general theme 1 and 3 application points Flashcards
(31 cards)
The economic problem
Scarcity: The NHS has limited resources—staff, beds, funding.
Opportunity Cost: HS2 delays showed the trade-off between transport investment and public service funding.
Specialisation & Division of Labour
- UK factories like Nissan Sunderland use division of labour for car production.
- UK specialises in financial services and exports to EU & USA.
Elasticity
PED: Cigarettes are price inelastic → tax revenue continues to rise even with higher duties.
YED: Waitrose products are income elastic—sales dropped slightly in 2022 due to falling real incomes.
XED: iPhones vs. Samsung = substitutes; petrol and cars = complements.
Supply shocks
Brexit and Ukraine war
Indirect Taxes & Subsidies
Sugar tax (2018): Tax on sugary drinks to reduce consumption.
Subsidies: Help to Buy scheme for first-time buyers
taxes on cigarettes
16.5% of ratil price
impact of sugar tax
A 2021 study by PHE (Public Health England) and others found: → 30% reduction in average sugar content of soft drinks between 2015 and 2020.
→ No significant reduction in total soft drinks sales volume, meaning people didn’t drink less, but drank less sugary versions.
monopsonies application points
🚆 1. NHS (UK healthcare sector)
- The NHS is the largest employer of doctors, nurses, and other medical staff in the UK.
- Because there’s little alternative for doctors and nurses, the NHS has wage-setting power.
- May lead to lower wages than in a competitive labour market, even though the NHS is not profit-maximising.
✈️ 2. Amazon warehouses / delivery contractors
Context: Amazon often dominates as an employer in certain warehouse districts or rural areas.
- The government is a monopsony of teachers
Removal of bankers bonuses 2023
In October 2023, the Conservative Government removed the bonus cap for bankers, which had previously limited bonuses to no more than twice basic pay.
The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) announced the removal of the cap on 24 October 2023, effective from 31 October 2023.
Reason for Removal: The cap was seen as limiting banks’ ability to compete globally for talent and potentially leading to higher fixed salaries and allowances that were not subject to performance-based incentives.
Immediate Impact: Following the removal, banks like Barclays and HSBC reported significant increases in total compensation for top executives. For instance, one HSBC banker received up to €19–20 million in 2024, compared to €12–13 million the previous year
- Incentives and Risk-Taking(moral hazard)
- increasing social inequality
Labour’s Proposed Zero-Hour Contract Ban (2024)
Banning zero-hour contracts would provide workers with greater job security and predictable income, addressing concerns of precarious work.
🔺 Link to Theme 3 (Labour Market Inefficiencies): Reduces market failure related to insecure employment.
Reduced Exploitation
Workers on zero-hour contracts often face exploitation, with employers offering minimal hours and no guaranteed income. The ban aims to protect workers from this exploitation.
🔺 Link to Theme 3 (Labour Market Inefficiencies): Addresses issues of labour market imperfections.
Increased Labour Costs for Employers
Employers may face higher costs as they need to provide guaranteed hours, potentially increasing wages for part-time workers.
🔺 Link to Theme 3 (Government Intervention): Reflects labour market intervention to balance power between employers and workers.
Impact on Flexibility
While the ban helps workers, it could reduce the flexibility of businesses, especially in industries like hospitality and retail, where demand fluctuates.
🔺 Link to Theme 1 (Market Failures): Potential inefficiency in meeting demand with a rigid workforce.
Companies pouring sewage into water
Environmental Impact
Companies discharging untreated sewage into rivers causes pollution, harming wildlife and ecosystems.
🔺 Link to Theme 1(Market Failure): Negative externalities where firms do not bear the full social cost of pollution.
Government Regulation and Fines
In response, the UK government has imposed fines on companies like Thames Water for illegal discharges. However, regulatory failure can occur if penalties are insufficient to deter behaviour.
🔺 Link to Theme 3 (Government Intervention): Government intervention to address market failure and incentivise responsible practices.
Public Outcry and Policy Change
Public pressure has led to calls for stricter regulations and an overhaul of how water companies manage waste, aiming to prevent further pollution.
🔺 Link to Theme 1&3(Government Intervention): Policy intervention to increase accountability of private companies to the public good.
Cost of Cleanup
The long-term costs of cleaning polluted water and restoring ecosystems burdens taxpayers and public resources.
🔺 Link to Theme 3 (Market Failure): Companies externalising costs, making the public pay for damage caused by their actions.
Increased Vaping (UK Context)
Health Concerns
Rising popularity of vaping, especially among young people, has led to increased concerns about long-term health risks like lung damage and nicotine addiction.
Regulation and Taxes
The government has considered higher taxes on vaping products to discourage use, as well as stricter age checks to prevent underage sales.
Impact on Smoking Rates
Vaping has contributed to a decline in smoking rates, as many smokers switch to e-cigarettes as a less harmful alternative.
