1- Introduction

Question 1

what is the main role of the government in the economy

Answer 1

1. regulation
2. collecting taxes
3. expenditures = fund public goods (infrastructure, defence), social state (health, education)
4. macroeconomic stabilisation (IR, inflation, FP, bailout policies)

Question 2

why does the government need to intervene
why cant social institutions be replaced by markets

Answer 2

• markets = not in the best interest for the whole of society - humans dont think rationally - they are cooperative
• need social cooperation to take care of young, sick and old
• best interest

Question 3

what would happen if you let markets decide education

Answer 3

• economic theory = student loans
• really = lifetime burden-people will not get educated

Question 4

what would happen if you let markets decide retirement benefits

Answer 4

• economic theory = save yourself - how much to save? when will you die?
• really = need institutions to help

Question 5

what would happen if you let markets decide health care

Answer 5

• economic theory = pay yourself - cant afford - inequality
• really = need gov

Question 6

are there situations where markets can help

Answer 6

yes
individualistic forces can undermine institutions

Question 7

what are the 3 public econ questions

Answer 7

• when should they interevene
• what is the effect of that intervention
• why do governments intervene in that way

Question 8

when should governments intervene
(2)

Answer 8

1. market failures (externalities, imperfect competition, imperfect info)
2. redistribution - there is inequality in economic resources across people

Question 9

what is a market failure = inefficient distribution of goods and services in the free market - rational decisions are wrong decisions for the whole group

Answer 9

when the market doesnt deliver an outcome that if efficient
1. externalities
2. imperfect competition
3. imperfect/asymmetric info
4. individual failures

Question 10

externalities

Answer 10

when the consumption/production of a good or service benefits or harms a third party

Question 11

imperfect competition

Answer 11

monopoly - one party has too much control can create imbalanced pricing and lead to market failure
- disrupt balance of demand, supply and price

Question 12

imperfect/asymmetric info

Answer 12

• buyer or seller lacks access to info on which prices are based = will overpay/undercharge for a good or service

Question 13

individual failure

Answer 13

people dont behave as fully rational beings
- people will not save for retirement

Question 14

why gov needed for redistribution
(even if market is efficient?)

• what do govs do to help

Answer 14

• market equilibrium could be generating economic disparity across people
• taxes and transfers redistribute wealth across people from rich to poor

Question 15

what is the tradeoff between equity and efficiency about

Answer 15

the more we try to be equal be redistributing wealth the less incentive there are for the rich to be richer = dampens economic incentive

• reduces incentive to work - if youre getting taxed more

Question 16

what is regressive tax

Answer 16

universal tax not based on income
takes a larger percentage of income from the low income earners compared to the high

Question 17

what is a progressive tax

Answer 17

tax based on income
tax disproportionately affects people with a high income
higher income = pay proportionally more taxes

Question 18

what is the benefit of progressive tax

Answer 18

reduces tax burden on low income earners
reducing inequality
reduces the share of income held by top earners and increases the share held by low earners (transfers)

Question 19

what is the difference between direct effect and indirect effect of gov intervention

Answer 19

direct effect = the intended effect that was predicted if individuals dont change their behaviour in response to the intervention

indirect effect = unintended effect = individuals change their behaviour - higher tax rate = work less or find a way to evade

Question 20

what is the difference between normative and positive economics

Answer 20

normative = how things should be - value judgement = theoretical
positive = fact = how things actually are = empirical

Question 21

what has happened to gov growth over process of development

Answer 21

size of government relative to national income grows

more developed = higher Gov spending as share of GDP

government size stabilizes in rich countries

Question 22

what has caused the government size to grow

Answer 22

expansion of social state, public education, retirement, healthcare, income support

Question 23

how does the government regulate - what is their regulatory role

Answer 23

1. UK national living wage = inequality
2. Food standard agency = safety and labelling
3. Health and Safety Executive = workplace safety
4. The environment Agency = water quality, flooding, regulate industry

Question 24

why are there debates over what to do with healthcare, taxes, climate change

Answer 24

• politics - different sides - benefits others
• decrease/increase taxes on big corporations

Question 25

what are the 3 main sources of TAX revenues the government raise

Answer 25

1. VAT
2. National Insurance
3. Income tax

Question 26

what is the difference between direct and indirect tax and how does it affect poor people

Answer 26

direct = income tax and national insurance are progressive taxes = rich people pay a greater share of their income toward the tax - helps with lower income earner inequality

indirect tax = low income earner pay a higher proportion of their income on VAT - spend most of their income on consumption

Question 27

which are the direct taxes on low income earners

Answer 27

income tax - top quintile pays more income tax = progressive
NIC
council tax - bottom quintile pays more council tax - as a % of gross household income = regressive

Question 28

what is the indirect tax on low income earners

Answer 28

VAT = regressive - poor people spend more of their income % on consumption