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Study for Economics Term 3 Exam - Coggle Diagram

- - - - PARETO EFFICIENCY AND EQUALITY
        
        An outcome may be a Pareto improvement, but it doesn't always mean this is a satisfactory outcome or fair.
        
        There could still be inequality after a Pareto improvement
  - - - Lower production costs
      - Increase in productive efficiency (more efficient use of resources)
      - Increase allocative efficiency (consumer needs are met)
  - - - Produce a combination of production using available resources
      - Produce at its lowest cost
      - SPECIALISATION helps to increase the productivity of your business
        
        SPECIALISATION of LAND: producing just one type of agricultural product.
        
        SPECIALISATION of LABOUR: where production is broken down into many separate tasks (DIVISION OF LABOUR)
        
        SPECIALISATION of CAPITAL: large scale production using high tech machinery rather than labour. IT ALLOWS FOR ECONOMIES OF SCALE.
        
        SPECIALISATION of ENTERPRISE: High knowledge and skills in a particular area.
        
        GAINS FROM SPECIALISATION
        
        Higher Output
        
        Variety
        
        A bigger Market
        
        Competition and lower prices
- - - - It occurs because there is no profit incentive for private producers to supply the good / service if it is a public good. They are unable to exclude non-payers from using the good / service.
      - Here there is a 'free rider' problem because there are no defined property rights or defined ownership of the public good.
        
        EXAMPLES OF PUBLIC GOODS
        
        Police
        
        defence
        
        beach
        
        parks
        
        highways
    - - Why? Because not all costs or benefits are taken into account
      - Therefore, some markets do not allocate resources efficiently.
        
        The distribution of some output may exclude members of the community (price level)
        
        The distribution of income may be viewed by the community as inequitable.
        
        Some desired output by the community is not produced in sufficient quantity
        
        Market power can limit the benefits of competition (eg Monopoly)
        
        Fluctuations in the economic cycle impact on the community in different ways.
  - - - Externalities arise whenever the market creates benefits or costs on a third party ie a party other than the consumer or producer. In both cases, negative and positive externalities, the market has failed to correctly portray the real costs and real benefits to firms and consumers, resulting in either the over-production or under-production of goods at the wrong price.
        The market has failed to optimally allocate resources.
        
        EXAMPLES
        
        Have you ever consumed a good where someone else (who didn't pay for the good) also received benefits from your consumption? E.g. watching fireworks.
        
        Have you ever consumed a good where your consumption had a negative effect on others? E.g. smoking in the presence of others, playing loud music.
        
        SHOULD THE COSTS OF EXTERNALITIES BE INTERNALISED INTO THE PRICE MECHANISM?
        
        PRICE MECHANISM
        
        When crude oil is taken from an oil well, it carries with it the capacity to c...
        
        ENVIRONMENTAL ECONOMISTS
    - - POSITIVE EXTERNALITIES: Under-Provision of Public/Merit Goods
        
        A merit good is a good which has positive externalities and is where individual consumption benefits others in society. The good is usually under-consumed / under provided in the market place under the price mechanism due to consumers under estimating or ignoring the social benefits e.g. education or health insurance.
        
        The fundamental premise of a merit good is that it provides some kind of merit (highly beneficial, significant value) to society as a whole, but is often under consumed by individuals in society.
        
        EXAMPLE: Education is considered one of the most vital merit goods of society as it increases not only efficiency in labour output, but also decreases government spending on welfare, crime and healthcare which allows government expenditure on other areas such as infrastructure, education, defence etc. Education is a good which is grossly undervalued in many developed countries with tax-funded (public) schooling. This maybe due to the good not having to be paid in full by its consumers and/or society's short-sightedness to pay for something that consumers cannot see the immediate benefits of.
        
        *GRAPH 5.17 GOES HERE
    - - For markets to function efficiently it is assumed that consumers and producers have perfect knowledge. If this was the case, then we can make informed decisions to gain the most optimal outcome. However, in reality, this is not the case. Why? Business aims to maximise profits, not maximise consumer value or the environment. Why do businesses use so much plastic even though it is non biodegradable?
    - - A public good is non rival and non excludable. Therefore, a price cannot be placed on a public good as non-payers cannot be excluded. e.g parks, beach, fresh air. Natural resources become like public goods where everyone benefits when they are provided. Consumption by one person does not reduce the amount available to another person. Therefore, it is difficult to exclude non-payers from using public goods. Many in society, in Australia and overseas, would claim the right to enjoy the benefits of the natural environment - rural scenery, non-polluted rivers, beaches, pristine views, etc. Few people would be willing to pay for the right if they knew they could not be excluded from the benefits. They would also be unwilling to pay if, having paid for the right, they thought they could not fully exercise that right
    - - A low of power in a few companies (high market concentration of market power) decreases competition in the economy and results in higher prices. Less competition also reduces the need to minimise costs (therefore more wastage, less efficient).
    - - Specialisation allows a country to take full advantage of its resources and to use them as efficiently as possible. Modern
  - - - NON RIVAL means that my consumption does not affect you consumption of a good. IT DOES NOT GET USED UP BY ONE OR A FEW PEOPLE.
      - NON EXCLUDABLE means that I cannot prevent you from consuming a good.
      - In other words, people have a sort of right to these goods, and some of them can be of benefit to people who don't pay for the good.
      - QUASI-PUBLIC GOODS are goods that provide benefits to the public, but could theoretically be restricted if necessary. This is how they differ from TRUE PUBLIC GOODS. An example of a Quasi-Public Good would be a road, because they could be restricted with the use of a tool system.
    - - MERIT GOOD - a private good with positive externalities. When consumer, a merit good creates positive externalities since the public benefit is greater than the private benefit. However, as consumers only take into account private benefits when consuming merit goods, it means that they are under-produced.
        
        For example, Goods or services (such as education and vaccination) are provided free for the benefit of the entire society by a government, because they would be under-provided if left to the market forces or private enterprise.
      - DEMERIT GOOD - a private good with negative externalities. It is a "good or service whose consumption is considered unhealthy, degrading or otherwise socially undesirable due to the perceived negative effects on the consumers themselves". It is over-consumed if left to market forces. Governments will often levy taxes on these goods, regulate or ban consumption or advertisement.
        
        Tobacco
        
        Alcohol
        
        Recreational drugs
        
        Gambling
        
        Junk food
        
        Prostitution