Preliminary Exam Topic 6

Question 1

No market is perfect - but what are market economies generally good at?

Answer 1

Deciding:
What goods and services to produce
What quantities to produce
How to organise production

Question 2

Define ‘LAISSEZ-FAIRE SYSTEM’

Answer 2

Laissez-faire system: Economic approach characterised by minimal government intervention in the affairs of individuals and businesses, allowing the free market to dictate prices and production.

Question 3

Effects of Laissez-faire system

Answer 3

Unsafe goods and services
Environmental damage
Community wants and needs may not be provided
Unstable and inefficient markets

Question 4

Define market failure

Answer 4

when the price mechanism takes into account private economic interests but don’t account for indirect costs and social interests (e.g environmental damage, negative externalities)

Question 5

Market failure can arise in the provision of G&S and income distribution, leading to:

Answer 5

Negative externalities
The abuse of market power
Economic instability.

Question 6

The government intervenes in markets to address market failures, with the goal of achieving:

Answer 6

Better allocation of resources
More equitable distribution of income
Greater economic stability.

Question 7

Define the ‘PUBLIC SECTOR’

Answer 7

The part of a country’s economy which is controlled or supported financially by the government.

When a good or service isn’t being provided by the private sector - the public sector may provide.

Question 8

Define the ‘PRIVATE SECTOR’

Answer 8

The part of the economy owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government.

Question 9

Public goods are an area of market failure - Define ‘PUBLIC GOOD’

Answer 9

is any product or service that is available to all residents of a society (national defence, police and fire services, clean air, and drinking water)

Question 10

What are the two characteristics a public good must be?

Answer 10

1. Non-rivalrous
2. Non-excludable

Question 11

Define ‘NON-RIVALROUS’

Answer 11

Non-rivalrous: consumption of a good by one person does not reduce the amount available for others.

Question 12

Define ‘NON-EXCLUDABLE’

Answer 12

Non-excludable: means that it is costly or impossible for one user to exclude others from using a good.

Question 13

Define ‘MERIT GOOD’

Answer 13

Merit Goods: a commodity or service, such as education, that is regarded by society or government as deserving public finance - benefits go beyond the individual who enjoys them directly

Once again they are usually undersupplied by the private sector - Governments play a role in providing merit goods, either directly (operating or funding most hospitals) or indirectly (financial support for arts groups).

Question 14

Define ‘DEMERIT GOOD’

Answer 14

Demerit Goods: a G/S whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves.

Question 15

How might the government change the production and sale of demerit goods?
- with examples

Answer 15

RESTRICTED: A licence to sell alcohol, and fines for supplying alcohol to people under 18 years of ages

HEAVILY TAXED: (as with tobacco) or completely prohibited

PROHIBITED: (such as dangerous illicit drugs).

Question 16

Define ‘COLLECTIVE GOOD’

Answer 16

Collective Goods - Non-rivalrous but not always non-excludable

Governments provide a range of collective G&S that benefit the whole community, education, health services, roads, railways, national parks and historic monuments.

Question 17

Government sometimes provide goods by operating as a natural monopoly.

Define ‘NATURAL MONOPOLY’

Answer 17

Natural Monopoly: A natural monopoly is a type of monopoly in an industry or sector with high barriers to entry and start-up costs that prevent any rivals from competing.
- occurs when competition would create inefficiency

E.g rail networks, because of the huge investment in buying land and laying rail track

Question 18

One of the governments main regulatory roles is redistributing income across the economy - it is the largest expense of the australian budget - what would happen if governments didn’t intervene?

Answer 18

Left to operate without any government intervention, free markets tend to produce substantial inequality in the distribution of income.
This inequality will widen over time, because wealth tends to generate more wealth.

Question 19

Particular groups within Australia that are susceptible to inequality and poverty.
Who are they (5)

Answer 19

Those with low education levels
Migrants from non-English-speaking backgrounds
Indigenous Australians
People with a disability
Single-parent families.

Question 20

What is the most common form of poverty in australia?

Answer 20

Relative poverty

Question 21

What are the two types of poverty?

Answer 21

Relative poverty and absolute poverty

Question 22

Define ‘RELATIVE POVERTY’

Answer 22

refers to those whose standard of living is substantially lower than the average for the economy - is often defined as below 30 percent of average earnings.

Question 23

Define ‘ABSOLUTE POVERTY’

Answer 23

occurs where individuals have only just enough income to enable them to survive

Question 24

Governments must act constructively to end the cycle of poverty - they can’t remove all the factors contributing to inequality, they can improve opportunities for people in disadvantaged groups.

These measures can improve social mobility (that is, help people who are born into a particular socio-economic class increase their wealth and socio-economic status).

