Markets and Market Failure Flashcards
1
Q
What are assumptions in economics?
A
Assumptions are initial conditions made before a micro or macroeconomic analysis is built.
Sometimes assumptions are used for simplification
Assumptions can be used to isolate the effects of a change in one variable on another.
Many assumptions are criticised for being unrealistic
2
Q
What is the ceteris paribus assumption?
A
To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus -i.e. all other influencing factors are held constant.
3
Q
What is a positive statement?
A
Positive statement are objective statements that can be tested, amended or rejected by referring to the evidence.
(Objective and testable theories)
4
Q
What is an example of a positive statement?
A
The falling price of crude oil on world markets will lead to a fall in demand for fuel efficient cars.
5
Q
What is a normative statement?
A
Normative statements are subjective statements -i.e. they carry one or more value judgments about what ought to be.
(Value judgement and opinions)
6
Q
What is an example of a normative statement?
A
A sugar tax is the best policy to cut obesity
7
Q
What is positive economics?
A
Positive economics deals with objective explanation and the testing and rejection of theories.
8
Q
What are the four economic resources?
A
Land
Labour
Capital
Enterprise
9
Q
What is land as a economic resource?
A
The stock of natural (environmental) factor resources available for production.
10
Q
What is enterprise as a economic resource?
A
Entrepreneurs organise the factors of production and also take risks
11
Q
What is labour as a economic resource?
A
The quantity and quality of the human input into the production process.
12
Q
What does capital refer to as a economic resource?
A
Man-made goods used to supply other products, e.g. technology, factories, machinery and software.
13
Q
What are capital goods?
A
Goods that are used to make consumer goods and services.
14
Q
What are examples of capital goods?
A
Factories Offices Machines Printing press Combine harvester Assembly line
15
Q
What are Free Goods?
A
A free good has zero opportunity cost in its supply.
16
Q
What are non-renewable resources?
A
Non-renewable resources are finite in supply.
Examples are crude oil, coal, natural gas and other fossil fuels, no mechanisms exist at present to replenish them.
The rate of extraction of finite resources depends in part on the current market price
17
Q
What are renewable resources?
A
Renewables resources are resources that are replaceable if the rate of extraction is less than the natural rate at which a resource renews.
Examples of renewable resources are solar energy, tidal power, oxygen, biomass, fish stocks and forestry.
18
Q
What is opportunity cost?
A
Opportunity cost measures the cost of a choice expressed in terms of the next best alternative foregone or sacrificed.
19
Q
What are examples of opportunity costs? (READ)
A
Work leisure choices: The opportunity cost of deciding not to work an extra ten hours a week is the lost wages given up.
The opportunity cost of the government spending an extra £10 billion on investment in the NHS might be that £10 billion less is available for spending on education or defence equipment.
20
Q
Why would you ration scarce resources?
A
Rationing is one way of allocating scarce goods and services when market demand exceeds available supply.
21
Q
What are examples of rationing?
A
Health rationing occurs when demand for health care services outstrips the available resources leading to waiting lists and delay for health treatments.
Cash rationing in Indian banks when the government in 2016 took larger denominations of bank notes out of circulation in a bid to reduce corruption.
Ticket rationing by clubs when demand for tickets for a big match exceeds capacity of a stadium.
22
Q
What are different ways to ration scarce resources?
A
By market price
By consumer income
By assessment of people’s need
By household postcode
By education level
By age
By gender
By nationality.
23
Q
Why has Food bank use grown rapidly in recent years?
A
Higher food prices have made food less affordable for low income households
High long term unemployment have hit family budgets
Declining real incomes for many people on lower wages
Welfare reforms including a a maximum welfare cap for families and tighter rules for claiming benefits.
More food banks have been set- i.e. supply is responding to growing demand and need among many families.
24
Q
What is a PPF?
A
A PPF shows the maximum potential output combinations of two goods an economy can achieve when all its resources are fully and efficiently employed.
25
Points inside the PPF are what?
Is an inefficient allocation of resources since it is possible to produce more of one good without sacrificing any of the other.
26
What are points on the PPF?
Any point on the PPF is an efficient allocation of resources.
27
What are points outside the PPF?
An output combination that is not yet attainable.
28
For an economy to be productively efficient it must be where on its PPF?
It must be on the PPF curve.
29
If there is a linear PPF (straight line PPF) what is the marginal opportunity cost between consumer and capital goods?
The marginal opportunity cost of switching resources between consumer and capital goods is constant.
30
What is a straight line PPF an indication of?
Perfect substitutability of resources such as labour or capital.
31
Combinations of consumer and capital goods lying inside the PPF happen when?
