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Old 20th October 2012, 09:26 PM   #1 (permalink)
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Income inequality-market failure (econs).

Hey hey

anyone know how to answer this question?

how does income inequality lead to market failure? (10m).

i know how it leads to market failure but for 10m, my explanation would be way too short.

my school notes didn't elaborate on this.

please help! thank u .

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Old 24th October 2012, 11:24 PM   #2 (permalink)
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Re: Income inequality-market failure (econs).

Funny how my school notes doesn't elaborate on it as well lol! We were told that's indeed a source for market failure but somehow we're rarely tested on it during tests and exams.. even in case study. Hmmmmm...

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Old 24th October 2012, 11:32 PM   #3 (permalink)
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Re: Income inequality-market failure (econs).

it came out as a 10m qn in 2 prelim papers last year, that's why i'm worried! .

btw for negative ext. in consumption, if u tax it will the tax eliminate the MEB or MEC? :/ .


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Old 24th October 2012, 11:36 PM   #4 (permalink)
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Re: Income inequality-market failure (econs).

Erm okay just referred to my lecture notes. They didnt really elaborate much.

Some points include the fact that it is socially unacceptable and may lead to misuse of resources for example the excess production of luxury items and lack of basic necessities. Why? Because the market responds to "dollar votes" or demand cast by consumers. Hence resources may be allocated mainly to the production of goods and services demanded only by the rich. Thus total welfare of society may not be maximised. Rich may pursue their own interest rathee than that of the community.
On the other hand, business monopolies contribute to inequality in income distribution as well because the monopolist charges a highee price than a PC (assuming same cost structure) and hence earn supernormal profits. These profits not widely distributed becas corporate stock ownership is largely concentrated in the hands of upper income groups. Owners of monopolist enterprises tend to benefit at the extent of rest of society. Ev: extent of this problem of course depends on size and number of monopolies and degree of monopoly power. Eg monopoly profit of vilage store may seem of little consequence when compared to profit of a giant national or international company .

Hope it helps.

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Old 24th October 2012, 11:38 PM   #5 (permalink)
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Re: Income inequality-market failure (econs).

Originally Posted by blacktoast94 View Post
Hey hey

anyone know how to answer this question?

how does income inequality lead to market failure? (10m).

i know how it leads to market failure but for 10m, my explanation would be way too short.

my school notes didn't elaborate on this.

please help! thank u .
edit: the above is nt bad
how short is your explanation?
your view of short might my long.

did you talk about externalities?


Last edited by ilold; 24th October 2012 at 11:39 PM.
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Old 24th October 2012, 11:42 PM   #6 (permalink)
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Re: Income inequality-market failure (econs).

Originally Posted by blacktoast94 View Post
it came out as a 10m qn in 2 prelim papers last year, that's why i'm worried! .

btw for negative ext. in consumption, if u tax it will the tax eliminate the MEB or MEC? :/ .
MEC.
You can visualise it as negative externalities causing a divergence between MPC and MEC right? So theres a deadweight loss to society as a result of the overproduction. So taxes basically shift the MPC curve upwards such that it coincides with the socially optimal equilibrium so no overproduction no DWL hence allocative efficiency.

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Old 24th October 2012, 11:45 PM   #7 (permalink)
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Re: Income inequality-market failure (econs).

Divergence between MPC and MSC* I mean!!

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Old 25th October 2012, 12:01 AM   #8 (permalink)
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Re: Income inequality-market failure (econs).

lol. econs... i got E for my H1 econs =.=

wish you all the best. i hate econs though :x

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