Key Essay Plans Flashcards
Assess the view that Price Discrimination is always damaging (25m)
Intro - Price Discrimination (Def) + Conditions 1. Price Maker, 2. Split Market 3. No resale, PD = not ALWAYS damaging.
P1 = 1st Degree = Very Damaging
- Perfect Discrimination
- May occur in the service sector
- Consumers pay the max they are W+A to
- All CS turned to PS.
Eval - Extra Revenue can be used for Dynamic Efficieny (benefit likely not to exceed cost to consumers), however, conditions for 1st PD rarely met.
P2 - 2nd Degree = Arguably Equitable
- Wholesale Discrimination
- Such as Costco
- Lower price for higher Quantity
- Some of CS turned to PS.
- If PD for raw materials, firms can benefit from purchasing EoS = Lower prices of other goods / services
Eval - What is the nature of good, is it usually consumed in high or low quantities.
P3 - 3rd Degree = Potentially not damaging
- Market split based on PED
- Inelastic = Higher Prices / Elastic = Lower Prices
- Cross-subsidisation - eg. high prices for some allow for low prices for others.
- Eg. Last Minute Holidays
Eval - Depends on who PED is inelastic for, if it is those with higher income - PD = Equitable ?
Conclusion - PD = Not always damaging
- Can be equitable (2+3)
- Dynamic Efficiency may occur (1)
Assess the view that Monopolistically Competitive markets best serve consumer interests (25m)
Intro - Define MC, Explain Consumer interests, MC = best market for consumers
P1 - Lower Prices than monopoly
- Many firms, Low Barriers, Some differentiation
- High Comp - PED >1
- P closer to MC - near Allocative Inefficiency
- Consumer Interests - Low prices
Eval - MC = Productive Inefficient (Monopoly = PE), MC have small market share = no EoS Benefit = higher AC. Monopoly may have lower costs, however monopoly power means MC is still better. (EOS Diagram)
P2 - Higher prices than Perfect Comp. (SR SNP in MC)
- Some Differentiation + Brand Loyalty = Some price making ability.
- Depends on EoS ability - how low are AC
- Perf Comp = no barriers to entry = AE
- Consumer interests may be best in Perf. Comp
Eval - Is some differentiation good, perf. comp has infitinte choice of suppliers, however all goods are homogenous. MC = Some differentiation, consumers are able to adapt to their needs and wants. Eg. Dishes at a restuarant. Depends on nature of market - is homogenity beneficial ?
Conc - Mono Comp = Best serves consumer interests if,
- Price Making Power is limited
- Differentiation is beneficial
Evaluate whether NMW is beneficial to labour markets (25m)
Intro - Define NMW, explain benficial (wages / QL)
P1 - Very beneficial in a monopsony
- Monopsony = Single employer, typically market failure
- Wages are determined by Prof. Max (MC = MRPL)
- NMW (if perfect) - Increases wages to W* + Increases employment to QL* = Allocative Efficient
- Reduces Voluntary Unemployment (increased willingness to work at the higher wage rate)
Eval - Higher wage costs - Higher VC - Higher AC - Higher Prices - Lower Int. Comp / Increased Poverty ? - Depends on the % of TC that are WC
P2 - Mixed success in Perf. Comp.
- Market already at Allocative Effiecieny
- NMW set above Market Eq.
- This does cause an increase in wages - Wmin
- Fiscal benefit = Increased Tax revenue
Eval - RW unemployment (QLS>QLD)= Esp. Youth (lowest MRPL), potential Hysteresis. Depends on elasticity of DL. Evidence has shown increased NMW will not have a major impact on employment.
Conc = NMW is beneficial to labour markets if,
- Wage costs = small % of TC
- DL is inelastic.
Using a diagram, analyse the impact of interdependence on consumers (9m)
Interdependence = Pricing follows other firms - Price rigidity.
Oligopoly = Few Firms, Some Differnetiation, High barriers to entry, interdependence + Price rigidity
OLIGOPOLY KINKED DEMAND CURVE
- Kinked Demand shows elastic PED above Em, Inelastic PED below Em.
- If price increase, prop greater market share loss - other firms do not follow price increase as they are subs and information provision is good, therefore, rival market share increases - Price rigidity due to Interdep.
-If prices decrease, prop smaller increase in MS, large profit loss deters other firms from following. - Even if MC change - price rigidity will hold.
As a result,
- Firms are unwilling to conduct price wars as they will either lose market share or profit
- Non-Price Comp = High = Beneficial to conusmers
- High consumer surplus
Evaluate the claim that UBI would be beneficial in the UK
Welfare policy wihich guarantees a monthly income to everyone in the population,reagrdless of their current income, employment or other factors. Covers basic needs, unconditional + funded via tax / borrowing.