There are unemployed resources or resources are used inefficiently. We could increase output by moving towards the PPF.
32
If a country produces more with the same resources what is this an improvement in?
Economic welfare through a gain in allocative efficiency.
33
What are causes of an outward shift in the PPF?
Higher productivity/ efficiency of factor inputs
Better management of factor inputs
Increase in the stock of capital and labour supply
Innovation and invention of new products and resources
Discovery / extraction of new products and resources
34
How does an increase in productivity cause an outward shift in PPF?
This increases the output per unit of an input used in production
35
How does better management of factor inputs cause an outward shift in PPF?
Improved management reduces waste and also improves quality.
36
How does an increase in the stock of capital and labour supply cause an outward shift in PPF?
Increased capital investment and inward labour migration
37
How does an increase in innovation and invention of new products and resources cause an outward shift in PPF?
Improved production processes can help to lift efficiency shifting PPF outwards.
38
How does the discovery / extraction of new natural resources shift PPF outwards?
Discovery of commercial viable land inputs drives extraction.
39
What causes an inward shift in PPF?
Damaging effects of natural disasterss
Destruction / loss of factor inputs caused by civil war or other forms of conflict
Large scale net outward labour migration
A trend decline in the productivity of inputs perhaps caused by recession which causes net investment to be negative.
40
What is resource depletion?
This is a decline in the stock of resources available, for example arising in the long run from the effects of de-population, climate change and low rates of investment in new capital inputs.
41
What are examples of resource depletion?
Human capital flight
Capital scrapping
Natural disasters
Deforestation
42
What is resource depreciation?
When the productivity / efficiency of resources diminishes with age and also with repeated use.
43
What are examples of resource depreciation?
Machinery
Skills Atrophy
Buildings
Basic infrastructure.
44
What are index numbers?
Index numbers are a useful way of showing data more easily and comparing and contrasting information.
The base value always has an index of 100.
45
How do you calculate percentage change?
New Figure - Old Figure / Old Figure * 100
46
What are the key assumptions of rational behaviour?
Agents choose independently of one another
An agent has fixed and stable tastes and preferences
An agent gathers complete information on all alternatives
Always make an optimal choice when given preference.
People make choices in order to maximise the satisfaction they get from spending a limited budget.
47
What is utility?
Utility measures the satisfaction we get from purchasing and consuming a product.
48
What is total utility?
The total satisfaction from a given level of consumption
49
What is Marginal utility?
The change in satisfaction from consuming an extra unit.
50
How does diminishing returns affect marginal utility?
The marginal utility of extra units decline as more is consumed.
51
If marginal utility is falling then what may consumers want?
Consumers may be only willing to purchase at a lower price.
52
What does marginal mean in economics?
Marginal in economics means having a little more or a little less of something.
It refers to the effects of consuming and or producing one extra unit of a good or service.
53
What is marginal benefit?
Marginal benefit is the change in total benefit from one extra unit.
54
What is marginal cost?
Marginal cost is the change in total cost from one extra unit.
55
Are ration consumers and producers assumed to calculate the marginal cost and benefit of each decision?
Yes.
56
What are information gaps?
Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.
For example, risks from using tanning salons, the complexity of pension schemes, uncertain quality of second hand products and knowledge of the nutritional content of foods and drinks.
57
What is Asymmetric information?
Is when there is an imbalance in information between buyer and seller which can distort choices
58
What are examples of Asymmetric information?
A used car seller knows more about vehicle quality than a buyer
Mortgages a borrower knows more about their ability to repay a loan than the lender, insufficient checks might be made.
59
What is adverse selection?
Adverse selection occurs when buyers have better information than sellers, and this can distort the usual market process. It can lead to missing markets as firms do not find it profitable to sell a good.
60
Adverse selection example explained?
Health insurance
Those most likely to purchase health insurance are those who are most likely to use it, i.e. smokers/drinkers those with chronic health conditions.
The health insurance company knows this and so raises the average price of insurance cover.
This may price some healthy lower-risk consumers out of the market, meaning that mainly higher risk individuals gain this insurance- this causes a market failure.
61
What is Moral hazard?
Moral Hazard is the concept that individuals have incentives to alter their behaviour when their risk or bad-decision making is borne by others
Any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly
62
What is an example of a moral hazard?
Bail-outs of the banking system after the 2007 crash.
63
How was the bail out of the banking system after the 2007 crash a moral hazard by banks.
Banks take excess risks leads to bank losses
This forces the government to bailout banks as the government can't allow banks to go bust.
The government bail-outs encourage increased risk taking by banks, as the banks know the increased risk could result in losses but know they won't bear the cost if things go badly.
