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Micro Economics, The market mechanism, market failure and government intervention in markets
Terms in this set (18)
Show how a higher price in the market for apples creates incentives to suppliers.
A higher price sends signals to existing suppliers to increase their output as well as to new producers to enter the market.
Economic agents are responding to increased profit incentives.
This will lead to an extension along the supply curve for existing firms.
Explain how economic incentives influence what, how and whom goods and services are produced
Incentives are functions of the price/market mechanism. What: higher prices signal to existing suppliers to supply more of a product, as well as other firms to switch from producing less lucrative products to more profitable ones. How: firms will look to use factors of production in the least-cost combination to maximise profit. For whom: producers will look to sell to the highest bidder in order to maximise producer surplus.
Explain why national defence may be considered an example of a public good
Defence may be considered a public good since it is impossible/impractical to exclude individual citizens from being defended once national defence has been provided. Defence is also non-rival in consumption: somebody being defended does not lead to any other individual feeling less defended.
Explain why a national park such as the Lake District may exibit characteristics of public goods, private goods and quasi public goods, depending on the time of year
In the low tourist season, national parks such as the Lake District may exhibit non-rivalry as visitors and their vehicles may not be in competition for views/space with other visitors/vehicles. However, at busy/peak season, space may be so limited as to be rival.
Explain why the environment may be considered a public good
The environment (including the air, seas, forests, beaches) is generally so vast as to be neither excludable nor rival, although there are more localised exceptions, depending on the narrowness of definition.
Describe how the tragedy of the commons may lead to environmental market failure
The tragedy of the commons is that common resources such as land, the seas and forests may be over-used without any legal limits or restrictions on their use. This can lead to environmental degradation and resource depletion, e.g. over-fishing in the North Atlantic.
Define the term marginal private benefit
The additional benefit to an individual consumer or producer from consuming or producing one more unit of a product, equal to marginal social benefit (MSB) minus marginal external benefit (MEB).
Explain the positive externalities that may arise from building a new airport runway
Positive externalities would include less pressure/overcrowding on the rail network and the attraction of foreign tourism and investment into the UK.
Define the term marginal social cost
The additional cost to society from the production or consumption of one more unit of a product, equal to marginal private costs (MPC) plus marginal external costs (MSC).
Explain why the absence of property rights may lead to the over exploitation of economic resources such as the environment
a lack of property rights is likely to lead to the tragedy of the commons, as everyone can consume and no rules on how much you can consume.
relevant diagram(s), e.g. over-consumption of resources such as forests and seas
Explain why tobacco is seen as a demerit good
A demerit good is one that would be over-consumed in a free market. Tobacco would be over-consumed as individuals are unable to appreciate the negative consequences to their health and/or it is priced too cheaply.
Explain how imperfect information may lead to undesirable consequences in the market for personal pensions
Imperfect information, arising from consumers' inability to carry out, or to comprehend, long-term calculations such as those in the case of pension premia and funds, tends to lead to the under-consumption/provision of personal pensions. Thus personal pensions may be seen as a merit good.
Analyse how occupational and geographical immobility of labour may lead to an inequitable distribution of income and wealth
linked to structural unemployment, inability to contest for jobs may constitute market failure as some individuals may find themselves in undesirable levels of poverty
this can lead to external costs, e.g. increased pressure on health services, social tensions and crime
credit use of relevant diagram(s), e.g. external costs, labour market diagrams
List competition policy measures that could be used to enhance competition between firms in the UK
Policy measures include: restricting mergers/takeovers, taxing excessive profits of large firms, regulating prices of dominant firms, subsidising new entry, privatisation, deregulation of markets.
Explain two possible economic benefits of increased privatisation
Benefits include: increased competition, lower prices, increased quality/customer service.
Define the term property rights
Property rights legally confer the right to own or use a resource such as land.
List possible sources of government failure
Sources include: regulatory capture, inadequate information, administration costs, unintended consequences, political bias.
Explain why government intervention in the market for education may lead to unintended consequences
use of relevant examples, e.g. school league tables creating unintended consequences in terms of pressure on schools, parents being untruthful about their address, some schools becoming less desirable
relevant diagrams, e.g. subsidising merit goods
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