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Market Efficiency and Market Failure - Coggle Diagram
Market Efficiency and Market Failure
Market Efficiency
Market efficiency occurs when consumer surplus equals producer surplus and total surplus is maximised/ production as lowest cost possible
when production is inefficient then resources aren't allocated at its best
the demand curve is also known as the willingness to pay curve. shows all the marginal benefits consumers get from a good.
consumers surplus is the difference between what consumers and willing to pay and what they actually pay
deadweight loss is a loss to society due to inefficiency
the market will be efficient is market operates at equilibrium
Market efficiency is producing goods that society wants at the lowest cost possible
Reducing Market Efficiency
Governments entering the market can reduce market efficiency by causing over of under production due to price changes.
Price ceiling
: is a maximum price set below equilibrium price, causes a shortage and is the space between supply and demand curve. you have a shortage and there is a deadweight loss because you are not producing at optimal point. governments are implemented so everyone can acquire the good.
Price floor
: is a minimum price set above equilibrium, helps producers. causes a surplus because it is expensive between supply and demand curve. Deadweight los because production isn't at optimal point at equilibrium. governments implement this to help producers or reduce consumption of the goods or service
Tax
: Governments levy taxes on goods and services to raise revenue for spending on schools, hospitals, roads. tax causes market price to increase and quantity to fall. decreases both producer and consumers surplus because they share the burden of the tax. tax revenue is less than the loss of total surplus, creating a deadweight loss because production isn't at optimal.
Subsidies
: a subsidy is a grant payed to producers with the purpose of reducing costs and increasing output. subsidies cause market price to decrease and quantity to increase. increase in producer and consumers surplus. subsidy is paid out of gov revenue and the cost of the subsidy is greater than the gain in total surplus. market has shifted from equilibrium optimal so therefore created deadweight loss and isn't efficient
Equity
Market efficiency is concerned with increasing the size of the economic pie while equity is concerned with dividing up the economic pie into equal slices for everyone
competitive markets result in unfair distribution of income because not everyone can satisfy basic wants and needs at the same level due to different careers
sometimes government face dilemmas with price restrictions because increasing price to equilibrium would increase efficiency it would decrease equity as some cant afford
vertical equity is based on the idea that those who earn more income should pay a higher rate of tax. this is the Australia's progressive tax system.
horizontal equity is based on the idea that those who earn the same income should pay the same rate of tax. and that people should choose their own pathway in life.
Market Power
market failure occurs when a market is not capable of producing at optimal or best outcome for society
the types of market failure are Market Power, Externalities, Public goods, Common property resources
imoerfect markets are characterised by small number of firms, firms have market power, firms use product differentiation, barriers to entry are used to restrict competition
Market Power
: dominant sellers. Aus post being monopoly, coles woolworths oligopoly. these restict competiton and may also have barriers to entry. they may have control of scarce resources, technological advantages or patent ownerships
Characteristics
of market power: restricting entry into the market, mass production because its cheaper, collusive behaviour (firms working together), unlikely to produce at optimal, profit maximisation
competition is good because it offers promise of lower prices and improved choice for consumers and greater efficiency, higher economic growth and increased employment opportunities
Externalities
Positive Externality
: Create an external benefit to a third party, this results in the good or service being under produced/consumed and underpriced resulting in market failure. As the private benefit is lower than the social benefit.
Negative Externality
: Create an external cost to a third party, this results in the Good or Service being over produced/consumed and under priced resulting in market failure. As the private cost is lower than the social benefit.
To internalise a negative externality the government can impose a tax on producers EQUAL to the cost of the externality.
To internalise a positive externality the government could pay a subsidy to consumers EQUAL to the value of the externality
Classifying goods
Private goods
: Rival and Excludable. computers, clothing, phones. most goods consumed by households.
common resources
: rival and non-excludable. forest, fish in sea, atmosphere. external costs are imposed and tragedy of commons occur when overconsumption and depletion of resources
Club Goods
: non-rival and excludable. netflix, spotify, gyms. you cant reduce someones supply but not everyone can pay for it
Public Goods
: non-rival and non-excludable. lighthouse, national park, national defense. free rider effect (people enjoy without paying) merit goods are goods from government
Rival
in consumption- When the consumption of the good by one person reduces the supply available to other users.
Excludable
- Is it possible to exclude non-payers from consuming the good?