64
What is an economic agent?
An economic decision maker who can recognise that different factors influence and motivate different economic groups.
65
Economics agents do not always act rationally- they sometimes:
Have a limited capacity to calculate all costs
Are influenced by their own social networks
Often act reciprocally rather than in pure self interest
Lack self control and seek immediate satisfaction
They are loss averse
They make different choices in cold and emotional states
Often fall back on simple rules of thumb when choosing
Satisfice rather than maximise utility/ private benefit.
Have a strong default to maintain the status quo.
66
What is bounded rationality?
This is the theory that there is only so much information that humans can be aware of. Therefore, when making decisions, we base them on a limited choice. They are rational given the limited choice and awareness of alternatives, but they rarely maximise total utility because people don’t want to take the time to fully consider all options.
67
What is anchoring?
Value is often set by anchors or imprints in our minds which we then use as mental reference points when making decisions.
Some anchors establish in our mind a low price, others establish a high price that we may pay on a regular basis.
68
What are examples of anchoring?
Refereeing decisions anchored by the size of home crowd.
Recommended tips used by taxi companies / restaurants
Behavioral scientists describe this as a cognitive bias.
69
What is habitual behaviour?
Most people carry on behaving as they have always done.
Repeat choices / purchases often become automatic because default choices don't involve any mental effort.
To get people to change their behaviour may require compelling incentives or introducing a form of mandated choice.
70
What are examples of habitual behaviour?
Your choice of daily breakfast cereal / razor / sandwich
Many consumers of energy, broadband stay with the same provider.
71
What are social norms?
Decisions where social norms outweigh personal decisions of utility, e.g. voting because it is considered social duty – even if we know voting makes no difference anyway.
72
What are examples of social norms?
Changing the social stigma of drink-driving and speeding
Observing white lines in car parks and on roads
Queuing behaviour in shops or at sports events
Observing smoking bans in public places
73
What is altruism?
The phenomenon in behavioural science for humans to behave with more kindness and fairness than would be the case if they behaved rationally.
Altruism is often linked to the concept of inequity aversion, whilst this is usually seen as positive it can also result in a negative outcome.
E.g. a person being willing to forego a gain if it means that someone else won't gain an even better reward.
74
What is loss aversion?
In behavioural economics, loss aversion refers to people’s preferences to avoid losing compared to gaining the equivalent amount.
75
What are the reasons for loss aversion?
Attachment to objects/decision. If we own something, we can develop an attachment/relationship. If a family member gave us a statue worth £100, we might feel bad about selling – even if someone offered us £200. However, if we saw the exact same statue in the shop, we may not want to pay even £10.
It feels careless/bad luck. We don’t like losing because it feels like bad luck, carelessness.
Image/reputational costs. If we lose, it may appear we are weak and it has a reputational cost. For example, if we invest in a project, but then give up because marginal cost is greater than marginal benefit – we may not be given another project. Therefore, it may be in our rational interest to persevere and put a gloss on the new project, rather than admit we were wrong.
76
What are behavioural nudges?
A nudge is a technique used by choice architects to change someone's behaviour in an easy and low-cost way, without reducing the number of choices available.
We often see it described as non enforced compliance.
77
What are examples of behavioural nudges?
Specific messages. To reduce missed hospital appointments, most hospitals send SMS text reminders on the day. Studies suggest that changing the words of the SMS can influence how successful these text messages are. For example, if text messages mention the direct costs to the NHS for missing an appointment (£160) – it helped reduce missed appointments from 11.1% to 8.5%. (Behavioural insights Blog)
Encouraging certain behaviours. A study found that if students are sent motivating text messages, attendance rates improved.
78
What is choice architecture?
Choice architecture described how decisions are affected by design / sequencing / range of choices available.
For example getting students to eat more healthy might involve altering the layout of the restaurant.
Smart building designs might make it more attractive / easier to take the stairs rather than use a lift.
79
When is choice architecture generally most effective?
Choice architecture is often effective when it encourages simplicity in the decisions that people must make in which the benefits and costs are made clear.
80
What is mandated choice?
A situation when people must decide in advance with respect to whether they wish to participate in a particular action they are required by law to make that choice.
These decisions are usually public policy decisions e.g. deciding whether to donate your organs when you die, choosing whether to make a ''living will'' etc.
81
What conventional interventions are there to tackle obesity?
Increased indirect taxes on high fat / sugar / salt foods
NHS Provision of weight-loss drugs
Tougher regulations on product content for food / drink manufacturers
Education programmes
Compulsory nutritional information.
82
What behavioural interventions are there to tackle obesity?