Give examples

Answer 24

E.G Universal access to free education until the completion of high school
E.G Special educational assistance programs and scholarships
E.G Measures to help mature-age people enter higher education are all ways in which governments can help address the effects of income inequality.

Question 25

What does it mean that Australia has a welfare state?

Answer 25

Australia has a “welfare state” – a system of welfare benefits (age pension, unemployment benefits, free access to health care, and subsidised access to housing).

Question 26

Define 'EXTERNALITY' (Postive/Negative) - Give Example

Answer 26

External costs and benefits that private agents in a market do not consider in their decision-making process. Contribution to increased carbon dioxide and global warming caused by the burning of fossil fuels, such as from coal-fired power stations and motor vehicles

Question 27

Why are externalities a form of market failure?

Answer 27

Externalities are a form of market failure because they occur where the price mechanism fails to represent the true social costs or benefits of production.

Question 28

Define 'COPORATISATION'

Answer 28

the process of transforming a government agency or public sector organisation into a corporation with a focus on efficiency, profit generation, and market-driven practices.

Question 29

Define 'PRIVATISATION'

Answer 29

the process of transferring ownership and management of a public sector enterprise or service to private individuals or organisations (goal of increasing efficiency + reducing gov involvement)

Question 30

Define 'COMPETITION'

Answer 30

:rivalry among individuals or organisations to achieve a larger share of a market, resources, or customers, often driving innovation, improving quality, and influencing pricing.

Question 31

Define 'CONSOLIDATION' in terms of being a firm in a market

Answer 31

Because of the costs involved in producing, distributing and marketing goods and services in some markets, only a minority of firms survive beyond their first few years of operation. Over time, industries often experience a process of consolidation in which fewer firms take a larger market share.

Question 32

For example, a monopolist will often restrict its production in order to charge a higher price and maximise its profits. Oligopolists find that engaging in price competition is futile, since their competitors are likely to match any price cuts. What do they do instead?

Answer 32

Instead of reducing prices, they will compete with advertising, brand packaging and product differentiation – activities that hold little real benefit for consumers.

Question 33

Firms in highly concentrated industries possess substantial market power, which makes it easier for them to exploit their customer. What methods do they use? (4)

Answer 33

1. Monopolisation 2. Price Discrimination 3. Exclusive Dealing 4. Collusion and Market Sharing

Question 34

Define 'MONOPOLISATION'

Answer 34

Occurs when a firm uses its dominant market position to eliminate existing competition, or prevent new firms from entering the market. For example, it might engage in temporary price cutting that is aimed at eliminating competition, rather than benefiting the consumer. The government has historically operated many monopolies in Australia in order to protect consumers from the abuse of monopoly power by private firms, such as Telstra before its privatisation.

Question 35

Define "PRICE DISCRIMINATION'

Answer 35

Occurs when a firm sells the same type of good or service in different markets at different prices. Examples of price discrimination: Include supermarkets and restaurants charging higher prices in areas where tourists gather and “Early-bird” pricing for event registration.

Question 36

Define 'EXCLUSIVE DEALING'

Answer 36

occurs when a firm sets conditions for supply that exclude retailers from dealing with other competitors. - Competition and Consumer Act 2010 forbids this Bunnings have found around around it with their lowest price guarantee.

Question 37

Define 'COLLUSION AND MARKET SHARING'

Answer 37

occur when firms agree on a pricing + market-sharing arrangement that reduces effective competition between them - inhibiting the entry of new competition into the market. - May attract criminal penalties under the competition and consumer act

Question 38

The final example of market failure occurs at a much broader level, across the entire economy - the problem of the boom-bust behaviour of economic activity in the business cycle. Describe

Answer 38

Without government intervention, a free-market economic system is likely to experience severe fluctuations in the level of economic activity - inhibiting consistent economic growth.

Question 39

Market forces can cause boom periods - excess demand for G&S causes price increases (inflation) - incurs substantial economic problems. What are some impacts of high inflation?

Answer 39

Distort business decision making Reduce consumers’ purchasing power Force an increase in interest rates

Question 40

The effects of high inflation can actually then conversly trigger a recession. What are some impacts of la recession?

Answer 40

Unemployment Business failures

Question 41

Define Micro-economic reform policies

Answer 41

designed to improve work practices and productivity levels with structural adjustment of individual firms and industries.

Question 42

Name the 2 macro-economic policies

Answer 42

- Fiscal - Monetary

Question 43

Australia has a three-tier structure of government: - Name the three tiers

Answer 43

1. Commonwealth / Federal Government 2. State Government 3. Local Government

Question 44

What is the role of the Commonwealth/Federal Government

Answer 44

Overall responsibility for the economy and has the most influence on economic performance + fiscal policy + budget + Collects revenue from personal income tax.

