Economics Revision

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What are the Functions of Prices?
1) The Signalling Function. 2) The Incentive Function. 3) The Rationing Function 4) The Allocative Function.
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What is Partial Market Failure?
When the market function, but produces the 'wrong' quantity of a good/service.
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What is Complete Market Failure?
When the market simply doesn't exist. This is AKA a Missing Market.
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How do Negative Externalities lead to the 'Wrong' Quantity of a Good being Produced?
If -ve production externalities are generated, goods end up being too cheap or under-priced. Prices under-reflect the true costs of production, which include the -ve externalities, & too much of the good is produced & consumed.
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How do Positive Externalities lead to the 'Wrong' Quantity of a Good being Produced?
Prices end up being too high, leading to the 'wrong' quantity of the good being produced & consumed. Prices over-reflect the true costs of production. Not enough of the good ends up being produced & consumed.
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What do Merit & Demerit Goods lead to (unlike public goods)?
Partial Market Failure.
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Name 2 examples of Merit Goods.
Education & Healthcare. Museums, crash helmets, seatbelts.
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What are Merit Goods?
Private goods (they're excludable & rival) even though they are often provided by the public sector.
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What are Merit Goods in terms of Benefits?
A good/service for which the social benefits of consumption enjoyed by the whole community exceed the private benefits received by the consumer. Consumption by an individual produces +ve externalities, benefit the wider community. E.g. civilised pop.
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What are Demerit Goods in terms of Benefits?
The social costs to the whole community result from the consumption of a demerit good, e.g. tobacco or alcohol, exceed the private costs incurred by the consumer.
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Give Examples of Social Costs that include the -ve Externalities.
Costs imposed on others from passive smoking & road accidents caused by drunken drivers, taxes raised to pay for the care of victime of tobacco-and alcohol-related diseases.
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What happens when free-riding occurs?
The incentive function of prices breaks down
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How do Governments encourage consumption of Merit Goods?
Through state provision & subsidy.
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How do Governments discourage Consumption of Demerit Goods?
Through regulation & taxation.
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Why do Governments Impose Price Ceilings?
To prevent prices rising above desired levels.
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What happens when a Price Ceiling is Imposed below the Free-Market Price?
It distorts the market & creates excess demand. In this situation a black market is likely to emerge.
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Why do Governments Impose Price Floors?
To prevent prices falling below desired levels, e.g. national minimum wage.
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When does Government Failure Occur?
When Government intervention in markets fails to correct market failure &/or leads to outcomes worse than the intervention was meant to correct. Like market failure, gvnmt. failure is associated with a misallocation of resources.
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How can Government Failure Occur?
Results from government decisions made on the basis of inadequate info; as a result of conflicting objectives; & from the administrative costs of gvnmt intervention. Also associated with the unintended consequences of gvnmt intervention in markets.
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Other cards in this set

Card 2

Front

What is Partial Market Failure?

Back

When the market function, but produces the 'wrong' quantity of a good/service.

Card 3

Front

What is Complete Market Failure?

Back

Preview of the front of card 3

Card 4

Front

How do Negative Externalities lead to the 'Wrong' Quantity of a Good being Produced?

Back

Preview of the front of card 4

Card 5

Front

How do Positive Externalities lead to the 'Wrong' Quantity of a Good being Produced?

Back

Preview of the front of card 5
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