Market Failure and Government Intervention:

Why might information failure arise?

1) The complexity of the good or marketplace in which it is bought and sold 2) Irrational consumer behaviour ie: a preference or brand loyalty or lack of knowledge about a rare purchase good 3) Difficulties in keeping track of prices charged by the vast number of firms in a competitive market 4) Insufficient knowledge about the actual differences between brands within the marketplace

What two methods of government intervention can be taken?

1) Methods which involve the manipulation of market mechanism (subsidies, indirect taxation) aka: market-based solutions 2) Non-market methods eg: direct forms of provision and various forms of regulation and control

What are the causes of market failure?

1) The failure of the market economy to provide public goods 2) The presence of externalities 3) Underprovision of merit goods 4) Overprovision of demerit goods 5) Monopolies and other market imperfections 6) Inequalities in the distribution of income and wealth

What are examples of information provision?

- Legislation on how interest rates are calculated and defined, so that consumers can compare different loans. - Public information broadcasts, to educated people of factors such as the effects of speed on the safety of pedestrians - Labelling of food products to help people overcome the dangers of food allergies - promotion and advertising of health screening programmes to help people avoid addiction and certain illnesses - warnings on cigarette packets, advising potential consumers on the risks of smoking

What is information failure?

A lack of information resulting in consumers and producers making decisions that do not maximise welfare

What is an oligopoly?

A market structure in which the supply of goods is dominated by a few firms.

What is a monopoly?

A market structure in which there is only one firm supplying all the goods in an industry.

What is a missing market?

A missing market means there is complete market failure in the provision of a good or service

What is a maximum price?

A price above which it is illegal to trade

What are minimum prices?

A price below which it is illegal to trade.

What are the effects of intervening into information failure?

Consumer protection laws and health and safety legislation overcome information failure A better educated population are less vulnerable to information failure

What are the disadvantages of minimum prices?

Consumers are paying a higher price than the market equilibrium Resources used to produce the excess supply could be used elsewhere - inefficient allocation of resources Government spending could be used for other things - high opportunity cost Destroying excess goods is a waste of resources

Give an example of a negative externality of consumption:

Consuming chocolate and then dropping the litter on the street

What are some different forms of privatisation?

Contracting out services - a government pays a private firm to carry out work on its behalf eg: cleaning gov-owned buildings Competitive tendering - private firms big to gain a contract to provide a service for the government Public Private Partnerships (PPPs)

What are the disadvantages with using taxation to correct market failure?

It's hard to determine the exact amount of tax as it is difficult to estimate the monetary cost of a negative externality Producers do not always pay the full amount of the tax - it is often shared with the consumer PED for many demerit goods in inelastic - consumption won't be affected as much as hoped for No point of using a tax if there is not increase in the information provision

What are the effects of intervening to provide public goods?

If public goods are not at all provided, state provision ensures provision If there is some provision, subsidies and legislation allows the level of output to increase in order to overcome market failure

How is inadequate information a cause of government failure?

Imperfect and asymmetric information are hard to assess the extent of market failure, so are hard to correct - an incorrect valuation of market failure may lead to taxes/subsidies set at an inefficient level Governments may not know where to allocate resources Governments do not know how consumers will react to a campaign

How does the immobility of the factors of production cause market failure?

In a market economy, changes in price act as a signal to the market to adjust the allocation of resources. However, if the factors of production are immobile, they may not shift easily between alternative uses eg: immobile labour may stay in occupation that offers a low income rather than shift to an occupation providing a higher income.

How do tradable permits limit negative externalities?

Incentive is for permit holders to achieve a lower level of pollution so they can sell the permit on. If firms don't have sufficient permits to cover their pollution, they'll be prosecuted

What are the advantages of PPP/privatisation?

Increased competition improves efficiency and reduces x-inefficiency Improves resource allocation - privatised firms have to react to market signals of supply and demand PFIs enable building of important facilities the gov may not be able to afford to build PFIs mean lower taxes in short run as gov don't have to immediately pay for facility Gov gains revenue from selling firms

How can state provision overcome market failure?

Increases consumption of merit goods Can reduce inequalities due to free provision of services preventing allocation via wealth Redistributes income from wealth

What methods of government intervention can be used to counter demerit goods causing market failure?

Indirect taxes Regulations and legislation Price controls

What methods of government intervention can be used to counter negative externalities causing market failure?

Indirect taxes Regulations and legislation Price controls

What are the effects of intervening into negative externalities?

