section 2 pt.3

• what is market failure?

  market forces resulting in an inefficient allocation of resources
• when does market failure occur?

  when market forces fail to produce the products that consumers demand, in the right quantities at the lowest possible cost
• what are the indicators of market failure?

  shortages, surpluses, high prices, poor quality and lack of innovation
• what are third parties?

  those not directly involved in producing or consuming a product
• what are social benefits?

  the total benefits to a society of an economic activity
• what are social costs?

  the total cost to a society of an economic acticity
• what are private benefits?

  benefits received by those directly consuming or producing a product
• what are private costs?

  costs borne by those directly consuming or producing a product
• what are external costs?

  costs imposed on those who are not involved in the consumption and production activities to others directly. they involve pollution
• what are external benefits?

  benefits enjoyed by those who are not involved in the consumption and production activities of others directly
• social cost= private cost + external cost
• social benefit= private benefits + external benefits
• what is socially optimum output?

  the level of output where social cost equals social benefit and society's welfare is maximised
• information failure on consumers?

  informed about nature of products, benefits and prices, if not: they will pay more than required and buy low quality products
• information failure on workers?

  informed about what jobs are offered, location, qualifications, and remuneration, if not they may end up in the wrong job
• information failure in producers?

  informed about what products are in demand, where good raw materials can be purchased at lowest possible price and cost effective methods of production, if not, production cost may be higher and revenue will decrease
• what are merit goods?

  products which the government/ consumers do not fully appreciate how beneficial they are and so which will be under consumed. such goods generate positive externalities
• measures to overcome lack of consumption (merit goods)

  providing info about how beneficial they are, providing subsidies to put down prices, make it free and make it compulsory
• what are demerit goods?

  products which the government/consumers do not fully appreciate how harmful they are and so which will be over consumed. such goods generate negative externalities
• measures to overcome overconsumption of demerit goods?

  providing info about their harmful effects, imposing taxes therefore raising prices, and banning those products
• what is a public good?

  a product that is non rival and non excludable and hence needs to be financed by taxation
• excludability means people can be prevented from consuming the product
• rivalrousness is whether individuals can consume them without affecting their availability to others
• what is a private good?

  a product which is both rival and excludable
• what is the free rider problem?

  when people can enjoy public goods without paying, so there may be insufficient incentive for private producers to invest in the production of public goods. it results in underproduction or inefficient allocation of resources
• a monopoly is a single seller that controls the whole market. market failure can arise because it may lack competitive pressure to respond to consumer demand.
• price fixing is when two or more firms agree to sell a product at the same price (oligopoly)
• govt. strategies to promote competition and prevent firms from abusing their market power?

  removing restrictions on entry of new firms into a market, making uncompetitive practices illegal (price fixing), stop firms from merging together and monopoly nationalization
• advantages of mixed economy?

  govt. can provide public goods, necessities, merit goods, and private businesses provide profitable most-demanded goods so everyone is provided for, govt. keeps externalities, monopolies etc. in control, govt. can provide jobs (better job security), govt. provides financial help to private organizations, govt. encourages consumption of beneficial goods and discourage consumption of harmful ones
• disadvantages of mixed economy?

  taxes will be imposed which will raise prices and reduce work incentive, laws and regulations can increase production cost and reduce production, and public sector organizations will still be inefficient and produce low quality goods
• a maximum price is set below the existing equilibrium price so more people will be able to purchase the product
• advantages of maximum price?

  consumers benefit because of the low prices and creates stability of markets in the short term
• disadvantages of maximum price?

  some consumers unable to purchase due to shortage and inefficient allocation of scarce resources
• a minimum price is set by the government above the existing equilibrium price and sellers cannot legally sell the product at a lower price
• advantages of minimum price?

  in agricultural markets, producers benefit because they receive a higher price and used in demerit goods to decrease its consumption
• disadvantages of minimum price?

  there is an opportunity cost because government purchases the excess supply and producers lower output which can lead to unemployment
• what is nationalization?

  moving the ownership and control of an industry from the private sector to the government
• advantages of nationalization?

  generate efficiencies when delivering utilities to the population, creates equity in society and generates revenue for government
• what are multinational companies?

  companies which produce in more than one country
• disadvantages of nationalization?

  government firms can be run inefficiently and there is an opportunity cost about the money to run it