Appeal to loss aversion e.g. the impact on family of heart attacks / premature death
Changing choice architecture in restaurants / vending machines / hospitals
Pre-commitment devices e.g. parents choosing healthy school meals in advance.
83
What conventional interventions are there on preventing / persuading against gambling?
Regulation of betting laws
Stronger advertising code
Better financial education on risks from betting
Maximum bets e.g. £2 instead of £100 on fixed odd terminals
Tougher local authority planning laws on new betting shops
Treating free bets offered by betting companies as taxable.
84
What behavioural interventions could be used to tackle gambling addictions?
Anchoring (maximum bet on a single bet)
Self commitment devices e.g. self-exclusion schemes from shops for 6 months
Friction cost- people wanting to stake over £50 on a fixed odds terminal must load cash via staff
Framing the savings from quitting in attractive terms.
85
Evaluate the effectiveness of behavioural nudges in achieving their aims?
Nudge theory may help minor behaviours but less so in addressing deeper social problems.
Samples used in laboratory testing for psychological biases might be flawed e.g. not diverse testing group.
Interventions such as taxes, subsidies and regulations are often as effective as behavioral nudges.
The impacts of nudges are contextual- i.e. what works in one country might not be as effective in another nation at different stages of economic development.
86
What is demand?
Demand for a product is the quantity that purchasers are willing and able to buy at a given price in a given time period
87
What is effective demand?
Only if demand for a product is backed up by a willingness and ability to pay the market price does demand become effective or realized or actual.
88
What is Latent demand?
Demand that is not yet expressed in the market place.
89
How does a fall in price of goods affect consumers income if ceteris paribus?
A fall in price increased the real purchasing power of consumers
This allows people to buy more with a given budget
For normal goods demand rises with an increase in real income.
90
What causes shift in the demand curve (LIST AT LEAST 5)?
Changing prices of substitutes in competitive demand
Changing price of a complement in joint demand
Changes in the real disposable incomes of consumers
Inequality in wages
Effects of advertising and marketing changing people's tastes
Interest rates
Seasonal factors
Changes in size and age structure of a population
Social and emotional factors
91
What is derived demand?
Derived demand occurs when there is a demand for a good or factor of production resulting from demand for an intermediate good or service.
92
Give an example of derived demand?
The rise in demand for mobile phones and other mobile devices has led to a strong rise in demand for lithium. Lithium is used in the batteries.
93
What is joint demand?
Joint demand is when demand for one product is positively related to market demand for a related good or service.
94
Are Two complements in joint demand and what is their cross price elasticity of demand?
Two complements are said to be in joint demand and their cross price elasticity of demand is negative.x
95
Give examples of goods in joint demand?
Fish and chips, iron ore and steel, apps for smartphones.
96
What is composite demand?
Composite demand is where goods have more than one use.
An increase in the demand for one product leads to a fall in supply of the other.
97
What are examples of composite demand?
An example is milk which can be used for cheese, yoghurts, cream, butter and other products.
98
What is supply?
Supply is defined as the quantity of a good or service that producers are willing and able to supply at a given price in a given time period.
99
What is the law of supply?
Is that as the price of a product rises, so businesses expand supply. Higher prices provide a profit incentive for firms to expand production.
100
What does a supply curve show?
A supply curve shows a relationship between market price and how much a firm is willing and able to sell.
101
What are causes of shifts in market supply? (Name 5)
Changes in the unit costs of production
A fall in the exchange rate causes an increase in price of imported components and raw materials
Advances in production technologies
The entry of new producers into the market
Favourable weather conditions
Taxes, subsidies and government regulations
102
What is joint supply?
Joint supply is where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by-product.
103
What are examples of joint supply?
An expansion in beef production will lead to a rising market of beef hides
A contraction in the market supply of lamb will reduce the supply of wool.
104
What happens at the equilibrium market price?
At the equilibrium price that is a state of balance between market demand and supply, the equilibrium price is the price at which the market for the product clears.
105
What are prices where demand are supply are out of balance called?
Points of disequilibrium.
106
What is excess demand?
Excess demand is when quantity demanded exceeds available supply.
107
How does Excess demand occur?
Excess demand happens when the current market price is set below the equilibrium price.
108
What is the result of excess demand?
This will result in queuing and upward pressure on price.
Higher prices then ration demand to those consumers with effective demand.
And higher prices in theory stimulate an expansion of supply as producers respond to the chance of higher profits.
109
What is excess supply?
Excess supply is a state of disequilibrium in the market.
When supply is greater than the demand and there are unsold goods in the market, then there is excess supply.
110
What is the result of excess supply in the market?
Surpluses put downward pressure on the market price.
