Application

Question 1

example of a free market economy

Answer 1

Hong Kong
- low tax rates
- relaxed regulations on businesses
- highly capitalist economic system

Question 2

where is the UK ranked out of the most economically free market in the world

Answer 2

7th

Question 3

example of a command economy

Answer 3

North Korea
- low levels on inequality as government control wages and employment
- suffers from food shortages, high inflation, corruption and unemployment
- around 20% of children affected by malnutrition

Question 4

example of negative production externality

Answer 4

• 2010 = BP well spilled oil in the Gulf of Mexico
• destroyed wildlife and damaged the tourist industry
• cost the local economy $4bn
• lost 3,000 jobs

Question 5

example of negative consumption externaility

Answer 5

• direct and passive smoking damages health
• burden on government’s health budgets
• 2012 = total healthcare expenditure to smoking-attributable disease was $422 bn or 5.7% of global health expenditure

Question 6

example of positive production externality

Answer 6

• spending on public transport
• gov claims every £1 spent on public transport returns £4 to the greater economy
  reduced transport costs =
• increased connection for businesses (suppliers, customers & labour)
• reduces geographical immobility of labour

Question 7

example of a positive consumption externality

Answer 7

• 2018 = UK spent 4.3% of national income on education
• human capital investment associated with higher GDP and lower inequality
• additional year of education is associated with over 18% higher GDP per capita

Question 8

example of a specific tax on demerit goods

Answer 8

excise duties on tobacco, petrol and alcohol
- 1% increase in price of tobacco and alcohol results in a 0.5% fall in demand (inelastic PED)
- tobacco tax rasies the gov around £9 bn but £2bn in tax rev is loss due to smuggling

Question 9

example of an ad valorem tax

Answer 9

VAT - 20% in UK
- regressive tax
- more relevant to the poor

Question 10

example of a subsidy on a merit good

Answer 10

• up until 2018, gov had a subsidy scheme in place for solar energy
• helped 800,000 households and 28,000 businesses to install solar energy

Question 11

example of a subsidy on an industry

Answer 11

• EU spends £50 bn per year subsidising european farmers to boost farmers’ incomes & ensure a stable food supply so they don’t have to rely on imports
• farmers generate 6% of the EU’s GDP but receive 30% of its total budget

Question 12

example of a minimum price

Answer 12

• 2018 scottish government introduced a minimum price of 50p per unit alcohol
• by the end of 2018, the volume of alcohol sold in scotland fell 3% from 2017

Question 13

example of a maximum price

Answer 13

• venezuela sets maximum prices on bread
• lead to significant shortages

Question 14

example of a maximum price in the labour market

Answer 14

salary caps
- labour gov proposed a 20:1 limit on the gap between the lowest and highest paid worker
- difficult for firms to recruit highly qualified CEO’s

Question 15

example of a government regulation

Answer 15

to address the challenge of obesity the government has introduced regulation forcing restaurants to put meal calories on menus and encouraged people to eat more fruit and vegetables

Question 16

example of government awareness campaign

Answer 16

2000’s THINK! to reduce road accidents
- road death reduce by 46%

Question 17

example of a contestable markets

Answer 17

• online music downloads
• low barriers to entry or exit in the market
• could be argued there are already some firms with large market share (Spotify, iTunes, Amazon, etc)

Question 18

example of a horizontal merger

Answer 18

• 2015, BT bought EE
• increased BT shares up to 4.5%
• BT estimated it would generate an extra £1.6 bn a year in sales and save £360m in terms of operating costs & capital

Question 19

example of a backwards vertical merger

Answer 19

• 2014, Nutella nought a turkish hazelnut producer, Otlan as the price of nuts spiked due to poor weather conditions
• Otlan is a world leading company in hazelnuts and receives more than $500 mil in revenue
• reduce Nutella’s costs and guarantee supply

Question 20

example of a vertical demerger

Answer 20

• 2015, eBay split from Paypal
• cost hundreds of millions of pounds on spending on new capital
• eBay bought PayPal for $1.5 mil in 2002 (forward vertical merger)
• PayPal became the bigger and stronger of the two companies
• splitting benefitted both firms: PayPal, acting independently, has allowed it to expand to other sites

Question 21

example of conglomerate demerger

Answer 21

• 2018, Whitbread (owner of Premier Inn Hotel Chain), sold Costa to Coca Cola for £3.9 bn
• sale allowed the firm to focus and grow its other businesses
• shareholders benefitted the most
• Whitbread used the money to reduce its debts & cut costs

Question 22

example of horizontal demerger

Answer 22

• 2013, Lloyds Bank split from TSB bank
• more than 4.6m Lloyds customers were transferred to the 631 branches being rebranded as TSB
• forced to demerge by the EU as a result of £20bn of taxpayer money pumped unbto the bank during the 2008 bailouts

Question 23

example of rising prices

Answer 23

cocoa:
- $11 per KG (2010) to $15 (2018)
- shrinking chocolate makers’ profit margins
response:
- shrinking size or reducing qualities of products
- focus on premium products & expanding their customer base
- vertical backward integration to acquire producers of cocoa

Question 24

example of collusion

Answer 24

• 2013, US government fined nine Japenese car part makers, including Hitachi and Mitsubishi, $740 mil for fixing prices
• japenese car part makers were fixing prices to US carmakers such as Ford and General Motors
• affected more than $5 bn worth of car parts sold to the US
• more than 25m consumers had suffered by paying a higher price for their car

Question 25

example of price discrimination

Answer 25

third degree: national rail
- Adults (inelastic PED) and Students (elastic PED) are charged different prices
- able to maker more profits than they would if they charged both markets the same

Question 26

example of government competition policy

Answer 26

• 2014, OFGEM referred energy industry to CMA for inefficiency & tacit collusion
• 2016, CMA found consumers had been paying £1.4 bn a year more than they would in a fully competitive market
• CMA started supporting price comparison websites to help the consumers find the cheapest energy prices
• temporarily capped prices for consumers on pre-payment meters

Question 27

example of sucessful government intervention on mergers

Answer 27

• 2018, CMA blocked Fox Broadcasting Company’s £11.7 bn takeover of Sky. it concluded the takeover would’ve been against public interest

Question 28

example of unsuccessful government intervention

Answer 28

• 2018, CMA tried to investigate the proposed merger of Sainsbury’s and Asda (combined market share of 28%)
• process has been criticised for being time consuming and complicated
• CMA may have took to long, potentially derailing a merger than could have benefited consumers
• regulator suffers from asymmetric information

Question 29

3 examples of a monopsony

Answer 29

1. NHS employs 1.5 million workers
2. UK gov employs 93% of the state sector teachers
3. McDonalds employ 1.9 mil workers globally

Question 30

3 examples of a trade union in the UK

Answer 30

1. public sector trade union density is 48.6% compared to 12% in the private sector
2. sectors with the strongest unions: education, public administration and health and social work
3. weakest unions: accommodation and food services

Question 31

minimum wage in the UK

Answer 31

2024 - £11.44 per hour

Question 32

examples of wage differentials

Answer 32

1. gender pay gap among full time employs is 7.7% from 30% in 1990s.
   - the largest gender pay gap is for workers above 50 – due to a lack to educational opportunities when they were younger
   - under 40s full time gender pay gap is 3%
2. ethnic pay gap – Chinese and Indian ethnicity have a higher median pay than white british in 2019.
3. regional pay gap – London and the southeast earn £765 a week, compared to around £600 for the north and midlands.
4. CEOs earn 117 times more than the average UK worker salary of £34k
5. the top 1% earners in the UK contribute to 30% of income tax revenue while 42% of all income earners, pay no income tax at all