Question 45

What is the role of the States Government + Revenue Source

Answer 45

State governments have a more limited role in national economic management, but they have extensive responsibilities for the delivery of many government services. Given states understand the specific needs of their cities and regions best they operate the: - Health system (although the Commonwealth has a major role in funding health care through the Medicare system) - School education - Infrastructure such as roads - The transport system - Electricity - Water utilities - Regional planning. Largest source of revenue for the State Governments is GST which is collected by the federal government and then distributed to the states. Rely on grants from the federal gov. Apart from grants from the Commonwealth, the state governments rely on state taxes such as: - Payroll tax - Stamp Duty - License Fee - Taxes on gambling and land ownership.

Question 46

Outline the role of local governments

Answer 46

Local governments are responsible for local planning and development decisions, providing some local services such as rubbish collection, road building and maintenance, and community facilities such as parks and libraries. Rates levied on local property owners are the main source of revenue for local governments, with around a quarter of funding coming from Commonwealth and state grants. Some money is also raised by fees, permits, and fines imposed by councils (for example, tree removal fees, outdoor cafe permits and parking fines).

Question 47

Define 'THE AUSTRALIAN CONSTITUTION'

Answer 47

The Australian Constitution: document providing the framework for Australia’s system of democratic government + the relationship between the Commonwealth (or federal) and state governments. Sets out the law-making powers of the commonwealth and state governments.

Question 48

The Commonwealth Government is only able to act under one of what are described as constitutional “heads of power.” what are these?

Answer 48

The "heads of power" mentioned in the Constitution refer to the specific areas of authority granted to the Commonwealth Government under the Constitution. These heads of power are exclusive to the Commonwealth and give it the authority to make laws and regulations in these areas, they include: Foreign Affairs: The power to make laws + decisions regarding international relations, foreign policy, and diplomatic matters. Defence: The defence of Australia and has the power to make laws and regulations regarding the Australian Defence Force. Currency: The power to regulate the currency of Australia, including minting coins and issuing banknotes.

Question 49

State governments hold all other powers that are not spelt out in the Constitution as belonging to the Commonwealth.

Answer 49

The Commonwealth shares responsibility with the states for most economic matters, such as business regulation, taxation, health and education.

Question 50

When the Commonwealth Government wants to implement major economic changes, it often needs to secure the support of the states.

Answer 50

The main effect of constitutional constraints is that the Commonwealth Government is forced to negotiate with state and territory governments when they implement major economic reforms

Question 51

The Commonwealth is increasingly engaged in funding services that were traditionally the responsibility of state governments, such as:

Answer 51

Early childhood education School infrastructure Specific health services Road construction.

Question 52

Define 'THE PUBLIC SECTOR' What does it consist of?

Answer 52

Public sector: refers to the parts of the economy that are owned or controlled by the government. It includes all tiers of the government as well as government business enterprises.

Question 53

To examine the size of the public sector in relation to the economy as a whole, and how this has changed over time. Two important indicators are:

Answer 53

Public sector outlays (spending) as a percentage of GDP Public sector employment as a percentage of total employment

Question 54

Define 'total public sector outlays'

Answer 54

Taken as % of GDP, total public sector outlays show the proportion of total annual expenditure by all levels of government compared with the expenditure for the whole economy.

Question 55

Define 'Public sector employment as a percentage of total employment'

Answer 55

Public sector employment as a percentage of total employment refers to the proportion of the total workforce employed in the public sector compared to the total number employed in an economy.

Question 56

Go read the public sector part

Answer 56

This sucks but go

Question 57

What 3 things have contributed to the growth of the public sector?

Answer 57

1. The Government’s Expanded Role after WW11 2. Provision of Government Services 3. The Growth of Social Security

Question 58

How has the governments expanded role after WW2 contributed to the growth of the public sector?

Answer 58

After the Second World War, governments in industrialised countries adopted a more active role in seeking to influence the economy’s performance. This reflected the influence of the Keynesian school of economics, which was dominant between the 1940s - 1970s. Keynesian theory argued that government spending could accelerate economic activity and help it to achieve full employment levels. This theory lost its popularity in the 1980s, governments were seeking to reduce their spending, to curb taxation and borrowing from the private sector.

Question 59

How has provision of government services contributed to the growth of the public sector?

Answer 59

As the economy has grown and living standards have improved, public expectations of the government have kept growing in relation to standards of: Health care Education Etc The public expects governments to provide community services including police, water and sewerage, roads and recreational facilities. Governments are also expected to address the problems created by economic growth, including congestion, pollution and the depletion of natural resources.