Indirect taxes and price controls can be used to increase prices to discourage consumers from buying products with negative externalities Regulation are used to limit output when negative externalities arise from production Better information for consumers can be used to discourage consumption of these products

What are the effects of intervening into demerit goods?

Indirect taxes and price controls increase prices and discourage consumption Regulation limit output and ban products eg: drugs Better information for consumers may be used to discourage consumption of these products

How do indirect taxes correct market failure?

Indirect taxes can be placed on demerit goods or goods with negative externalities to discourage consumption

What is asymmetric information?

Information which is not equally shared between two parties like consumers and producers

What are the disadvantages of subsidies?

It can be difficult to put a monetary value on the 'benefit' of the positive externalities Any subsidy has an opportunity cost - the money spent on it might be better spent on something else Subsidies may make producers inefficient and reliant on subsidies as they have less incentive to reduce costs or innovate The subsidised goods may not be as good as those they're attempting to replace eg: state education may be poorer quality than private education

What is government intervention?

It describes government actions that are designed to affect economic activity and the allocation of resources

Why is taxation vital to Government Intervention?

It finances it

What is regulation?

It involves the imposition of rules, controls and constraints, which restrict freedom of economic action in the market place

What is government failure a result of?

It is an unintended consequence of an intervention to correct a market failure

Why is it hard to set regulations?

It is hard to work out what is 'correct' eg: medical groups want alcohol age to rise, alcohol producers will want it to fall Some regulation is more effective if it is worldwide rather than in just one country Hard and expensive to monitor compliance with them

What is privatisation?

It is the transfer of the ownership of a firm.industry from the public sector to the private sector

Why do the government prefer to put taxes on price inelastic goods?

It raises higher revenue and is not damaging to the firms producing the good. Therefore, they only want to tax goods which have serious negative repercussions on economic welfare.

How does direct taxation correct market failure?

It redistributes income through progressive taxes

How do inequalities in the distribution on income and wealth cause market failure?

Labour is not a homogenous factor of product and people posses different skillset Therefore, some earn higher incomes than unskilled workers Inherited wealth enables a person to have a much greater spending power than others.

How can land be immobile?

Land is naturally geographically immobile However, natural resources can easily be transported Land can also easily be used for different things so is occupationally mobile However, 'brownfield' sites are more expensive to adapt than 'Greenfield' sites

What methods of government intervention can be used to counter information failure causing market failure?

Legislation eg: consumer protection laws Education Public expenditure to promote merit goods and discourage demerit goods

What are the disadvantages of state provision?

Less incentive to operate efficiently due to absence of price mechanism May fail to respond to consumer demands as it lacks the motive to profit to determine what's applies O/C of state provision Can reduce individuals' self-reliance

What are the consequences of government failure?

Market distortions: income taxes act as a disincentive to working hard, government price fixing (eg: minimum v maximum prices) can lead to distortions of price signals eg: overproduction (CAP), subsidies may encourage inefficiency as they have removed the incentive

What is market failure?

Market failure occurs when a market economy does not achieve an efficient allocation of resources

What are the two forms of price controls which can be used to correct market failure?

Minimum price Maximum price

How can market failure caused by the lack of provision of public goods be overcome?

Mixed economies an used government intervention so that tax revenue is used to finance public goods

How do monopolies cause market failure?

Monopolies results in higher costs than in a competitive firm as there is no need to lower costs - productive inefficiency Higher prices due to the higher costs Lower output than in a competitive market If consumers cannot afford the product they have no choice but the forego it - allocative inefficiency Reduce variety of products available to consumer

What are the three main market imperfections which can cause market failure?

Monopoly Imperfect Information Immobility of factors of production

What are the effects of intervening into monopolies?

Monopoly power can be regulated eg: by bodies like Ofgem or Ofcom Price controls enforces on certain industries can regulate monopolies Increases in direct taxes on profits can be used to discourage the use of monopoly power

What is moral hazard?

Moral hazard is when people take risks because they won't suffer the consequences if things go wrong eg: an individual may not lock their doors if they have home insurance. The insurance provider lacks information about how the information is acting

What is an example of complete market failure?

National defence - consumers will value defence and be prepared to pay for it, but they are unlikely to see the benefit directly and a service that would improve welfare is not provided. There is a missing market.

Why are demerit goods over provided in the market economy?

