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Explain what is meant by market failure
Market Failure occurs when the price mechanism fails to allocate resources efficiently thus leading to a misallocation of scarce resources (a net welfare loss)
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List types of market failures
1. externalities 2. under-provision of public goods 3. information gaps
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Explain what is meant by private costs
Costs internal (to the individual to an exchange or a transaction Internal costs which are to an individual from an exchange or transaction. Price mechanism fails to take into account these costs
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Explain what is meant by external costs
Costs faced by a third party resulting from an exchange or transaction. Price mechanism fails to take into account these costs
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Explain what is meant by social costs
Costs to society from an action that has been committed. Private Costs + External Costs = Social Costs. Price mechanism fails to take into account these costs
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Explain what is meant by private benefit
Positive third party effects resulting from a transaction.. The price mechanism fails to take into account these benefits
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Explain what is meant by external benefit
Benefits to the individual from an action they have committed.
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Explain what is meant by social benefit
Benefits to society from an action that has been committed. Private benefits + External benefits = Social benefits
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Show the market failure graph (external costs)
.
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What is meant by the socially optimum position
This is the optimal distribution of resources in society. When output occurs at the intersection of marginal social benefit (MSB) and marginal social cost (MSC)
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What is meant by welfare loss
Welfare loss is the excess of social cost over social benefit for a given output
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Show the market failure graph (external benefits)
.
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What is meant by welfare gain
Welfare gain is the excess of social benefit over costs
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What is the impact of external costs
Pollution from transport (asthma, environmental defradation, infertile land). Litter. Smoking and alcohol (anti-social behaviour alcohol crim £11bn 2011). Over eating = ^^ health problems (NHS and taxpayer)
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Impacts of private costs
Producer: Cost of employing FoP (expensive). Opp costs. Internal growth (economies of scale) Consumer: health effects, opp costs
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What is the impact on external benefit
Employment from business. Research and development (more tech).
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Impact of private benefits
Wages/Profit/Job satisfaction to producer. Utility consumer gets fomr consumption
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Explain the impact of government intervention on externalities
.Indirect taxes to increase price of -ve good anmd reduce demand. Internalises . Subsidy ^^ +ve. Regulation effective in ensuring SOQ is met. Information. Prodvide good direction. Permits
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Explain what is meant by a public good
Goods which are non-rivialry and non-excludable
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Explain what is meant by non-rivalry
The consumption by one person does not decrease the consumption by another. For example a Television show
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Explain what is meant by non-excluable
It is impossible, or extremely costly, to prevent someone from benefiting from a good. For example National defence
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Explain why defence is an example of a public good
An example is of a public good is defence as it is non excludable and non-rival, as you cannot exclude people from consuming it and one person consuming it will not stop the military from protecting others
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Explain why public goods may not be provided by the private sector
create a free rider problem because the quantity of the good that a person is able to consume is not influenced by the amount the person pays for the good, so why pay anything at all. This would cause market failure – under-provision (too few goods )
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Explain the free rider problem
A free rider is a person who consumes a good without paying for it once it is provided, therefore there is little incentive for producers to provide sufficient quantities leading to under-provision.
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Explain what is meant by a private good
Goods which are rivialry and excludable. This means that consumption by one person results in the good being unavailable for consumption by another
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Explain what is meant by rivalry
One person's consumption of a product reduces the amount available for other people to consume - because scarce economic resources are used up in producing and supplying the good or service
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Explain what is meant by excludable
Consumers can be excluded from consuming the product if they are not willing to pay for it
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Explain what is meant by symmetric iunformation
when buyers and sellers have equal amounts of information about the product
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Explain what is meant by asymmetric information
: where buyers and sellers have access to different amounts of information about the good or service involved in the transaction
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Explain how imperfect market information may lead to a misallocation of resources
Individuals tend to be myopic, they can overconsume harmful goods or goods we do not need or underconsume goods as we ignore long term benefit.
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Explain how information affects the D&S curve
.
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Other cards in this set

Card 2

Front

List types of market failures

Back

1. externalities 2. under-provision of public goods 3. information gaps

Card 3

Front

Explain what is meant by private costs

Back

Preview of the front of card 3

Card 4

Front

Explain what is meant by external costs

Back

Preview of the front of card 4

Card 5

Front

Explain what is meant by social costs

Back

Preview of the front of card 5
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