Question 60

How has the growth of social security contributed to the growth of the public sector?

Answer 60

The development of welfare and social security programs was a major priority of Australia’s first governments following the federation of Australia in 1901. By the mid-twentieth century, Australian governments created a “welfare state”, where comprehensive social security programs would support those struggling. The costs of these programs increased as life expectancy grew, the population aged and unemployment rates increased.

Question 61

Economic functions of the Australian Government Include:

Answer 61

Reallocation of Resources Redistribution of Income Stabilisation of Economic Activity Government business enterprises Other – including competition and environmental policies

Question 62

GO READ ECONOMIC FUNCTIONS OF THE AUSTRALIAN GOVERNMENT

Answer 62

YAY

Question 63

Define direct taxes

Answer 63

Direct taxes: paid by the individuals/business firms on which they are levied – they cannot be passed on to someone else. Personal income tax is a direct tax, as it must be paid by the person on whom it is levied. Other direct taxes include company tax and capital gains tax.

Question 64

What are three ways the government can reallocate resources?

Answer 64

1. Taxation 2. Gov Spending 3. GOVERNMENT PROVISION OF GOODS & SERVICES GO READ

Question 65

Define indirect taxes

Answer 65

Indirect taxes: are levied on individuals and business firms - can be passed on to someone else. An indirect tax is attached to a good or service, rather than to an individual or a company. Goods and Services Tax (GST) is indirect tax, as it is levied on the seller, but it is usually passed on to the consumer (in part or in full) in the form of a higher price.

Question 65

Examples of gov spending to reallocate resources

Answer 65

Funding for the arts, which might otherwise be unprofitable Grants for start-up businesses that lack access to finance Subsidies for telecommunications companies such as Telstra to provide broadband services in regional areas where those services would not be profitable Cash payments to private employment search businesses, which find jobs for unemployed people. GO READ

Question 66

What are the ways in which the government can redistribute income?

Answer 66

Taxation Social Welfare GO READ

Question 67

In what ways can the government stabilise economic activity?

Answer 67

Fiscal economic policy Monetary policy GO READ

Question 68

Define 'MONETARY POLICY'

Answer 68

Monetary Policy: conducted by the Reserve Bank of Australia (RBA) through setting interest rates + buying/selling government securities to influence the money supply, inflation, and economic growth, with the goal of achieving low and stable inflation, full employment, and a sustainable economy.

Question 69

Define "DOMESTIC MARKET OPERATIONS' (within monetary policy)

Answer 69

The main instrument = domestic market operations: buying and selling of government securities by the RBA in order to affect the cash rate in the short-term money market and influence the level of interest rates. There is tight and loose monetary policy

Question 70

Define 'FISCAL POLICY'

Answer 70

Fiscal Policy: Conducted by the federal government, involves the use of taxation and government spending to influence the overall level of economic activity, with the aim of promoting economic growth, reducing unemployment, and maintaining price stability, through measures such as budget surpluses or deficits, tax cuts, and increased government spending.

Question 71

Define 'TIGHT MONETARY POLICY'

Answer 71

Tight monetary policy: If the government wishes to slow down the level of economic activity, it tightens monetary policy, putting upward pressure on interest rates.

Question 72

Define 'LOOSE MONETARY POLICY'

Answer 72

Loose monetary policy: If the government wants to increase the level of economic activity, it loosens monetary policy, putting downward pressure on interest rates.

Question 73

Define contractionary, expansionary and neutral fiscal policy stances

Answer 73

A contractionary fiscal policy stance: the government would be planning to increase taxation revenue or decrease government expenditure (or a combination of both) An expansionary fiscal policy stance: the government might reduce taxation revenue or increase government expenditure (or use a combination of both) A neutral fiscal policy stance: This occurs when the government does not change the budget outcome from the previous year’s level.

Question 74

Define GBE (Government business enterprises) Go read section

Answer 74

Government business enterprises (GBEs) are businesses owned and managed by a government at either the Commonwealth or state level.

Question 75

Many GBEs have been privatised = give an example of this

Answer 75

Medibank Private The Commonwealth Bank Qantas

Question 76

Most of those government-owned enterprises that have not been privatised have undergone corporatisation. Define 'CORPORATION'

Answer 76

Corporatisation: whereby public enterprises act as private business enterprises, with independent managers that are accountable for performance and limited government involvement in business operations.

Question 77

What are remining GBE's

Answer 77

Australia Post Australian Rail Track Corporation

Question 78

Define 'COMPETITION'

Answer 78

Competition is the pressure on business firms in a market economy to lower prices or improve the quality of output to increase their sales of goods and services to consumers.