Small scale tested = successful
Never fully implemented
P1 - UBI can support those not in work
- Frictional Unemployment-support while finding bestjob
- Increased affordability of essential goods and services
- Reduction in absolute poverty
However
- Huge Cost to Govt = Opp. Cost + Intergen. ineq.
- Increased disposable income = higher inflation
P2 - UBI can create an incentive to work
- Everyone is eligible for UBI - used to top up income
- Means tested benefits require criteria to be met = as income increases, benefits decrease.
However
- Encourages laziness = Dependence on UBI - disincentive to work, poorly targeted
Conc.
Whilsy well intended, UBI is likely to be ineffective as;
- Too costly to the Govt. (huge opp. cost).
- Does not provide a sufficient incentive to work
Evaluate the argument that the interests of consumers would be better served by returning the UK water industry to state ownership (25m)
Intro - Define nationalisation, Explain consumer interests, A well regulated private sector (or PPP) will best achieve consumer outcomes.
P1 - Improved consumer welfare
- Transfer of ownership = different objectives (AE vs PM)
- Allocative Efficiency
- Help alleviate some cost of living issues
Eval - A counter argument is that state-ownership can reduce profits.
- Less profits as prices are closer to AC = No Dyn. Eff.
- X-inefficiency
- Reduced fiscal benefit - lower corp tax
P2 - Public Nat. Mon > Private Nat. Mon
- High fixed costs for water industry (ie. pipelines) make a natural monopoly = EoS benefit.
- Private = Monopoly power = High prices
- Public = AE
- Govt. can access more funds for capital investment, ie. cheap borrowing via Guilts.
Eval -
- Public Natural Monopoly usually make a loss
- Requires a large subsidy to survive.
Conc
- Ownership of the industry is not the only factor influencing performance.
- Should be judged on a case by case basis
- Nationalisation should be made on an economic rather than political judgement.
- Price competition is unlikely in the water industry
- Strong regulation of Nat. Mon can act as surrogate competition
A well regulated private sector (or PPP) will best achieve consumer outcomes.
Evaluate the likely impact of imposing a plastic tax (25m)
Intro - Explain the market failure (overproduction), plastic tax may fail to achieve it’s desired impact.
P1 - One potential impact = reduction in external cost
NEG EXT IN PROD + TAX DIAGRAM
- Currently overproduced (Em > E)
-Divergence of MPC / MSC = cost to third party, eg. environmental costs of pollution.
- Pigouvian Tax - Increased VC, CP, reducing profits.
- Govt. Rev = Po, P, E*, A.
- In theory, depending on PED, promote reduction in plastic usage / use of sustainable subs.
- Therefore, some / all of the DWL is internalised.
However -
- Plastic has mixed externalities = eg. food hygine + preservation - reduced food wastes.
- Plastic is relatively cheap packing - low Transport cost.
- Therefore, these benefits of plastic may not be seen in subs packing.
P2 - Second likely impact = increased prices
- In theory, plastic tax will shift the supply curve in.
- If the PED for plastic packing is relatively inelastic, costs (tax burden) can be passed onto consumers.
INELASTIC PED + CONS BURDEN DIAGRAM
- Eg. Plastic Packing on Ready Meals.
- Regressive Impact
Consumers face burden of tax more than the actual polluter.
However -
- In the LR, firms may be incentivised to recycle / use sustainable alts.
- Sub Packing producers experience increased demand, potential EoS.
- Eg. Purchasing EoS = lower AC.
- Prices of Sub packing will fall in the LR (assuming increasing returns to scale).
BUT - Sustainable Alts may not have the capacity to accommodate for EoS.
Furthermore -
- Tax rev obtained can be used in order to finance information provision, re. costs of plastic on environment.
However -
- This is likely ineffective due to bounded rationality.
Could use -
BEHAVIOURAL ECON DIAGRAM
LAFFER CURVE
Conc - Tax should not be imposed
- Burden will likely be faced by consumers
- Information provision - likely ineffective
- Sustainable Alts do not have the capacity
- Benefits of Plastic lost
Evaluate the view that XXX industry should be privatised (25m)
Intro - Privatisation (Def), Link to Q, Conclusion - Depends on market.