Negative externalities Information failure where consumers are not aware of the damaging effects Negative consequences are not fully considered by individual consumers

Why are merit goods under provided in the market economy?

Positive externalities which are ignored by the price mechanism Information failure in that the consumer is not fully aware of the benefits Benefits to society are not fully valued by individual consumers

What methods of government intervention can be used to counter public goods causing market failure?

State provision/public expenditure Regulations and legislation Subsidies

What methods of government intervention can be used to counter positive externalities causing market failure?

Subsidies Regulations and legislation Price Control

What are the effects of intervening into positive externalities?

Subsidies and price controls tend to be used to encourage producers to provide more goods where positive externalities exist Regulations can be used to ensure producers provide better information in order to encourage more consumption of these products

What are the main methods of government intervention?

Taxation and subsidies Gov expenditure/State provision Buffer stock systems Price controls Public/Private partnerships Legislation and Regulation Tradable pollution permits Information provision Competition policy

What are indirect taxes?

Taxes paid on spending by firms, households and other organisations. The major indirect tax in the UK is the value added tax (VAT)

What are the negative externalities of production?

The adverse consequences to third parties arising from the manufacturing or provision of a good or service

What are negative externalities in consumption?

The adverse consequences to third parties arising from the purchase or use of a good or service

What is the risk of banning an entire good?

Banning the externality had the perverse effect of preventing production of a good like electricity as well as the bad externalities Banning the good is called a market replacement rather than just market adjustment

Why does partial market failure often exist?

Because consumers have insufficient knowledge to appreciate the benefits of the goods or service, or may lack the financial resources to pay for it. eg: without government funded health and education, many would go without - so the private market is underproducing them. Contrastingly,

How does the market economy provide the perfect allocation of resources?

Because it is in equilibrium at the point at which the additional private benefit is exactly equal to the additional private cost of making the product

Where must a maximum price be set?

Below the current market price or it will have no effect

What are the positive externalities of production?

Benefits to third parties arising from the manufacturing or provision of a good or service

What are positive externalities in consumption?

Benefits to third parties arising from the purchase or use of a good or service

What is marginal external benefit?

The positive impact or benefits that accrue as a consequence of the externalities to third parties aka: positive externalities The difference between the MPB and the MSB

What are negative externalities?

The problems experienced by third parties not involved in an economic activity. These problems can be passed on due to either the consumption or production of a commodity by other members of society

How can subsidies correct market failure?

They can encourage the consumption of merit goods or goods which provide positive externalities in their consumption or production

How does regulation solve market failure?

They can help reduce negative externalities like pollution Sometimes they even ban them eg: heroin They can reduce the power of monopolies Provide protection for consumers and producers from problems arising from asymmetric information

How does the free market/ market economy treat externalities?

They ignore them

Why are indirect taxes popular with governments?

They improve economic welfare whilst also being able to bring in extra government revenue.

When does a misallocation of resources occur?

When an economy fails to produce goods at the lowest average total cost and/or fails to achieve the goal of providing those goods to the consumer to whom they provide the greatest welfare

What is productive efficiency?

When firms are producing at the lowest possible average costs (the minimum point of the ATC)

When does market failure arise?

When firms do not produce at the lowest point of average total cost and/or When goods are not allocated to the people that receive the greatest welfare from those goods

What is government failure?

When government intervention causes a misallocation of resources in a market - resulting in a net welfare loss

When will a government introduce a maximum price?

When it believes the market determine price reflects an abuse of market power or is inequitable Can be also used to redistribute income Promote equity and to enable poor people to purchase basic necessities

How does elasticity affect the impacts of a subsidy?

When supply is elastic, a subsidy will lead to a significant fall in price and a rise in quantity When supply is inelastic, the effects on price and quantity will be less When demand is inelastic, the effect on price and quantity will be less than the subsidy

Why might indirect taxation not always work in correcting market failure?

When the demand is price inelastic, indirect taxes will have very little impact on the quantity purchased - however, in this instance, it is a very useful source of government revenue.

What is allocative efficiency?

When the goods produced by an economy find their way to consumers who get the greatest welfare/happiness from those goods

What are external shocks?

Where government policies can be affected by issues outside of its control eg: a major oil leak would affect pollution policies

How can the presence of positive externalities cause market failure?

Where positive externalities exist, a good or service will be underprovided, as the full benefits to society are not being considered when decisions to create beautiful gardens or buy education are made in a market economy

What is regulatory capture?

