Unit 1 - Introduction to markets and market failure
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Theme 1: Introduction to Markets
and Market Failure
Essay Plans:
1. Discuss how the divorce of ownership from control may affect the conduct
and performance of firms:
Point 1: Separation of ownership and control can lead to agency problems.
Limitation: Effective corporate governance mechanisms can mitigate agency issues.
Point 2: Managers may prioritize short-term gains over long-term shareholder value.
Limitation: Performance-based compensation structures can align managerial
interests with shareholder interests.
Point 3: Lack of accountability may lead to managerial entrenchment or self-
dealing.
Limitation: Shareholder activism and regulatory oversight can hold managers
accountable.
Point 4: Separation of ownership and control may reduce managerial risk aversion.
Limitation: Excessive risk-taking may lead to financial instability or shareholder
losses.
2. Discuss methods of government intervention to protect consumers within the
energy market:
Point 1: Price regulation can prevent monopolistic pricing and ensure affordable
energy prices for consumers.
Limitation: Price caps may discourage investment in infrastructure or lead to supply
shortages in the long term.
Point 2: Consumer education and information campaigns can empower individuals
to make informed choices about energy providers and tariffs.
Limitation: Information asymmetry and complex market dynamics may limit the
effectiveness of consumer education initiatives.
Point 3: Anti-trust regulations can promote competition and prevent anti-
competitive behavior among energy companies.
Limitation: Regulatory enforcement may be challenging in fragmented or vertically
integrated energy markets.
, Point 4: Subsidies and incentives for renewable energy adoption can reduce reliance
on fossil fuels and promote sustainability.
Limitation: Subsidies may distort market signals and lead to inefficiencies if not
carefully targeted or phased out.
3. Assess whether the supply of uranium is more likely to be price elastic or
price inelastic:
Point 1: The supply of uranium is likely to be relatively price inelastic in the short
term due to long lead times and limited production capacity.
Limitation: Technological advancements or regulatory changes may influence the
responsiveness of uranium producers to price changes.
Point 2: Uranium mining is characterized by high fixed costs and capital-intensive
extraction methods, contributing to supply constraints.
Limitation: Cost reductions or efficiency improvements may increase the elasticity
of uranium supply over time.
Point 3: Uranium reserves are concentrated in a few countries, leading to
geopolitical risks and supply disruptions that can affect price elasticity.
Limitation: Diversification of supply sources or alternative energy technologies may
reduce dependency on uranium and alter supply dynamics.
Point 4: Demand for uranium is driven by long-term considerations, such as nuclear
power plant construction and decommissioning schedules, influencing supply
responsiveness.
Limitation: Regulatory changes, safety concerns, or shifts in energy policy may
affect the elasticity of uranium demand and supply.
4. Assess the likely reasons for differences in the price elasticity of demand for
tobacco cigarettes and e-cigarettes:
Point 1: Price elasticity of demand for tobacco cigarettes is relatively low due to
addictive properties and limited substitutes.
Limitation: Tobacco control measures or health campaigns may influence consumer
behavior and increase price sensitivity over time.
Point 2: E-cigarettes offer alternatives to traditional smoking, with higher price
elasticity due to a wider range of substitutes and less addictive nature.
Limitation: Regulatory uncertainty or safety concerns may dampen consumer
confidence and limit the elasticity of demand for e-cigarettes.
Point 3: Changing social norms and attitudes towards smoking may affect price
sensitivity and demand elasticity for both tobacco and e-cigarettes.
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