Theme 4 - Market failure

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  • Created by: becky.65
  • Created on: 26-02-18 21:00
What is market failure
When there is an inefficient allocation of resources. Some resources are being wasted or not producing as much as they could do; resources are being used inefficiently and consumers are worse off that they could be
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How is having monopoly power in a market an example of market failure?
Some prices will be higher than they need to be, reducing real incomes, output may be restricted, choice may be reduced and innovation slowed
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What is market power?
The ability of a producer to exert some level of control over a market
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How can businesses exert their market power?
Setting prices, restricting output, influencing other producers, creating barriers to entry and influencing suppliers
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What is the significance of a business having market power?
They can have some control over the market and spend less time and effort competing so competitive forces are reduced
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What is a cartel?
Any agreement within a group of businesses to reduce competition, avoiding competing with each other
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Why are cartels illegal?
They increases prices and make businesses not actively compete with each other; reducing consumers real income and they reduce the incentive for a business to compete or innovate which can affect the economy as a whole
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What issues can cartel members agree on?
Price fixing, reducing output, equal market sharing, fixing discounts, restricting the consumers and outlets they supply, bid rigging so that the contracts they win they can charge higher prices for
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Where are cartels more likely to emerge?
In markets where the competition is limited, such as in an oligopoly
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What is explicit collusion?
Two or more businesses form an actual agreement to follow a joint strategy
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What is tacit collusion?
Competing firms may not communicate in any way, they just keep their prices stable at the same level and they avoid price cutting so prices will be higher than if competition was strong
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What are restrictive practices?
Any action that a business might use to limit competition
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How can governments be accused of restrictive practices?
Where industries are heavily regulated because this may restrict entry into the market
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What are some examples of restrictive practices?
Forcing retailers not to stock a competitor's products, refusing to supply retails who discount products, tie-in sales where retailers are forced to stock the full range of the suppliers goods, exclusive dealing, resale price maintenance
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What is monopsony power?
When the buyer has power over the sellers and can drive down the costs of inputs to lower the cost of production
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What are the advantages of having monopsony power?
Lower costs may mean lower prices
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What are the disadvantages to the consumer and supplier of a business having monopsony power?
Suppliers may have low profits and pay low wages and monopsony power can translate into monopoly power which can reduce competition and consumers disposable income
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What is a natural monopoly?
They exist when they are considered to be the most efficient form of market structure
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What are the advantages of natural monopolies?
They reduce waste and reduce the capital costs of having to install a new power line for each supplier, which can save time and reduce costs and thus prices
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What are the disadvantages of natural monopolies?
Having no competition can keep prices high, there is no pressure to be efficient, rising costs can be passed onto the consumer, investment in innovation may be low, innovation may be slow, line rental can be high which can push prices up
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How can the labour market hold monopoly power?
A trade union can restrict the supply of labour and negotiate pay above the free market wage levels, resulting in higher costs which will be passed onto the consumer in the form of higher prices
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How can monopsony employers exploit their workers?
They can pay below free market wages because workers have nowhere else to go and find employment e.g. nurses and teachers
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What are the implications of anti-competition practices for the consumer?
Increased prices reduces disposable income so the standard of living is reduced, consumers may not have the same range of choice and products may lack innovation that a competitive market would achieve
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What are the implications of anti-competition practices for businesses?
Businesses won't become as efficient as they could be which can weaken their competitiveness in international markets so exporting businesses may suffer
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How can competitive markets increase profits for a business?
Businesses may experience economies of scale and increased pressure for innovation can lead to success in export markets
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What are the implications of market failure for governments?
Governments want economic growth which is slowed by market failure and future growth relies on businesses being able to enter markets and grow and this can be stifled by market failure, gvrnt. bodies can be overcharged by suppliers with market power
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How can bilateral monopolies be a problem to the government?
Powerful organisations that employ people who all belong to a single trade union can present problems through strikes or forcing wages too high for the government to afford
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Other cards in this set

Card 2

Front

How is having monopoly power in a market an example of market failure?

Back

Some prices will be higher than they need to be, reducing real incomes, output may be restricted, choice may be reduced and innovation slowed

Card 3

Front

What is market power?

Back

Preview of the front of card 3

Card 4

Front

How can businesses exert their market power?

Back

Preview of the front of card 4

Card 5

Front

What is the significance of a business having market power?

Back

Preview of the front of card 5
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