Where regulated industries pressurise their regulatory body into making decisions that favour themselves, the companies, as opposed to the consumers

How can labour be immobile?

Workers do not want to move, since friends and family may live nearby Regional variations in house prices Relocation costs Some workers may not have flexible skills High skilled workers may be immobile as they are reluctant to waste the training and skills they have developed Low skilled workers have a limited range of job opportunities

Give examples of merit goods:

education, health, recreation and leisure, safety equipment, libraries, museums

What are the advantages of subsidies?

The benefit of goods with positive externalities is internalised Increases demand for merit goods as they are now more affordable Subsidies will change the preferences of both consumers and producers - producers will want to supply goods with positive externalities Subsidies can support a domestic industry until it grows to the point that it can exploit economies of scale

What is marginal private benefit?

The benefit to someone of consuming the last unit of a good

What are positive externalities?

The benefits which accrue to third parties not involved in an economic activity, These benefits can be passed on due to either consumption or production of a commodity by other members of society.

What are PPPs?

public-private partnerships A private firm works with a government to build something or provide a service for the public eg: Private Finance Initiative (PFI) where a private firm is contracted by the gov to run a project In UK some public building built by a private firm but leased by the gov Means you can get the competition of privatisation, whilst ensuring the provision of the public good :)

What do minimum prices cause?

Excess supply and a reduction in demand

What does the extent to which an individual oligopolist possess market power depend on?

1) The market share of a particular oligopolist 2) The extent to which products in one market can be substituted by products from another market 3) The extent of product differentiation between different oligopolists' products 4) The level of brand loyalty for the products of a particular oligopolist 5) The necessity of the product being provided 6) The extent to which there are barriers of entry to the market as a whole, or barriers which prevent direct competition with a particular product 7) The level of knowledge and information within the market

What are demerit goods over-provided in the market economy?

1) They provide negative externalities 2) Consumers have imperfect information that leads them to overestimate the benefits they will receive from the demerit good (information failure)

Why are merit goods under-provided in the market economy?

1) They provide positive externalities 2) Consumers have imperfect information that leads them to underestimate the benefits they will receive from these goods (information failure)

Example of PPP:

2010 Marks and Spencer agreed to provide funding to Somerset County Council to collect waste from roadsides in the county Enabled the council to improve its recycling services, whilst M&S benefitted from collection of recyclable plastic

How are conflicting policy objectives a cause of government failure?

A certain policy objective may have a negative impact on another. Eg: environmental objectives may increase costs for firms which could result in unemployment Issue of political unpopularity - governments will offer short-term solutions as they're under pressure to solve issues quickly

What is rejectability?

A feature of a good or service whereby any individual can choose not to consume that good

What is non-rivalry?

A feature of a good or service whereby if a person consumers that good or service, it does not reduce the quantity available for others to consume

What is excludability?

A feature of a good or service whereby if an individual pays for that goods or service it is possible to prevent others from having access to that good or service

What is non-rejectability?

A feature of a good or service whereby if that good or service is provided, an individual must accept it, even if they would choose not to consume that good or service

What is non-excludability?

A feature of a good or service whereby if that good or service is provided, it is impossible to prevent others from having access to the benefits (or demerits) of that good or service

What is rivalry?

A feature of a good or service whereby if the person consumes that good or service, the quantity available diminishes and so it is not available for others to consume

What is a free rider?

A free rider is someone who benefits from a good or service without paying it

What are the disadvantages of PPP/privatisation?

A privatised public monopoly may become a private monopoly - extra measures like deregulation need to be taken to avoid this Privatised firms may have less focus on safety and quality as they are focused on reducing costs and increasing profits The new private firm may need regulating to prevent it from being a private monopoly - adds cost for taxpayers PFI cost more in LR than it's worth, adds to gov debt and not value fro money PFIs = higher taxes for future generations Less control of quality and increased risk to consumers

What is a subsidy?

A subsidy is a payment to a producer in order to encourage greater production of a good

What is a progressive tax?

A tax that takes a higher proportion of taxpayers' incomes as their incomes increase

What is a regressive tax?

A tax which takes a lower proportion of taxpayers' incomes as their incomes increase

What is proportional tax?

A tax which takes the same proportion of taxpayers' incomes, regardless of their income level

Where must minimum prices be set?

Above market price

How can information provision correct market failure?

By improving the quality of information, market failure arising from asymmetric information can be reduced. It also allows consumers to be aware of both the positive and negative externalities of a good or service Discourages consumption of demerit goods and encourages it of merit goods

How can capital be immobile?

