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Market failures (Government Intervention (Buffer Stocks (uses a price…
Market failures
Government Intervention
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Minimum prices
Here goods cannot be sold at a price below this. Minimum prices are set above the market price, so supply will exceed demand, resulting in a glut or surplus.
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Buffer Stocks
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If the price becomes too high, the government or buffer stock authority release the good onto the market from storage
The government or buffer stock authority purchases large quantities of the good and stores it, to reduce the supply available to the market so raising the market price
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Private and Public Goods
Public goods
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A good is rivalrous if one person consuming it ‘uses it up’, meaning someone else cannot consume it
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Examples: Education, Street Lamps,
Two important concepts when we are thinking about classifying goods as private or public goods are the concepts of rivalry and excludability.
Private Goods
Private goods are rivalrous and excludable, although sometimes the government provides publicly provided private goods
Free Rider Problem
If you can’t exclude somebody from using the good, then if one person privately provides the good, everybody else enjoys the same benefit, but does not have to share in the cost
this incentivises people to not pay for provision of the public good, in the hope that others will do so.
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Market Failure
Defintion
market failure is a situation in which the production and allocation of goods and services is not efficient.
Types of market failures
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X inefficiency
Occurs when a firm is not producing at its maximum output. (Usually occurs in highly uncompetitive markets where there is no incentive to do so)
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Monopoly Power
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Monopoly 'power' occurs when there are only few suppliers in a market or when certain firms are the price-takers
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