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Economics 1.4.1
Economics- Edexcel 1.4.1
| Term | Definition |
|---|---|
| Free market system | markets are best suited to allocating scarce resource and allows the market focus of supply and demand to set prices |
| Role of the government | to protect property rights, uphold the rule of the law and maintain the value or purchasing power of the currency |
| Competitive markets | deliver improvement in allocative, productive and dynamic efficiency |
| Government intervention | when the state gets involved in markets and acts to correct one or more market failures to improve economic efficiency and social welfare and to change the distribution of income and wealth |
| Examples of interventions | laws, regulations, taxes, subsidies, maximum and minimum prices to change price signals, better information or direct provision to change resource allocation |
| Name 8 types of market failure | factor immobility, public goods, demerit goods, negative externalities from consumption, merit goods, imperfect information, high relative poverty, monopoly power in a market |
| What is a consequence of factor immobility | structural unemployment |
| What is a consequence of public goods | failure of market to provide pure public goods and the free rider problem |
| What is a consequence of demerit goods | over consumption of product with negative externalities |
| What is a consequence of negative externalities from consumption | consumption above the socially optimal level |
| What is a consequence of merit goods | under consumption of products with positive externalities |
| What is a consequence of imperfect information | damaging consequences for consumers from poor choices |
| What is a consequence of high relative poverty | low-income families suffer social exclusion and there are negative externalities |
| What is a consequence of monopoly power in a market | higher prices for consumers cause loss of allocative efficiency |
| Example of government intervention to factor immobility | state investment in education and training |
| Example of government intervention to public goods | government funded public goods for collective consumption |
| Example of government intervention to demerit goods | information campaigns and a minimum age for consumption |
| Example of government intervention to negative externalities from consumption | consumption taxes or tougher environmental standards |
| Example of government intervention to merit goods | subsidies or information on private benefits |
| Example of government intervention to imperfect information | statutory information or labelling |
| statutory | relating to rules or laws which have been formally written down |
| Example of government intervention to high relative poverty | taxation and welfare redistribute income and wealth |
| Example of government intervention to monopoly power in a market | competition policy or measures to encourage new firms into a market |
| What are the 3 main reasons for government intervention? | to correct one or multiple market failures; to achieve a more equitable final distribution of income and wealth; to improve the performance of the macroeconomy, reduce unemployment or simulate growth |
| 1st fiscal policy intervention- indirect taxes | raise prices of de-merit goods and products with negative externalities to increase the opportunity cost of consumption and reduce demand towards a socially optimal level |
| 2nd fiscal policy intervention- subsidies to consumers | lowers the price of merit goods, boosts consumption and output of products with positive externalities(increase in market supply and lower equilibrium price) |
| 3rd fiscal policy intervention- tax relief | government may offer financial assistance, eg. tax credits, for business intervention in research and development or reduce corporation tax to promote new capital investment and extra employment |
| 4th fiscal policy intervention | changes to taxation and welfare payments |
| Fiscal policy | the use of government spending and tax policies to influence economic conditions |
| Corporation tax | a tax that's paid on any corporate profits |
| stakeholder | any person or organisation that has an interest in a specific project or policy decision |
| Examples of stakeholders | employees, nearby communities, suppliers, shareholders and investors, creditors, government, taxpayers, trade unions, professional associations, advocacy groups, prospective customers/employees, local national and international communities, competitors |
| Evaluation of government interventions | value judgements, changing prices to change incentives and behaviours, social science, combinations of policies, markets can sort themselves out, costs and benefits, law of unintended consequences, case-by-case basis |
| Law of unintended consequences | any action has results that are not part of the actor's purpose |
| Things to consider when looking at efficiency of a policy | does it help to allocate scarce resources better /improve allocative productive and dynamic efficiency? Is the policy equitable / sustainable? Should it be used alongside another? |
| What is the aim of an indirect tax? | to make the polluter pay and internalise the negative externality |
| Why is implementing taxes difficult? | hard to set the right tax rate, cost of collection, inelastic demand, redistribution(wealth) effects, increased costs to 3rd parties, reduced competitiveness internationally |
| ring-fenced | a virtual barrier that segregates a portion of an individual's or company's financial assets from the rest usually so it can be used in specific areas |
| Arguments for a sugar tax | external costs of consumption cause market failure, information failure in long-term consumption, raises revenue that can be ring-fenced, provides incentive to reformulate drinks and offer healthier alternatives |
| Arguments against a sugar tax | regressive, more effective policies like better information, people may switch to other sugary products, risk of lost jobs in pubs and shops that rely on sale |
| subsidies | Payments by the government to suppliers that reduce their costs |
| Evaluation of subsidies | does it meet aims / affect productivity or efficiency(e.g. dependency on state aid) / cost / benefit / help correct one or more market failure |
| Maximum prices | a legally imposed maximum price or price ceiling in a market that suppliers cannot exceed |
| Aim of maximum price | to prevent price from rising above certain level and promote equity |