Public Health Campaigns
Public health bodies like the NHS have launched campaigns to warn of the risks of vaping, especially among non-smokers who may become addicted.
Increased Gambling (UK Context)
Rise of Online Gambling
The growth of online gambling platforms, especially during and after the COVID-19 pandemic, has led to an increase in gambling participation across all demographics.
Gambling-Related Harm
There has been a rise in gambling addiction, with a notable impact on mental health, leading to calls for stronger regulation of the industry and more support for those affected.
Government Regulation
The UK government has been considering reforms, such as limiting stakes for online slots and introducing mandatory affordability checks to prevent problem gambling.
Advertising and Sponsorship
Gambling advertisements, especially sports betting ads, have become increasingly prominent. The issue has prompted discussions about potential restrictions on gambling ads, especially targeting younger audiences.
Fat tax proposal
UK’s Proposed Fat Tax (2024)
Public Health Initiative
The UK government is considering a fat tax on unhealthy foods to combat rising obesity rates, particularly among children.
Scope of the Tax
The proposed tax would target foods high in sugar, salt, and fat, including items like cakes, biscuits, and snacks.
Government Support
Health Secretary Wes Streeting and Chief Medical Officer Chris Whitty support the tax as a measure to improve public health.
Public Opinion
A YouGov survey indicates that two-thirds of the UK public support such taxes, provided the revenue is used for children’s health initiatives.
Industry Response
Food industry representatives express concerns that the tax may disproportionately affect lower-income families and could lead to higher food prices.
cuts to hs2
✂️ Recent Cuts and Financial Implications
Cancellation of Phase 2: In October 2023, Prime Minister Rishi Sunak announced the cancellation of the northern leg of HS2 due to escalating costs and delays .
Financial Impact:
£2 billion in costs: HS2 Ltd disclosed over £2 billion in costs following the downgrade, including £1.1 billion in incurred costs and £1 billion in accounting charges due to diminished future income expectations .
£100 million in wind-down costs: The termination of Phase 2 involves extensive wind-down costs and site restoration amounting to £100 million
labour plans for childcare
🏫 Expansion of Childcare Services
300 New Nurseries: Labour pledges to open 300 new state nurseries within 12 months, converting empty classrooms into childcare spaces to meet growing demand.
The Guardian
Free Childcare for Eligible Parents: Starting in April 2025, 80% of childcare costs will be covered for eligible parents, with full funding available from September 2025.
The Guardian
🧠 Support for Child Development
Child Health Action Plan: Labour’s plan includes providing every school with a qualified mental health counsellor, boosting preventative mental health services, and transforming NHS dentistry.
Wikipedia
Early Years Pupil Premium: An increase in funding for disadvantaged children to support early development and school readiness.
The Guardian
🏛️ Policy Reforms
Restoration of Sure Start Centres: Labour advocates for the restoration of Sure Start centres, aiming to provide comprehensive support services for families with young children.
Wikipedia
Increased Investment in Education: The October 2024 budget includes a £6.7 billion capital investment in education, with a 19% real-terms increase, to support the expansion of childcare services.
real world context for the argument that monopolies are allocatively and productively inefficient
📦 1. Dynamic Efficiency: Amazon’s Innovation
➡️ Amazon has invested billions in logistics (e.g. same-day delivery, Alexa AI, warehouse robotics).
➡️ This is an example of dynamic efficiency, which benefits consumers in the long run.
✅ Counter to productive inefficiency — high profits are reinvested into better tech + services.
🛍️ 2. Consumer Benefits: Low Prices + Free Delivery
➡️ Despite being a monopoly in some areas, Amazon often offers cheaper prices + free delivery.
➡️ This suggests that allocative inefficiency may not always harm consumer welfare.
✅ In highly competitive sectors like retail, monopolies still have incentive to keep consumers happy.
🌍 3. Economies of Scale: Lower Unit Costs
➡️ Firms like Amazon and Tesco can spread costs over millions of customers → average costs fall.
➡️ This could lead to lower prices, benefiting consumers despite a lack of competition.
✅ Counter to productive inefficiency — they may be operating closer to the bottom of the AC curve.
🤖 4. Funding Innovation: Google & Amazon’s R&D
➡️ Amazon invested $84 billion in R&D globally (2023), funding Alexa, AWS, automation.
➡️ Innovation can boost consumer choice and create new markets.
✅ Allocative efficiency may be restored long term through better products and services.
⚖️ 5. Regulation Pressure
➡️ The CMA (UK’s Competition and Markets Authority) and public scrutiny reduce abuse of monopoly power.
➡️ Threat of fines or intervention (e.g. GDPR rules, digital markets legislation) may check inefficiency.
✅ Means monopolies may behave more like competitive firms to avoid intervention.