As prices fall, there is an extension of demand which helps to lower the surplus and take the market towards equilibrium.
111
What is consumer surplus?
Consumer surplus is the difference between the price consumers are willing and able to pay for a good or service.
112
Where is Consumer surplus on a demand curve?
Consumer surplus is shown by the area under the demand curve and above the market price.
113
What is producer surplus?
Producer surplus is the difference between the price producers are willing and able to supply a product for and the price they get in the market.
114
Where is consumer surplus on a supply curve?
Producer surplus is shown by the area above the supply curve and below the price.
115
What is PED?
Price elasticity of demand measures the responsiveness of demand after a change in the good's own price.
116
How do you calculate PED?
% Change in quantity demanded
| % Change in price
117
What is PED of a normal good with a downward sloping demand curves?
All normal goods with a downward sloping demand curves will have a negative coefficient of PED.
118
Does it matter about the negative symbol when calculating PED?
Since changes in price and quantity usually move in opposite directions, usually we do not bother to put in the minus sign.
We are more concerned with the co-efficient of elasticity.
119
If PED = 0 demand is?
Perfectly inelastic
120
What does Perfectly inelastic demand mean?
Demand does not change when the price changes, the demand curve is vertical.
121
If PED is between 0-1 what is demand?
Inelastic
122
What does inelastic demand mean?
The change in demand is smaller than the percentage change in price.
123
If PED = 1 what is demand?
Demand is unit elastic?
124
What is unit elastic?
The change in demand is the same as the change in price.
125
If PED is greater than 1 then what is demand?
Elastic
126
What is elastic demand?
Demand responds more than proportionately to a change in price.
127
What are the factors affecting PED?
Number of close substitutes available for consumers
(More close substitutes there are the more price elastic the demand)
Price of the product in relation to total income
(When the % of budget is high, demand is more price sensitive)
Cost of substituting between different products
(When switching costs are high, demand will tend to be price inelastic)
Brand loyalty and habitual consumption
(High levels of brand loyalty makes demand less price elastic)
Degree of necessity / luxury
(Necessities have a lower price elasticity, luxuries are an optional spend)
128
What can Firms use PED estimates to predict?
The effect of a change in price on total revenue of sellers
Price volatility in the market following changes in supply
The effect of a change in an indirect tax on price and quantity demanded and also whether the business can pass on some / all of the tax onto the consumer in the form of a higher price
129
What is an example of how businesses can use PED for price discrimination?
Usually a business will charge a higher price to consumers whose demand is estimated to be price inelastic PED is less than one.
130
What are the problems with the accuracy of PED?
Problems with inaccurate or incomplete data collection can occur
Consumer price sensitivity changes over time
Price elasticity of demand varies by region / time
Not all businesses are profit maximisers- many aim to increase revenue
PED will vary within product ranges e.g. economy and premium products
Rival producers will change their market strategies from time to time.
131
How do calculate income elasticity of demand (YED)?
% Change in quantity demanded
/
% Change in real income
132
What is the YED of normal goods?
YED is greater than 0
When incomes are falling the demand for normal and necessary goods to a lesser extent will fall.
133
What is the YED of luxury goods?
Higher than 1
134
What is the YED of necessities?
Have a income elasticity of 0-1
These products have a low but positive income elasticity.
135
What is the YED of inferior products?
These have a negative income elasticity, Less than 0.
136
What are inferior goods?
Inferior goods are counter-cyclical goods this means that they are products whose demand varies inversely to the economic cycle. E.g. Demand rises in a downturn/recession.
137
What are examples of inferior goods?
Own label discounters
Urban bus transport
Cigarettes
Economy class travel
Own label cereals
Economy food stuffs
138
What is cross price elasticity of demand?
Cross elasticity of demand (XED) measures the percentage change in quantity demand for a good after a change in the price of another.
139
How do you calculate XED (Cross elasticity of demand)?
% Change in the Quantity Demanded of good X
/
% Change in the price of good Y
140
What is the XED for substitutes? (Not actual value just what is it positive/negative e.g.)
Close substitutes have a STRONG POSITIVE cross price elasticity of demand.
An increase in the price of one product will lead to a rise in demand for its substitute.
The higher the value of the co-efficient the closer the two products as substitutes.
141
What is the XED for complements?
When there is a strong complementary relationship, the cross elasticity of demand will be HIGHLY NEGATIVE
142
What is the XED for unrelated products?
Unrelated products have ZERO cross price elasticity of demand.
143
What does Perfectly elastic supply mean?
An increase in demand can be met without any change in market price.
144
What does perfectly inelastic supply mean?
Supply is fixed and does not respond to a change in the market price.
145
If supply is elastic, what does this mean for producers?
