Evaluation Points

Question 1

Wage efficiency theory

Answer 1

• increases in the minimum wage may not reduce profits for firms because workers will work harder as the opportunity cost of losing their job is now higher
• this may increase productivity and could actually increase profits for the firm

Question 2

Good evaluation points for implementing a policy

Answer 2

• time lag
• how difficult is it to measure its success?
• does it only benefit one group of people?
• no guarantee of success
• opportunity costs
• monetary cost of implementation
• short run vs long run arguments

Question 3

Asymmetric information

Answer 3

• can result in market failure as consumers make irrational decisions
• moral hazard - when excessive risk is taken by somebody given that a third party will bear the cost of that risk - the excessive risk is against social interest - can apply to policies like nationalisation and state provision

Question 4

Behavioural economics

Answer 4

• can explain why certain market failures take place
• can also compliment the extent of market failures e.g. habitual behaviour of an action possessing external costs

Question 5

Quasi public good

Answer 5

• sometimes demonstrates the characteristics of a pure public good (non excludable and non rivalrous), but other times demonstrates the characteristics of a private good (excludable and rivalrous)
• given that, a quasi public good may be able to be provided by a private profit motivated firm in the free market
• therefore state provision may not be necessary if they demonstrate characteristics of a private good enough

Question 6

Lump of labour fallacy

Answer 6

• refers to mistakes in the expectation of the size of the labour force increasing often because of immigration of working age people or tech advancements
• fallacy is that many people assume job opportunities is fixed
• however does not account for the fact that immigration and tech advancements can actually create more jobs in the future through e.g. innovation or entrepreneurship

Question 7

Contestable markets

Answer 7

• great evaluation to monopoly and oligopoly markets where we may say in theory, there is allocative inefficiency
• if the markets are contestable, there may instead be gains of allocative efficiency
• can also use as evaluation to the need for regulation by CMA - if a market is contestable, we may benefit from the effects of competition, outcomes in line with the public interest