Real World Examples Flashcards
(17 cards)
Indirect tax
- Many countries have high indirect taxes on goods such as polluting cars, candy, alcohol, and cigarettes.
- This helps in reducing people’s consumption because the price will be higher, but surplus for both consumers and producers will decrease. The government will on the other hand earn money, which can be spent on other priorities.
- UK sugar tax, 24 pence per litre
Subsidy
- China has for many years heavily subsidized electric cars, in an effort to increase both production and consumption.
- This has worked because these cars are now significantly cheaper than petrol cars. Both producer and consumer surplus has increased, however, this is a costly government effort, since the more successful this scheme becomes, the more money the government has to spend.
- Since 2009, over 200 billion yuan, around 30 billion usd
Minimum price
- In the US there is a nationwide minimum wage of $7.25/hour, which acts as a price floor in the labor market.
- This value hasn’t changed since 2009 despite inflation, so many want this to increase to $15/hour. This would increase workers’ surplus but reduce companies’ surplus.
- However, others argue that since this will increase the price of labor, there will be an excess of labor, in other words, more unemployment, because companies won’t be willing to pay that much.
Maximum Price
New York rent control since 1920s
Public Good
Examples of public goods:
Basically anything you can think of that companies won’t provide because they won’t make any money off of it: National military, streetlights, parks (in most cases), police, knowledge, etc.
Government intervention in response to public goods:
- In the vast majority of countries there is at least some form of military provided by the government.
- Some of the militaries’ goods and services are provided directly by the government, such as making armor and organizing the hierarchy in the system.
- However, the government may also pay private companies to design and build things themselves, such as fighter jets from Lockheed Martin or missiles from Raytheon (contracting out to the private sector). This is the case in many Western countries and is infamously known as the military-industrial complex. Sometimes this works because private companies tend to be more efficient than state entities, but since they also aim to maximize profits it can also be much more expensive than otherwise.
High and low unemployment
Singapore: 2%; no minimum wage
Spain: 14%; high job protection
Direct tax used to correct economics inequality (impacts on stakeholders)
Wealth Tax, Argentina, 2021
Argentina introduced progressive wealth tax with rates up to 1.75% for those who earn more than 3,000,000 ARS. The Gini coefficient decreased by 0.71%.
Stakeholders:
Governments - more tax revenue but need to pay for tax compliance
Wealthy Argentines - lose more income than before
Argentines: better access to public services and infrastructures
Evalaution:
+ tax revenue
+ greater equality
+ more programs
- discouragement of wealthy individuals (possible migration)
Indirect tax used to correct economics inequality (impacts on stakeholders)
Taxes on luxury goods, USA, 1991
Imposition of an indirect tax of 10% on luxury goods.
Stakeholders:
Wealthy Americans - have to pay more, don’t really care
Governments - tax revenues
Evaluation:
+ The Gini coefficient decreased by 0.78%
Expansionary Monetary Policy
Great Recession, USA, 2007-2009
In order to stimulate economic activity and counteract the effect of the recession, The Federal Reserve System introduced interest rate reduction and quantitative easing.
Evaluation:
+ recovery for businesses/investment
+ shorter time lags
- possible risks of inflation
- market distortion
Contractionary Monetary Policy
- In mid 2018, the inflation in India was rising, nearing 5%.
- Contractionary monetary policy was used, increasing interest rates to 6.25% to curb spending and reduce inflationary pressure.
- Argentina used 40% interest rates to try to control inflation and try to control a dive in the peso.
Expansionary fiscal policy (short-term and long-term effects included)
Covid-19, Hongkong, 2019-2022
To promote economic activity and boost GDP, HK government introduced transfer payments (total 38.6B USD), subsidies (for rent and operation), and job-retention.
In short-term, this led to reduced unemployment, higher inflation, increase in revenues for businesses. In long-term, job retention has supply-side effects, thus leading to economic growth
Evaluation:
+ more consumer confidence
+ more employment
- budged deficit
- tax revenue in HK government
Contractionary Fiscal Policy
Greek debt crisis, 2000s-2010s
To address budged deficit, the Greek government cut wages, reduced government spending, and increased taxes
Evaluation:
- temporary eased government budged deficit
- still working on high unemployment, social unrest
Market-based Supply-side policies
- “Thatcherite” Economic reforms, UK, 1980s
Margaret Thatcher introduced deregulation of financial market, privatization of state-owned enterprises, tax cuts, and labour market reforms to combat high inflation and slowing economic growth. - Trump cut corporate tax from 35% to 21%
Tariff (year, aim, effects on market, and consumers)
Tariffs on European Steel in the US, 2018
Aim: to protect steelmaking states such as Ohio
Effect on market:
- increased price of steel generated government revenue
- retaliation with EU on American goods
Effects on consumers:
- less consumer surplus
- increased producer surplus
Free trade area (free trade area’s title, countries, how, pros and cons)
North America Free Trade Area (US, Canada, Mexico), 1994
How: reduced tariffs, trade restrictions
Pros:
- increased efficiency
- increased trade
- less unemployment
Cons:
- production usually shifted towards Mexico
- environmental impact
- social disparities
Customs Union (trade title, countries involved, year, aim, how, pros and cons)
South African Customs Union (Botswana, Eswatini, Lesotho, Namibia, South Africa), 2002
Aim: foster cooperation and enhance development
How: common external tariffs, eliminating internal tariff
Pros:
- trade facilitation
- investment
Cons:
- overpowerment of South Africa
- external trade challenges
Consequences of Economic Growth (Impacts on living standards, environment, income distribution)
China - in 2019, growth totaled $22.5TR, the largest in the world; 6% growth
Living standards: GDP per capita has increased, more infrastructure, reduced poverty
Environment: severe air pollution and loss of natural habitats
Income distribution: disparities between rural/urban areas
