Some useful acronyms for content – useful when you are thinking about the structure / content for longer answers:
Sources of Market Failure –> “I’M 2 EPIC” = (2 lots of I’M)….
– Immobility (Geographical and Occupational) …… Inequality (Wealth and Income) ie Business or Economic growth comes at cost of greater Inequality -> higher GDP but a more unhappy society.
– Moral Hazard (Principal / Agent problem; Individual maximisation not leading to Societal Economic Maximisation / Optimal allocation of resources) …. Merit goods (And of course Demerit goods) Merit goods typically has +ve Ext / maybe suffer from Imperfect Information BUT Is here as underconsumption may be due to Consumers inability to calculate benefits)
– Externalities (+ve and -ve) / Public Goods (Missing markets – complete market failure – also Quasi Public Goods, concepts of Non-Rivalry, Non-Excludability and Non-Rejectability / Information Failure (eg Market for Lemons) / Competition (Monopoly typically raises prices / reduces level of production)
Sources of Govt Intervention “I’M MR. STOPP”
Information Gaps / Mix, Max prices / Regulation (Banning goods like hard drugs, guns) / Subsidies and Taxes / Other (Nudges, Behavioural Economics, Government Advice / Pursuasive Advertising) / Public Goods / Permit Schemes
Sources of Govt Failure “U DIX”
Unintended Consequences
Distortion of Markets (XS Demand / XS Supply / Black or Underground Markets)
Information Failure (Govt makes bad decisions)
eXcessive Administration Costs (from the intervention)
