MAXIMUM AND MINIMUM PRICES:
price levels set by the government to control supply
and demand
Maximum price creates excess demand, meaning
people can easily consume merit goods, this causes
positive externalities. This is shown as a price cap
below equilibrium
Minimum price creates excess supply so there's less
consumption of demerit goods. This is shown as a
price cap above equilibrium
They can address underconsumption of merit goods and essentials (Max) ,overconsumption
of demerit goods and information gaps (min) positive externalities (max positive and min
negative) and information gaps. They don't account for the shadow economy, takes a lot of
costly admin to monitor the market/black market and is difficult to target at the correct level.
INFORMATION GAPS
All economics agents need full symmetrical information in order to make informed rational
decisions about price and quantity. Therefore, asymmetric information causes market failure
because the wrong P and Q are created. Consumers that lack information are myopic.
Moral hazard- making a decision in your own best interest whilst ignoring the risks because if
a problem occurs the cost will not solely fall on you. Eg, changing your behaviour once you
know you insurance will pay the claim
Adverse selection- when one party has more information than the other, inaccurate price
signals are created, eg healthy people being priced out of health insurance because insurers
know that those in need will pay extra
PUBLIC GOODS
Non excludable- individuals who have not paid cannot be stopped from using the product
Nonrivalrous- one person's consumption doesn't stop anyone else from consuming it, the
quality does not worsen because its non diminishing
Quasi public good- when not both of the characteristics apply all of the time
Private goods- rivalrous and excludable
Public goods are a market failure because it's a missing market. Companies will not supply
them because of the free rider problem- which is when they cannot charge for them so
cannot profit. Therefore the state has to step in to deal with this allocative inefficiency.
EXTERNALITIES
An externality is when the production or consumption of a good has an external spill over
effect on a third party where no appropriate compensation is paid.
Negative externalities are over produced/consumed and are demerit goods. Negative
externality of consumption is when the marginal social cost is greater than the marginal
private cost
Positive under produced/consumed and are merit goods. Positive externality of consumption
is when the marginal social benefit is greater than marginal private benefit
Social benefit = private benefit + externality
Social cost = private cost + externality
Optimal output = marginal social benefit = marginal social cost
Private cost is experienced by the producer
, In an externalities graph:
Cost (MPC or MSC) is like a supply curve because it represents the cost of producing
another unit to the producer
Benefit (MPC or MSC) is like a demand curve because it
represents how willing people are to consume the goods
depending on the benefit it gives them.
The deadweight welfare loss triangle always points towards the
optimal output
You can tell this is a negative externality of production because
the MSC is greater than the MPC so the socially optimal output
quantity is smaller than the current equilibrium quantity.
a negative externality of production can be reduced with a tax
because the tax shifts the mpc left, closer to the msc. This
means that the new equilibrium is closer to the socially optimal
one and the DWL triangle has shrunk.
this is a positive externality of consumption graph because currently by
consuming Q1 we are missing out on the welfare that could be gained
from consuming the social optimal output of Q2 and this means that
MPB is bigger than MSB
Tradable permits (carbon unit) is the way in which countries are
allowed to pollute a certain amount based on the amount of units (one
ton of CO2) they have. Supply and demand determines the price but if
a country can't stay within their quota they can trade. They can buy from a country with
spare or invest in reducing emissions in a developing country to match their own excess,
which is probably cheaper and easier.
TYPES OF ECONOMY:
Command economy is Run and owned by the state, so they decide where resources are
allocated like socialism and communism.
Mixed economy is when Resources are allocated through both the price mechanism and
state intervention. The factors of production are both privately and state owned
Free market is when Market forces guide resource allocation and All factors of production
are privately owned like Capitalism
price levels set by the government to control supply
and demand
Maximum price creates excess demand, meaning
people can easily consume merit goods, this causes
positive externalities. This is shown as a price cap
below equilibrium
Minimum price creates excess supply so there's less
consumption of demerit goods. This is shown as a
price cap above equilibrium
They can address underconsumption of merit goods and essentials (Max) ,overconsumption
of demerit goods and information gaps (min) positive externalities (max positive and min
negative) and information gaps. They don't account for the shadow economy, takes a lot of
costly admin to monitor the market/black market and is difficult to target at the correct level.
INFORMATION GAPS
All economics agents need full symmetrical information in order to make informed rational
decisions about price and quantity. Therefore, asymmetric information causes market failure
because the wrong P and Q are created. Consumers that lack information are myopic.
Moral hazard- making a decision in your own best interest whilst ignoring the risks because if
a problem occurs the cost will not solely fall on you. Eg, changing your behaviour once you
know you insurance will pay the claim
Adverse selection- when one party has more information than the other, inaccurate price
signals are created, eg healthy people being priced out of health insurance because insurers
know that those in need will pay extra
PUBLIC GOODS
Non excludable- individuals who have not paid cannot be stopped from using the product
Nonrivalrous- one person's consumption doesn't stop anyone else from consuming it, the
quality does not worsen because its non diminishing
Quasi public good- when not both of the characteristics apply all of the time
Private goods- rivalrous and excludable
Public goods are a market failure because it's a missing market. Companies will not supply
them because of the free rider problem- which is when they cannot charge for them so
cannot profit. Therefore the state has to step in to deal with this allocative inefficiency.
EXTERNALITIES
An externality is when the production or consumption of a good has an external spill over
effect on a third party where no appropriate compensation is paid.
Negative externalities are over produced/consumed and are demerit goods. Negative
externality of consumption is when the marginal social cost is greater than the marginal
private cost
Positive under produced/consumed and are merit goods. Positive externality of consumption
is when the marginal social benefit is greater than marginal private benefit
Social benefit = private benefit + externality
Social cost = private cost + externality
Optimal output = marginal social benefit = marginal social cost
Private cost is experienced by the producer
, In an externalities graph:
Cost (MPC or MSC) is like a supply curve because it represents the cost of producing
another unit to the producer
Benefit (MPC or MSC) is like a demand curve because it
represents how willing people are to consume the goods
depending on the benefit it gives them.
The deadweight welfare loss triangle always points towards the
optimal output
You can tell this is a negative externality of production because
the MSC is greater than the MPC so the socially optimal output
quantity is smaller than the current equilibrium quantity.
a negative externality of production can be reduced with a tax
because the tax shifts the mpc left, closer to the msc. This
means that the new equilibrium is closer to the socially optimal
one and the DWL triangle has shrunk.
this is a positive externality of consumption graph because currently by
consuming Q1 we are missing out on the welfare that could be gained
from consuming the social optimal output of Q2 and this means that
MPB is bigger than MSB
Tradable permits (carbon unit) is the way in which countries are
allowed to pollute a certain amount based on the amount of units (one
ton of CO2) they have. Supply and demand determines the price but if
a country can't stay within their quota they can trade. They can buy from a country with
spare or invest in reducing emissions in a developing country to match their own excess,
which is probably cheaper and easier.
TYPES OF ECONOMY:
Command economy is Run and owned by the state, so they decide where resources are
allocated like socialism and communism.
Mixed economy is when Resources are allocated through both the price mechanism and
state intervention. The factors of production are both privately and state owned
Free market is when Market forces guide resource allocation and All factors of production
are privately owned like Capitalism
