Market imperfections

• What is the principle-agent problem?

  When the agent makes the decision for the principle but acts on their own interests
• What is symmetric information?

  Where both consumers and producers have perfect market information
• How can the immobility of factors of production lead to market failure?

  This is where factors of production cannot move to produce the good with the highest social benefit. This causes a misallocation of resources, thus market failure.
• What are the 2 types of factor immobility?

  Geographical immobility - where FOPs can't move between areas

  Occupational immobility - where FOPs can't change between areas (lack of transferable skills)
• What is a monopoly?

  Where 1 firm dominates the market (market share > 24%)
• How can monopolies lead to market failure?

  • Monopolies can lead to inefficiency (as there is no incentive to be productive as 0 competition = higher prices and profits) = misallocation of resources
  • Monopolies can exploit consumers with higher prices
  • = goods are under-consumed = consumer needs + wants not fully met
  • loss allocative efficiency = market failure
  • have no incentive to become more efficient due to no competition and COP are high
• How do you increase competition in an economy?

  Promote more small and medium enterprises in the market
• What are the benefits of SME's?

  More jobs

  More innovation

  More investment
• how can asymmetric info lead to market failure?

  occurs when either the buyer or seller has more info than the other party in an economic transaction = informed info cannot be made = misallocation of resources
• what is the mobility of labour?

  ability for workers to fluctuate between jobs
• what is evidence that labour markets do not work efficiently?

  unemployment
• what is capital immobility?

  • rapid technological change - can make machinery obsolete
  • structural change in the economy - type of capital needed changes along with economy
• what is land immobility?

  difficulty to change land to produce a variety of products e.g UK struggles to produce grapes
• what are high barriers for entry?

  any legal or financial restrictions which prevent new firms from entering the market e.g expensive start up costs
• Example of monopolies:

  Market for rail travel e.g Southeastern