A subsidy is a direct payment made by government to encourage production or consumption. They are a form of ‘reverse taxation’. Examples include grants to farmers and the educational maintenance allowance.
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What effect do subsidies have on the supply curve?
A subsidy works in the opposite way to a tax. By effectively reducing the costs of production, the supply curve shifts to the right, causing a reduction in the price and an increase in quantity demanded and supplied.
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How can regulations, standards and legal controls correct market failure?
They override the working of the market mechanism by imposing direct controls to correct market failure.
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What are some problems with regulations, standards and legal controls?
It is difficult to set the standards at the right level – this requires accurate information that is not always available. Once standard have been set, if a firm is polluting within these standards, there is no incentive to reduce pollution further.
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What are 'tradable permits'?
A market based means of correcting market failure. Permits are issued allowing the owner to right to emit a specific level of pollution, these permits can then be bought and sold between owner and purchaser.
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What are advantages and disadvantages of tradable permits?
It combines the benefits of a market solution with those of regulation. Still problems with calculating and actually distributing permits to polluters.• Also issues with policing and enforcing the law when firms do not keep to within their limits.
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What is 'information provision'? Give an example of information provision
Governments can correct market failures by attempting to reduce the level of ‘information failure’ in the market by providing this information to producers and consumers. E.g. health warnings on cigarettes, public safety campaigns.
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What is a problem with information failure?
People can easily ignore it.
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AS Economics- Unit 1- Markets in Action
By Maddy
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Other cards in this set

Card 2

Front

What is 'productive efficiency'?

Back

Achieved where production takes place using the least possible amount of scarce resources.

Card 3

Front

What is 'allocative efficiency'?

Back

Preview of the front of card 3

Card 4

Front

What is 'economic efficiency'?

Back

Preview of the front of card 4

Card 5

Front

What is 'information failure'?

Back

Preview of the front of card 5
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