Paper 4 essay plans Flashcards
(15 cards)
Policies to reduce negative externalities
Indirect taxation of activity
Subsidies of alternative
Prohibition of activities
Improved information
Pollution permits
Allocative efficiency is not achieved because social costs are greater than private costs and overconsumption leads to a misallocation of resources
The equi-marginal principle
When the price of a good changes the consumer will adjust their spending to maintain the equi-marginal principle which suggests that consumers allocate their budget in such a way that the marginal utility is equal across all options so maximise utility
Limitations of marginal utility theory
Consumers may have imperfect information, not be rational or be impacted by advertising
Unable to distinguish between income and substitution effects so does not account for Giffen goods
Assumes ceteris paribus
Assumes that money has constant utility
Difficulty in accounting for one-off purchases
Benefits of privatisation
Greater competition in the market if the industry is privatised as competing firms
Greater scrutiny of operations by shareholders should hold the company to account and raise efficiency
Wider access to funds not dependent on a governments macroeconomic concerns
Disadvantages of privatisation
May lead to the break up of a natural monopoly
State monopoly may be replaced with private monopoly
Often accompanied by an industry regulator suggesting it needs policing
Contribution of profitable state owned assets to state funds lost
Loss of employment and burden of unemployment falls on the government
Ignore negative externalities and their consequences
Factors affecting supply of labour
Wage rate
Working conditions
Training and education
Alternative opportunities
Population and migration
Wage suppression
Limited mobility
Factors affecting demand for labour
Productivity of labour
Wage rates
Demand for product
Technological change
Substitute inputs
Bargaining power of workers
Cost of hiring additional workers
Why efficiency may not be achieved in a free market
Market failure due to possible excess profits, the need for large investments, the existence of externalities, merit goods and the need for public goods
Government intervention can overcome this by regulation, taxation, subsidies or ownership aimed at achieving productive and allocative efficiency
Characteristics of a perfectly competitive labour market
Large numbers of workers and employers
Homogenous work
Perfect information
No barriers to entry or exit
Influence of trade unions
Can increase the productivity of the workforce but this can also be produced by substituting capital for labour leading to an increase in unemployment
If they gain higher wages for labour, capital looks relatively cheaper so unemployment may increase more
Also depends how easily capital can be substituted for labour and the existing ratio
If new wage is above market equilibrium there will be excess labour supply
Limitations of statistics to assess living standards
Does not specify time periods
Need to take into account population size
Wages and unemployment shows changes in material living standards
Changes in wages compared with inflation suggests there is a change in real income
Limitations of the use of tariffs to reduce the negative effects of globalisation
May lead to retaliation leading to a misallocation of resources
Restricting imports and trade diversion will reduce allocative and productive efficiency leading to a net welfare loss
Leads to high prices for consumers and producers
May remove some existing benefits of globalisation
Strengths of using national income figures
Reflects average income and economic activity giving a general sense of wealth
Helps compare living standards across countries
useful for tracking economic growth and development over time
Limitations of using national income figures
Doesn’t account for income distribution, inequality, quality of life or non-monetary factors. Ignores informal economies and unpaid work which may affect real living standards
Limitations of the Phillips curve
In the 1970s there was high inflation and high unemployment
In the 2000s there was low unemployment and low inflation
In the 1960s and 70s there was more structural strength between wages and inflation as there was a larger proportion of unionised labour
Since the 1950s when the Phillips curve relationship was determined there has been an increase in world trade and development of MNCs
