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42 Cards in this Set
- Front
- Back
What is market failure a result of? |
Inefficient allocation of scarce resources. |
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How does the inefficient allocation resources occur? |
The price mechanism (forces of demand and supply) fails to allocate resources efficiently. |
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What are externalities? |
The effects of producing or consuming a good to an innocent third party not involved in the market transaction. |
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What is private cost? |
The cost of doing something for consumer/firm. |
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What are external costs? Give an example of an external cost? |
Costs caused by externalities. eg. consuming cigarettes could cause the cost of healthcare to rise because a third party suffers from the effects of passive smoking. |
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What is social cost? |
The private and external costs added together which is the cost upon society.
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What is a private benefit? |
The benefit gained by consumers or firms. |
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External benefits are caused by externalities. Give an example of an external benefit? |
Factory that invests in new equipment that is more energy efficient demands less energy, reducing impact on climate. |
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Social benefit is the private and external benefit together. How does market failure occur? |
When only the private costs and benefits are taken into consideration and not the external costs or benefits. |
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What are merit goods? |
Goods that have greater social benefits than private benefits. |
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Give an example of merit goods? |
Health care and education. |
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Why do merit goods tend to be underconsumed? |
• The positive externalitites they provide are ignored; production and consumption fall below optimal level.
• Imperfect information - consumers dont always realise full benefits merit goods provide. |
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What are demerit goods? |
Goods that have greater social costs than private costs. |
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Consumption of demerit goods is regarded as what? |
Harmful. |
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Give an example of demerit goods? |
Cigarettes and Heroin. |
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Give two reasons why demerit goods tend to be overconsumed? |
• In the free market negative externalities are ignored; production and consumption above socially optimal level.
• Due to imperfect information, consumers dont always realise harm that demerit goods cause. |
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What can short term decision making affect? |
The consumption of goods. |
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Why can short term decision making affect the consumption of goods? |
Individuals can fail to make provisions for future changes in circumstances. |
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Give an example relating to short term decision making? |
An old age pension - the short term benefits of paying towards a pension (knowledge you are saving for old age) are less than the long term benefits of receiving pension. |
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How can governments intervene in markets for merit and demerit goods? |
Governments can provide goods directly or make use of taxes and subsidies. |
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What two characteristics do public goods have? |
• Non-excludable - people cannot be stopped from benefiting even if they have not been paid for - eg. armed services. • Non-rivalry - one person benefiting from good doesn't stop others also benefiting - eg. flood defences. |
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Private goods are excludable and exhibit rivalry. Give an example of this? |
University education - paying for a place in university takes a place and excludes anyone who can't afford it. |
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What are public goods that exhibit characteristics of private goods called? |
Quasi (non pure) public goods. |
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Give an example of quasi public goods? |
Roads - although free to use and one person using it doesn't prevent another adding a toll excludes people who don't pay and congestion will make a road exhibit rivalry as there's limited number who can benefit at any one time. |
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New technology can cause what to occur? |
The changing of a public good to a private good. |
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Give an example of new technology causing a change in good from public to private? |
• Analogue TV meant anyone who owns TV and aerial could receive broadcasts that were non-excludable and non-rivalrous.
• Invention of digital technology has meant channels can be encrypted to ensure people have to pay for it. |
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Public goods are what, by the free market? |
Under provided. |
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Outline the 'free rider problem'? |
It means once public good provided impossible to stop someone benefiting from it. eg. street cleaning services cannot stop free rider who refuses to pay benefiting from clean street.
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What cannot work if the free rider problem exists? |
The price mechanism - consumers wont choose to pay for public good they can get for free because other consumers have paid for it.
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If people wait and see who pays for public goods, what will happen? |
Public goods wont be provided. |
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Why is it difficult to set a price for public goods?
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It is difficult to work out their value to customers; producers tend to overvalue benefits of public goods to try and raise price but consumers undervalue benefits to lower price.
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What does the problem with the value of these benefits mean for firms? |
Firms are reluctant to supply public goods leading to market failure. |
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Positive externalities link to the free rider problem. Why? |
They are a form of public good and they're consumed by those who don't pay for them. |
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What does symmetric information mean? |
Everyone has equal and perfect knowledge. |
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What does symmetric information allow? |
Efficient allocation of resources as buyers and sellers are assumed to have full knowledge regarding price, costs, benefits and availability. |
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What does asymmetric information involve? |
• Sellers have more information than buyers (eg. car salesmen has more knowledge on car history than buyer).
• Buyers have more information than sellers (eg. antiques collector has more information than seller). |
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Provides of some services (eg. healthcare) have a lack of information as it is what? |
Unpredictable - healthcare providers don't know when someone is going to become ill. |
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Moral hazard is a possible result as a result of asymmetric information. Explain concept of moral hazard? |
• When people take risks because they wont suffer consequences themselves - eg. home owner buys house insurance and behaves recklessly knowing they are covered.
• The insurance provider lacks information in regard to how consumer is behaving. |
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What does asymmetric information mean for consumption of merit and demerit goods? |
• Merit goods are underconsumed and demerit goods are overconsumed; people lack info regarding full personal benefit of merit goods or they may not know the harmful effects of consuming demerit goods. |
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Explain how information failure affects the provision of merit and demerit goods? |
Merit goods are underprovided and demerit goods are overprovided causing a misallocation of resources and market failure. |
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Give an example of information failure in regard to merit/demerit goods? |
• Pension providers - greater knowledge of pension schemes available than clients; may sell more expensive schemes.
• Doctors have greater knowledge of medicine - may persuade clients to purchase more expensive care.
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Why might a consumer lack information as to what computer is best for their needs for example? |
May be too complex or confusing to understand technical differences. |