Capital tends to be much more mobile because it is often easy for equipment to be relocated or adapted to another use Existing capital equipments (like a coalmine) only has one use

What are the disadvantages of maximum prices?

Demand is higher than supply so not everyone is able to buy the good Governments will have to introduce a rationing scheme to allocate the good Excess demand can lead to the creation of a black market for a good

What will a maximum price cause?

Excess demand and a shortage of supply (q1 to q2)

What are direct taxes?

Direct taxes are those levied on income or wealth such as income tax

What are the effects of intervening into immobility?

Education encourages greater occupational mobility by developing skills and flexibility within the workforce State provision of housing eases issues related to moving house and provides a more flexible housing market to encourage greater geographical mobility of labour Rent controls ensure house prices are too much

How can enterprise be immobile?

Entrepreneurs are more likely to take risks and move geographically or occupationally However, some entrepreneurs operate from home when starting a business Most successful businesses are ones which focus on the entrepreneur's skillset

What are the advantages of permits?

Firms have a financial benefit from reducing emissions as they can raise funds through the sale of permits Firms causing low levels of pollution will benefit from these schemes - they'll be able to sell permits, allowing them to invest more and expand It's not just a punishment to firms but also provides a method of raising fund to pay for new technology to reduce emissions

What are the disadvantages of regulations?

Following excessive regulations can be expensive and may force firms to close or to move to a different country Monitoring compliance with regulations can be expensive for a government If the punishment for breaking regulations isn't harsh enough, then they may not be a deterrent and change behaviour

What are the two forms of immobility?

Geographical immobility: where the resources cannot move easily from one geographical area to another Occupational immobility: where the resources cannot easily move from a particular use or job to another

What are demerit goods?

Goods which are over provided in the market economy as their consumption is more harmful than actually realised

What are quasi-public goods?

Goods which are partly excludable or partly rivalrous eg: a tolled road

What are merit goods?

Goods which are underprovided in the market economy and which have more private benefits than the consumer realises eg: education

What are public goods?

Goods which have non-rivalry and non-excludability. Some public goods are non-rejectable but this is not a necessary characteristic for a good to be public

How can administrative costs be a cause of government failure?

Government intervention uses a large amount of resources which can result in high costs Monitoring policies can be expensive

How can governments intervene to stop market failure from inequality?

Governments can take action to create a more even distribution of income through welfare and taxation. Progressive taxes increase equality, whereas regressive taxes worsen it, proportional taxes leave it the same Welfare like JSA and the state pension redistributes income As does Government spending on goods like health and education

What are the advantages of maximum prices?

Help to increase fairness Prevent monopolies from exploiting consumers

How is the excess demand from a maximum price dealt with?

Households will be rationed by quantity rather than price through queues, waiting lists and ballots. However, this allows the emergence of a black market.

What is a specific tax?

One that adds a certain amount regardless of the price of the good

What are ad valorem taxes?

Percentage taxes

How does imperfect information cause market failure?

Perfect competition relies on consumers and producers having perfect information. Without this information, the market will fail eg: average costs will not be minimised as firms don't know the cheapest way of producing the good, consumers will be unaware of the cheapest products to buy

What are price controls?

Price controls exist when the government take action to affect directly the price paid for a good

What is the market mechanism based solely upon?

Private benefits and private costs, since in a market economy supply is based off of the private costs of firms and demand is based off of the private benefits of individuals

What are the advantages of minimum prices?

Producers have a guaranteed minimum income which will encourage investment Stockpiles can be used when supply is reduced (ie: poor harvest) or as overseas aid

Give an example of a positive externality of production:

Producing military equipment could be an improvement in technology that benefits society

Give an example of a negative externality of production:

Producing steel could be pollution that harms the local environment

How can the presence of negative externalities cause market failure?

Products with negative externalities reduce the economic welfare of third parties. Where negative externalities exits, the good will be over provided as the negative effects on society are not being considered when decisions are made in the market economy

How does the Government use public expenditure/state provision?

Public expenditure can be used to provide public goods and encourage the production of merit goods so that they are free or largely free when consumed Benefits can redistribute wealth State provision can come directly from gov or for can purchase the good from the private sector and provide it to the public for free Decision is a value judgement made by the government as to what good/service they think is important for society

What is public expenditure?