P1 - Can increase efficiency + Govt. Rev
- Transfer of ownership = new objectives
- Profit Motive > Allocative Efficiency
- Reduced X-Inefficieny DIAGRAM
- Govt. Revenue increases - Windfall Rev / Corp Tax
Eval -
- Reduction in socially beneficial services
- Often privatised cheaply
DEPENDS ON - regulation (to maintain social welfare)
P2 - Result in Private Natural Monopoly.
NATURAL MONOPOLY DIAGRAM
- Natural Monopoly may arise is best number of firms is one (ie. due to huge fixed costs)
- Private NM achieve huge SNP and only provide a low Q
- Public NM = Higher Q = Allocative Efficiency
- This makes a large loss = requires large sub
Eval -
- Opp Cost of Sub Nationalised NM
- Potential Dynamic Efficiency of Private NM.
Conc. - Privatsation is only beneficial if:
- Socially benefical services are protected
- Natural Monopoly does not form
- Private market will be contestable / competitive.
Explain 2 possible causes of poverty in the UK (15m)
- define absolute and relative poverty
- world bank sets the poverty line to $1.90 a day
FIRST CAUSE: low wages and unemployment
- the uk is mainly affected by relative poverty which is related to having low income
- unemployment and low wages both cause low incomes
- even though the UK has a gov. that spends on welfare benefits, the unemployed are likely to be at the bottom of income
- low wages due to elastic demand and high+elastic supply also cause low incomes (show in diagram)
SECOND CAUSE: tax/benefits system leading to the poverty trap
- this stops people who are in poverty from escaping poverty
- when low waged people start to earn higher wages they may only actually receive a small percentage of their wage increase. This is because benefits will be reduced and income tax and NI will have to be paid.
- in some cases this could even cause a drop in disposable income levels
- this system can cause a disincentive for people to find work or increase the number of hours they work. This causes relative poverty to become persistent.
To what extent can the problem of poverty in the UK be solved through the operation of market forces? Justify (25)
INTRO: define absolute and relative poverty + the uk is mainly affected by relative poverty rather than absolute poverty
FIRST PARA
- market forces can lead to job creation, providing one of the strongest routes out of poverty
- the uk has reasonably good levels of social mobility
- markets cause the tickle down effect - the rich spend money in the economy that then provides jobs for the poorest - helps absolute poverty but less effective for relative poverty
SECOND PARA:
But may not fully solve poverty: some people may not be able to work or respond to these incentives such as the ill, disabled or elderly. Therefore poverty could be solved through market forces for some groups but not others. ALTERNATIVES TO SOLVE THE PROBLEM OF POVERTY:
- direct progressive taxes rather than indirect regressive taxes
- state provision so that people are not excluded from services such as health and education
THIRD PARA: other methods to solve relative poverty: many people on NMW and state benefits are still in relative poverty but not in absolute poverty
- depends on what counts as ‘solving’ the problem of poverty - is this in terms of absolute or relative poverty
HOWEVER
possibility of government failure - whereas if the problem of poverty could be solved through market forces this would not be needed. Gov. intervention could actually cause poverty to be persistent due to ideas such as the poverty trap.
EVALUATION - absolute poverty may be solved through market forces - trickle down effect. Less effective for relative poverty as markets widen income inequality. So use market forces to a certain extent but ultimately government intervention.
Assess the view that in the Uk, the consequences of wealth inequality are more damaging than the consequences of income inequality (25)
INTRO - define wealth and income
- in the uk, wealth is more unevenly distributed than income
CONSEQUENCES OF INCOME INEQUALITY ARE BAD
- potentially unfair, especially if discrimination is involved
- poverty trap resulting from income inequality
- negative impact on social indicators: education, health, crime
- likely to result in regional inequalities
- gov intervention/policies to improve them could have a large opportunity cost
- crime could also stop businesses from functioning - negative impact on economy along with low job satisfaction/motivation resulting from income inequality
- people not excluded from essential services - NHS/education because of income
- however, gov can reduce income inequality through the progressive taxation system and benefits. income is earnt and acts as both a reward and an incentive. Also trickle down effect.
CONSEQUENCES OF WEALTH INEQUALITY ARE WORSE
- unequal distribution of property, causing some to live in low-quality homes, or having to frequently move house
- wealth earns income on its own: wealth creates income via interest, rent and dividends
- the hindrance of social mobility via the wealthy affording better education, health, cultural goods
- impact on poverty, including child poverty and pensioner poverty
- however, wealth inequality allows investment which everyone can benefit from. Doesn’t outweigh the control that these people have
EVALUATION
wealth limits social ability for future generations and gives head starts in life that are difficult for other to compete with. Much easier for the UK to redistribute income than wealth. Wealth inequality likely to have a more than proportional impact on income inequality before tax.
