Market Failures
When the market naturally fails to deliver an efficient outcome
Market Failure
What is a DIRECT government action that can be used to encourage the production of demerit goods.
Ban the good
A negative externality of production is naturally ___and ___ by the market
Over produced and under priced
These goods are non-rival and are non-excludable.
What are public goods?
What is a demerit good
A good that society considers to be harmful or negative to the good of communities
The type of income tax system implemented in Australia, which makes the distribution of income more even in Australia
Progressive income tax system
This market structure can lead to market failure because the firm has significant market power and can restrict output and charge prices above those that would exist in a competitive market. As a result, consumer utility is reduced.
Monopoly
A government-imposed minimum price that sellers are legally allowed to charge for a good or service set at a higher price than the equilibrium price under market conditions.
What is a price floor?
A positive externality of production is naturally ______and _____ by the market
under produced and over priced
A good or service that is rival and excludable
Private good
These are costs borne by a third party, not the producer or consumer.
External costs?
The part of the tax system that includes an amount of income an individual can earn each financial year before they have to start paying income tax.
Tax free threshold
How to work out the external cost/unit for a good with a negative externality
The vertical distance between the supply curve (private cost) and supply curve (social cost)
A negative externality may be corrected using this...
Tax
A positive externality of consumption is naturally _______ and ______ by the market
Under produced and over priced
The _____ problem describes the idea that people can consume public goods without paying meaning there is no incentive for establishment or paying for establishment
Free rider problem
Social cost
private cost + external cost
The main argument against minimum wages:
Lower demand for labour as employers deterred from hiring labour due to higher cost of labour
Unemployment
What is meant by internalising the externality
Aligning the private benefits/costs with the social benefits/costs to make the consumers and producers act in a way that accounts for social costs & benefits of production & consumption
A positive externality may be corrected using this?
A negative externality of consumption is naturally _______ and _____ by the market
Over produced and under priced
Why is a school not a public good?
It is excludable by price
how much of the economy’s income goes to each household
income distribution
The measure of income inequality with
0 = lowest income inequality
1= highest income inequality
Gini coefficient
WHY is street lighting considered a classic example of market failure?
Because it is a public good, free riders can use it without paying and so the private sector will not provide it even though society needs it.
Will a price ceiling be successful in addressing market failure where the price of goods is too high?
No, whilst this prevents the price from rising to its equilibrium level, which the government considers too high for consumers, as a result, quantity demanded exceeds quantity supplied, creating a shortage of the good or service.
Why is a tax successful at solving market failure involved in a negative externality of consumption.
Because it will increase costs of production, shifting supply upwards to the left, allowing for the price to be increase and the socially desirable Q to be achieved.
Why is a parking lot with 30 spots not a public good.
Because it is rival, the consumption of this will eventually cause someone to miss out.
Why would adding a tax to the market for cigarettes be less effective in reducing quantity demanded than adding a tax on the consumption of juice.
Because the same per unit indirect tax on an inelastic good will cause a smaller decrease in the Qd than when implemented in a relatively elastic demanded market like juice
Govt action redistributes income collected through tax to lower income earners, thereby increasing the income of low income earners, reducing the difference in income levels between high and low income earners by this amount
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