The market mechanism, market failure and government intervention in markets
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Course
Individuals, firms, markets and market failure
Institution
AQA
To the students doing AQA A levels Economics this topic covers the entirety of markets ranging from all the ways market failure occurs (externalities, public goods, demerit and merit goods) to how to internalise and deal with the damages in order for the market to operate effectively either through...
The market mechanism, market failure and government
intervention in markets
The Signalling Function- provides information that allows
buyers and sellers in a market to plan and coordinate their
economic activity.
The Incentive Function-Prices create incentives for people to
alter their economic behaviour.
The Rationing Function-Rises prices of products that have a
limited supply of goods because demand will start to decrease
this will allocate the available quantity to those willing and able
to pay that price.
● The Rationing Function distributes scarce goods to those
consumers who value them the most.
The Allocative function-when resources are directed away
from markets where prices are too high (and there is excess
supply) Point B, to markets where prices are too low and there
is excess demand Point A.
❖ Perfect competition firms and consumers passively accept
the market price which is set by interaction of supply and
demand in the market
Advantages of the price mechanism
❖ Consumer sovereignty is strengthened where consumers
choose or vote for which product should be spending their
own money
, Disadvantages of the price mechanism
❖ Imperfectly competitive markets do have asymmetric
market information,when one party to a market transaction
possesses less information to the exchange than the
other, and power, which unfortunately favours producers
rather than the consumers.
The price mechanism is the way in which the basic economic
problem is resolved in a market economy.
Market failure-Occurs when there is a misallocation of
resources.
Partial market failure-Is when a market does not function, but it
delivers the ‘wrong’ quantity of a good or service, this leads to
a misallocation of resources.
The price mechanism has 4 functions:allocative,incentive,
signalling and rationing and when all 4 of these functions
perform well the market also works well and market failure is
nonexistent. However if one or 2 of these price functions break
down, then market failure occurs.
● How public goods, positive and negative externalities, merit and demerit
goods, monopoly and other market imperfections, and inequalities in the
distribution of income and wealth can lead to market failure.
A private goods is when it’s excludable,possible to prevent
people who have not paid it to consume it or use it, and it’s rival
,that when one person consumes or uses the good, it
diminishes the availability of the good for others.
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