Vaping and negative externalities
Vaping consumption among teens has surged → in 2023, 20.5% of 11–17-year-olds had tried vaping, many regularly. ⬇️
This creates negative externalities in consumption, such as potential long-term health risks and strain on future NHS resources.
⬇️
The private benefit to users (e.g. nicotine hit) exceeds the social cost (e.g. youth addiction, passive vapour, disposal of vapes), so the good is over-consumed at the free market equilibrium. ⬇️
This results in market failure, as the marginal social cost (MSC) > marginal private cost (MPC), requiring government intervention such as advertising bans, flavour restrictions, or vape taxes.
disadvantages of organic growth application
E.g Basecamp, online tech company, made $100m in annual revenue but took almost 20 years to get there
Marks & Spencer struggled for years due to its slow, organic growth strategy, unable to match the expansion rate of fast-moving competitors like Zara.
Asymmetric information application
🏥 1. Healthcare Market
Patients often lack knowledge about treatments, prices, or necessity — GPs and specialists may overprescribe (supplier-induced demand).
Example: Overprescription of antibiotics in the NHS despite long-term risks of resistance.
🧾 2. Used Car Market (Market for Lemons)
Sellers know more than buyers about a vehicle’s condition. (ADVERSE SELECTION)
UK example: AutoTrader and HPI checks became widespread to reduce asymmetric info when buying second-hand vehicles.
💸 3. Financial Markets
2008 Financial Crisis: Banks sold complex mortgage-backed securities with hidden risks. Credit rating agencies (like S&P) gave them AAA ratings, misleading investors.
🎓 4. Higher Education
Students may lack full information about the real value of different degrees (e.g., salary prospects, employment rates).
UK government launched the Graduate Outcomes Survey to help students make more informed decisions.
🏠 5. Rental Property Market
Landlords may hide defects (e.g., mould, structural damage) or not disclose full tenancy terms.
Government introduced landlord licensing schemes in places like Liverpool and selective licensing in parts of London to improve transparency.
how asymmetric info is trying to be helped
✅ 1. Technological solutions reduce information gaps
Platforms like AutoTrader, Rightmove, and Trustpilot allow buyers to access reviews and data, helping reduce asymmetric info.
Evaluation: Technology is reducing information gaps, but misleading online reviews or fake ratings can still distort decisions.
✅ 2. Government regulation improves transparency
Regulations like the Consumer Protection from Unfair Trading Regulations (2008) require full disclosure from sellers.
Evaluation: These laws reduce exploitation, but enforcement can be weak, especially in fragmented markets like private rentals.
✅ 3. Professional standards and certifications
In healthcare or finance, professionals must follow codes (e.g., GMC for doctors, FCA for financial advisors).
Evaluation: These bodies reduce the risk of exploitation, but regulatory capture or low penalties can weaken their effectiveness.
✅ 4. Education and public awareness campaigns
UK government efforts like Compare the Market for insurance or NHS campaigns on overprescribing help inform consumers.
Evaluation: These tools help reduce info failure, but they rely on consumer engagement, which may be low in disadvantaged groups.
wage differentials application:
8.6%, with a slight decrease from 8.95% the previous year.
Investment banking and insurance firms are particularly affected by this disparity, with some firms reporting pay gaps of over 30%
🎓 3. Education/Skill-Based Differentials
➡️ Graduates earn £10,000+ more per year on average than non-graduates.
🏦 4. Sectoral Wage Differences
➡️ Finance workers earn ~£1000/week, while hospitality workers earn ~£430/week (ONS, 2023).
➡️ Differences due to productivity, skill levels, and union power.
👮♂️ 5. Public vs Private Sector
➡️ In 2023, public sector pay rose by 6.2%, private by 7.3%.
➡️ But long-run trend shows public sector often lags, especially during austerity periods.
➡️ STEM graduates command the highest premiums — e.g. computer science grads earn ~£42k median after 5 years (DfE, 2023).
housing market application
The average monthly private rent in the UK was £1,326 in the 12 months to February 2025
Policy Responses:
➡️ First Homes Scheme (2021): Discounted homes for key workers/local buyers.
➡️ Renters Reform Bill (2024): Ends Section 21 “no-fault evictions” and aims to improve rental conditions.
The average monthly rent in London is around £2,081, despite the avg income being around 47k (UK is around 40k)
Marks and spencers - how are they tackling the principal agent problem
Marks & Spencer’s Plan A: M&S’s sustainability goals (e.g., reducing carbon emissions) align with both shareholders’ and employees’ interests, helping reduce the principal-agent problem.
🔗 1. Linking Manager Performance to ESG Goals
➡️ Under Plan A, senior managers are partially rewarded based on ethical/sustainability targets (like reducing carbon emissions or improving supply chain ethics).
➡️ This aligns long-term corporate social responsibility goals with shareholder interest in protecting brand value and reducing long-term risk.
➡️ Helps reduce short-term profit-chasing behaviour that may harm long-term firm value.