Public expenditure describes spending by the government on the provision of goods and services and spending cash benefits. It is often referred to as government spending

Why can't the market economy provide public goods?

Public goods are those where the person paying for them cannot prevent others from also benefitting from what they have payed for. Eg: if a person pays for street lighting, other people who have not payed for it also benefit as it can be used constantly by anyone using the street

How can privatisation improve efficiency?

Publicly owned firms can be inefficient as they lack competition and they can lead to market failure Competition can be increased through privatisation as it is open to free market competition Private firm have to keep shareholders happy so will maximise profits - this involves reducing costs

What methods of government intervention can be used to counter monopolies causing market failure?

Regulations and legislation State provision/public expenditure Direct taxation Price controls

Why might market failure also occurs in oligopolies?

Since some oligopolists enjoy such a measure of economic power that they effectively can act in a similar way to a monopoly

How can government bureaucracy interfere with the way markets work?

Regulations interfere with the forces of supply and demand, preventing markets from working efficiently eg: planning controls create delays and subsequently restrict supply Regulations create time lags meaning the government cannot respond quickly to either consumers or producers Can lead to a lack of investment and prevent an economy from operating at full capacity

What are the drawbacks of the NHS?

Since the NHS is free at the point of delivery, it has led to excess demand and problems like long waiting lists Hospitals and clinics can be wasteful of resources, such as money wasted on unused prescriptions The NHS may not always respond to wants and needs of patients eg: has to make cost-saving actions against wishes of the population NHS can reduce patients' self-reliance - people go to GP for a sore throat because they can

Give an example of a positive externality of consumption:

Someone consuming training to a doctor which will eventually benefit society.

What methods of government intervention can be used to counter merit goods causing market failure?

State provision Subsidies Regulations and legislation Price control

What methods of government intervention can be used to counter immobility of FOP causing market failure?

State provision of housing Education Regulations and legislation

What are the effects of intervening into merit goods?

State provision of merit goods where the merits are significant but not fully recognised eg: education and health (also these will later benefit the economy) Subsidies and price controls in the private industries encourage producers to provide more merit goods, and lower the price for consumers Government can provide better information to encourage consumption of these products

What is marginal private cost?

The cost of producing the last unit of a good

What are externalities?

The effects of economic activity on third parties who are not directly involved in the decision to produce or consume the good

How is the excess supply from minimum prices dealt with?

The goods will have to be either stockpiled or destroyed

What is marginal external cost?

The negative impacts or costs that are the consequence of externalities to third parties aka: the negative externalities The difference between the MPS and MSC curves

What is marginal social benefit?

The overall total benefit - the marginal private benefit + the external benefit

How does asymmetric information cause market failure?

The person with the greater knowledge will have greater bargaining power when it comes to deciding on price. This causes market failure since the quantity purchased will not relate purely to the value of the good being traded If the seller has greater information the good will be over provided and overpriced

How can regulations generate positive externalities?

The state can impose regulations forcing the generation of positive externalities eg: local authority bylaws which require household to maintain the appearance of properties or ordered landowners to plant trees In this situation it is illegal not to provide external benefits for others

What is marginal social cost?

The total costs of a particular action - the marginal private cost + the external cost

What are the disadvantages of tradable permits?

There are problems calculating and distributing the permits to consumers It's hard to calculate the market price for traded permits Enforcing and policing the system is difficult and costly

How do minimum prices correct market failure?

They are set to ensure suppliers get a fair price eg: CAP

What are private goods?

Those which possess rivalry, excludability and rejectability

Why do Governments intervene is the market?

To provide public goods To take into account positive and negative externalities To regulate merit and demerit goods To correct any information failures To regulate monopolies To deal with immobility of FOP To redistribute income Overall to correct and prevent market failure

Give examples of demerit goods:

Tobacco, alcohol, drugs

What are tradable permits?

Tradable permits are a market-based means of correcting market failure The total number of permits is strictly controlled so that the negative externalities produced are limited The permits can be bought and sold fast an agreed price between the owner and purchaser

What is the most well-known example of an ad valorem tax?

VAT

How is an economy's efficiency assessed?

Via productive efficiency and allocative efficiency

When does complete market failure occur?

When a good or service is wanted but there is no firm supplying goods to satisfy that demand

When do missing markets occur?

When a good or service provides a collective benefit to a community, but individuals are unlikely to understand and value the benefit to themselves as individuals

When does partial market failure occur?

When a market exists but where the level of production is too high or too low