| Where is a maximum price set? | below the existing free market equilibrium price |
| Name some examples of maximum prices in the UK | rent, energy price caps, CEO pay or bonuses, mobile roaming charges, regional monopoly water companies, interest rates charged by pay-day lenders, annual charges to occupational pension plans, currency pegs |
| Currency pegs | a policy in which a national government or central bank sets a fixed exchange rate for its currency with a foreign currency or a basket of currencies and stabilises the exchange rate between countries |
| What is the effect of a maximum price? | quantity supplies contracts while quantity demanded extends leading to a disequilibrium with excess demand and unofficial secondary markets(scarce supply) |
| what does choosing where a maximum price is involve? | normative judgements |
| arguments in favour of rent controls for housing | reduces excess profits of exploitative landlords, increase the geographical mobility of labour and keeps structural unemployment low, increases disposable incomes and reduces the demands on the state welfare benefit system |
| arguments against rent controls | landlords may: withdraw investment(diminished supply of private sector rented housing) /cut back on the level of maintenance spending (reduce quality and increase risks) /replace houses to rent for those to buy (drives average property prices higher) |
| minimum prices | legally imposed price floor below which the normal market price cannot fall |
| where is the minimum price placed? | above the normal equilibrium price |
| examples of minimum prices | guaranteed price support schemes for producers or minimum prices for consumers to reduce sales |
| arguments for minimum prices on alcohol sold in supermarkets | reduces some negative externalities (reduces consumption) / cuts premature deaths, workplace absenteeism, NHS costs / pubs may benefit (substitution effect) / targets cheaper, higher-strength drinks |
| arguments against minimum prices for alcohol | tax on responsible drinkers (inequitable) / better to raise alcohol duties(tax revenue used for socially beneficial projects) / inelastic / regressive / extra spending on enforcement / unintended consequences(buy from across the border) |
| tradable pollution permits | regulated allowances that allow producers to generate pollution that can be traded on the open market |
| cap-and-trade scheme | the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap |
| countries with carbon taxes or carbon pricing through emissions | Sweden, European union, China, India, Chile, south Korea, Alberta, Singapore |
| carbon emissions trading | form of pollution control that uses the market mechanism to change relative prices and incentives for producers and consumers to reduce their carbon emissions |
| EU carbon emissions trading scheme | cap-and-trade scheme for carbon dioxide in 30 countries |
| higher prices of tradeable pollution permits | greater incentive to cut pollution |
| scarcer carbon permits | higher market price |
| what is the supply elasticity of carbon trading permits? | perfectly inelastic as there is a fixed quantity |
| UK carbon price floor | applies to fossil fuels used for electricity generation |
| arguments for a carbon price floor | reduce risks of investing in new nuclear energy capacity, helps reduce carbon price volatility, makes low carbon electricity more competitive |
| arguments against a carbon price floor | better to restrict the total supply of carbon permits more to increase market price, carbon tax is better as it raises useful tax revenues, might damage international competitiveness of sectors leading to lower exports and lost jobs |
| carbon tax | a green tax which levies a charge per tonne of CO2 emissions designed to encourage innovation in low-carbon technologies |
| what does a carbon tax do? | increases the private cost of emitting carbon, contracts output towards the social optimum and raises tax revenues |
| rebate | a sum of money that is credited or returned to a customer on completion of a transaction |
| advantages of a carbon tax | internalises the externality / makes the polluter pay / carbon fee on imported products stops businesses relocating to avoid paying / lowers pollution and raises extra revenue |
| disadvantages of a carbon tax | low price elasticity of demand / risk of higher structural unemployment / damage competitiveness of domestic businesses overseas |
| what are pure public goods provided on the grounds of? | Fairness(everyone should have equitable access), efficiency and social welfare(positive externalities from good quality public services) |
| examples of provision of information | health warnings, nutritional labelling, gamble aware campaigns, industry standard, consumer protection laws e.g. refunds |
| examples of regulations to correct externalities | smoking bans, minimum age laws, max co2 emissions for vehicles, recycling directives, speed limits, fishing quotas |
| command-and-control approach | a type of environmental regulation that allows policy makers to specifically regulate both the amount and the process by which a firm should maintain the quality of the environment |
| arguments for regulation to correct market failures | spur for business innovation, more effective if demand is unresponsive to price changes, can be gradually toughened to help stimulate capital investment |
| disadvantages from heavy use of regulation in markets | high cost of enforcement, unintended consequences, discourage small businesses leading to less competition in markets |
| ad valorem tax | percentage tax |
| bail-out | emergency government financial support to prevent a business failing |
| buffer stock purchases | when a government agency buys up stocks in a market designed to reduce surpluses and increase the market price |
| carbon trading | pollution control that uses the market mechanism to change relative prices of using high and low carbon production techniques |
| consumer regulations | leads that restrict consumption of certain goods and services |
| direct payment | form of subsidy |
| indirect tax | tax on supplier which might be passed on to consumers through a higher price |
| nationalisation | when a government takes control or ownership of a private business |
| privatisation | the sale of public sector organisations to the privater sector |
| specific tax | set tax per unit |
| subsidy | any government financial support |
Created by:
jessharris
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