Then producers can increase their output without a rise in cost or time delay.
146
If supply is inelastic what does this mean for producers?
Then firms find it hard to change their production in a given time period.
147
What is the formula for price elasticity of supply (PES)?
% Change in Quantity Supplied
/
% Change in price
148
When PES is Greater than 1, what is supply? (Price inelastic, elastic e.g.)
Price elastic
149
When PES is smaller than one, supply is?
Price inelastic
150
When PES is 0, supply is?
Perfectly inelastic
151
When PES is equal to infinity?
Supply is perfectly elastic following a change in demand.
152
What are factors affecting PES?
Spare production capacity
Stocks of finished products and components
Ease and cost of factor substitution / Factor mobility
Time period and production speed?
153
How does the amount of spare production capacity affect PES?
If there is plenty of spare capacity then a business can increase output without a rise in costs and supply will be elastic in response to a change in demand.
154
How does the amount of stocks of finished products and components affect PES?
If stocks of raw materials and finished products are at a high level than a firm is able to respond to a change in demand - supply will be elastic. Perishable goods are often harder / more expensive to store.
155
How does the ease and cost of factor substitution / factor mobility affect PES?
If capital and labour are occupationally mobile then the elasticity of supply for a product is likely to be higher as resources can be mobilized to supply the extra output, e.g. the reallocation of workers to new tasks.
156
How does the time period and production affect PES?
Supply is more price elastic the longer the time that a firm is allowed to adjust its production.
157
What is Elasticity of supply?
A measure of the sensitivity of quantity supplied of a good or service to a change in the price of that good or service.
158
How does the elasticity of supply differ from manufactured products compared to agricultural goods?
The supply of manufactured goods tends to be more price elastic than the supply of agricultural goods.
This is because manufactured goods are generally more mass produced and are easier to store the finished goods. Generally they also have spare capacity / extra production shifts.
Whereas Agricultural goods are harder to store because they are often perishable, growing seasons mean production period is longer. They are also unpredictable supply because of volatile climate.
159
What are the problems from a chronic shortage of affordable housing in the UK?
Overcrowded homes
Young people Living with parents
Reduced geographical mobility
Problems for firms recruiting.
160
Why is there a low elasticity of supply for houses?
Production time frame
- It can take years for a housing project to be completed
- Delays in planning process e.g. if people complain
Limited spare capacity / low stock levels
- Housing supply can be restricted by shortage of skilled labour
- Other factor inputs used in construction such as cement, bricks may also be in scarce supply.
161
How are some markets in-related?
An increase in supply in one market may impact upon other markets, increase in the price of solar will reduce the demand for coal.
A decrease in demand in one market may impact upon other markets, an decrease in the demand for new houses will reduce the demand for bricks.
162
What can cause a price volatility?
An adverse supply shock can cause market prices to rise especially when PED is lower than 1
Rising market demand can cause price spikes, especially when supply elasticity is low.
Price of oil might drop if demand is lower than forecast and supply conditions are favorable.
163
What demand factors can cause price volatility in the coffee market?
Growing demand in emerging nations as incomes rise.
Price of substitutes for coffee
Inelastic demand among coffee consumers
164
What supply side factors can cause price volatility in the coffee market?
Climatic conditions
Inelastic supply in the short run
Number of countries producing coffee
165
What are the factors affecting UK house prices?
Mortgage interest rates
Speculative buying of properties
High cost of renting a property
High land prices and other building costs
Low level of new house building
Incentives such as Help to Buy scheme.
166
What are the four functions of the price mechanism?
Allocate
Rationing
Signalling
Incentives
167
What does Allocate mean in the context of the price mechanism?
Allocating scarce resources among competing uses.
168
What does rationing mean in the context of the price mechanism?
Prices serve to ration scarce resources when market demand outstrips supply.
169
What does Signalling mean as a function of the price mechanism?
Prices adjust to demonstrate when resources are required and where they are not.
170
What does incentives mean as a function of the price mechanism?
When the price of a product rises quantity supplied increases as business respond.
171
What is market failure?
This occurs when there is an inefficient allocation of resources in a free market.
172
What different types of market failure are there?
Positive externalities
Negative externalities
Merit Goods
Demerit goods
Public goods
Monopoly power
Inequality- Unfair distribution of resources in the free market
Factor immobility
Agriculture
Information failure
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What is complete market failure?
When the market does not supply products at all - there is a missing market.
174
What is an example of complete market failure?
Pure public goods, this is a missing market in the provision of public goods.
175
What is Partial market failure?
When the market functions but it supplies either the wrong quantity of a product or at the wrong price.
176
What is an example of a partial market failure?
Negative externalities in production.
Most market failures covered in A level Economics are partial, involving a deadweight loss of social welfare.
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What are externalities?
Externalities are spill-over effects from production and or consumption for which no appropriate compensation is paid to one or more third parties affected.
178
How do externalities cause market failure?
Externalities cause market failure if the price mechanism does not take account of the social costs and benefits of production and consumption.
179
What are marginal private costs?
Cost to producing firm of producing an additional unit of output or costs to an individual of any economic action.
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What are marginal external cost?
Cost to third parties from the production of an additional unit of output.
181
What is marginal social cost?
Total cost to society of producing an extra unit of output.
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How do you calculate marginal social cost?
Marginal private cost + marginal external cost.
183
What are private costs?
The costs faced by the producer or consumer directly involved in a transaction.
184
What are external costs?
External costs occur when the activity of one agent has a negative effect on the wellbeing of a third party.
External costs damage third parties, but the consumer and producer don't have to pay, meaning that output will be too high. In the case of production externalities, the market price will therefore be too low.
185
How do you calculate the social cost?
The private cost + External cost
186
If negative externalities exist, do social costs exceed private costs?
Yes.
187
What is marginal private benefit?
Benefit to the consumer or a business of consuming / selling an additional unit of output.
188
What is marginal external benefit?
Benefits to third parties from the consumption of extra unit of output.
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What is marginal social benefit?
Total benefit to society from consuming an extra.
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How do you calculate marginal social benefit?
Marginal social benefit = Marginal private benefit + marginal external benefit.
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What are private benefits?
Are the benefits for producer and or consumer directly involved in an economic transaction.
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What are external benefits?
External benefits occur when the activity of one agent has a positive effect on the wellbeing of a third party.
193
How do you calculate social benefit?
Private benefit + External benefit
194
When positive externalities occur do social benefits exceed private benefit?
Yes
195
What are the private costs of a wind farm?
Cost of land + Planing permission
Cost of manufacturing the wind turbines
Installation costs
Labour costs
196
What are the external costs of wind farms?
Visual and noise pollution for some people
Installation and transport congestion
Falling property prices in affected areas
197
What are private benefits of a wind farm?
Cheaper electricity in the long run if economies of scale and new wind farm technology can be used.
Less impact on personal health than fossil fuels.
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What are external benefits of a wind farm?
Fewer harmful gases emitted
Employment created
Technology used can be exported overseas
Lower taxpayer subsidies required in the long run.
199
What are examples of negative externalities from production?
Air pollution from factories
Pollution from fertilizers
Industrial waste
Noise pollution
Collapsing fish stocks
Methane emissions.
200
What are examples of negative externalities from consumption?
Particulates from vehicle pollution
Household waste
Noise pollution from neighbours
Air pollution from smokers
Traffic congestion
Impact of addiction on families
Litter from tourists
Spillover costs from rising levels of obesity
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What is the social optimum output level?
Where Marginal social benefit is equal to Marginal social cost.
202
What are examples of positive externalities from consumption?
Health programmes
Early years education
Subsidised bike schemes in urban areas
Public libraries / community spaces
Museums and Galleries
Free school meals / nutritional advice.
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What are examples of positive externalities from production?
Open source software made freely available to users
Positive spillover effects from research and development.
204
What are some examples of interventions to address the issue of pollution from plastic?
Banning microbeads from consumer products
Bans on plastic cotton buds and other products
Plastic bag charge / tax to reduce single use bags
Encourage businesses to develop recyclable polymers
Provide free drinking water in cafes / restaurants / public places
Refundable deposit schemes on plastic bottles
205
What are the externalities in transport?
Congestion externalities from vehicles
Noise and air pollution from aircraft
Damage to sea bed from freight containers
Expansion of electric car ownership and use
Growth of car sharing apps reduce single car usage
Investment in light rail infrastructure.
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What are the private costs of a cross rail?
Construction costs
Operating costs
Cost of capital (interest paid on loans)
Potential health and safety costs / insurance liability
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What are the private benefits of a cross rail?
Lower transport costs for businesses
Time savings for travelers and businesses
Potential innovation spill-overs and export potential in and around London / South East
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What are the External costs of a cross rail?
Externalities from the construction project
Landscape issues
Increased noise and congestion in and around new stations
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What are the External benefits of a cross rail?
Regeneration in deprived communities
Potential re-skilling of the workforce employed
Lower CO2 and other emissions.
210
What are public goods?
Pubic goods are non-rival and non-excludable, usually provided collectively by the state.
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What does non-rival mean?
Consumption by one person does not reduce the supply available for others
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What does not excludable mean?
Public goods are non-excludable meaning that the benefits derived from them cannot be confined solely to those who paid for it. Non payers can enjoy the benefit of consumption at no financial cost to themselves.
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What is a Quasi-public good?
Quasi public goods are semi-non rival and semi-non-excludable goods.
A quasi-public good is a near public good. It has some of the characteristics of a public good.
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What is an example of a quasi public good?
Crowded beaches
Toll roads and bridges
215
What are private goods?
Private goods are excludable, rival in consumption and rejectable
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Why are examples of private goods?
Private gym
Exclusive clubs
Tickets to an event
Meals in a restaurant
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What is the free rider problem?
This occurs when people can benefit from a good/service without paying anything towards it.
It also occurs, if people can get away with making only a token contribution
If enough people can enjoy a good without paying for the cost then there is a danger that, in a free market, the good will be under-provided or not provided at all.
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Why are pure public goods not normally provided by the private sector?
Pure public goods are not normally provided by the private sector because they would be unable to supply them for a profit.
219
What is the case for the state providing public goods?
| There are 4 reasons name at least 3
The non rival nature of consumption provides a strong case for the government rather to provide and pay for public goods
State provision may help to prevent under-provision and under consumption of public goods so that social welfare is improved.
If the government provides public goods they may be able to do so more efficiently because of economies of scale
Providing essential public goods helps affordability and access to important services for lower income households.
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What is the case against the state provision of public goods?
If the government becomes a monopoly provider, there is a danger of lack of productive efficiency arising from a lack of competition.
In some cases the state will fund and the private sector provides public goods e.g. using public private partnerships.
221
What is a common pool resource?
When no-one owns a resource it may get over-used for example fish stocks and deforestation.
People use and benefit from a common pool resource such as grazing land without regard to the effects on others.
Over-use of a renewable resource can lead to a long term decline in maximum sustainable yield.
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What is a merit good?
Merit goods are good and services the government feels people under-consume and might be subsidised or made free.
Merit goods can be rival, excludable and rejectable.
It is a good that society values and judges that people should have regardless of their ability to pay.
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Who provides merit goods?
Both the state and the private sector provide merit goods.
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Why may individuals not purchase merit goods even though they provide private benefits of their consumption?
With merit goods individuals may not act in their own interest because of imperfect information.
They do not fully understand the private benefits of their consumption.
225
What does consumption of merit goods generate?
Consumption of merit goods generates positive externalities where the social benefit exceeds the private benefit.
226
What are de-merit goods?
A product which generates negative externalities in consumption.
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What are the characteristics of a de-merit goods?
A good which social optimum level of consumption is less than the private level of consumption
A good which society judges is undesirable and whose consumption should be restricted- social benefit is less than the private benefit of consumption.
Consumers may be unaware of the negative externalities that these goods create - they have imperfect information.
228
What are the private costs of a E-cigaretette?
Cost of starter e-cig packs
Cost of liquid-nicotine cartridges
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What are the External costs of E-cigarette consumption?
Vapor from e-cigs is dangerous
Gateway for young people to smoke
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What are the private benefits of E-Cigarette Consumption?
Utility from a nicotine hit
Less social isolation
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What are the External Benefits of E-cigarette consumption?
E-cigarettes help smokers quit
Reduced health costs to society
232
Are E-Cigarettes a demerit good?
Think about the question using previous knowledge.
233
How does monopoly power lead to market failure?
Monopoly make higher profits at the expense of a loss of allocative efficiency.
The monopolist will seek to extract a price from consumers above the cost of resources used in making the product.
Higher prices mean that consumers' needs and wants are not being satisfied, as the product is being under-consumed.
Higher prices cause a loss of consumer surplus and welfare and will disproportionately affect lower income families.
234
What are the potential benefits of having a monopoly in power?
Profits can be used to fund innovation with important spillover benefits. This can lead to gains in dynamic efficiency.
Monopoly producers may achieve economies of scale- leading to lower average costs
A firm may enjoy domestic monopoly power, but also face significant competition from overseas.
Monopoly producers may be subject to price regulation which limits their long profitability allowing other firms to be able to compete.
235
What is government intervention?
Government intervention is when the state gets involved in markets and takes action to try to correct market failure, improve economic efficiency and change the distribution of income and wealth.
236
How can the government intervene?
The government can use regulations, taxes, subsidies, maximum and minimum prices to change price signals , better information or direct provision to change resource allocation.
237
What are indirect taxes?
An indirect tax is a tax that increases the supply costs faced by producers.
The amount of tax is shown by the vertical distance between the two supply curves.
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Why may indirect taxes be ineffective?
The impact of tax depends on upon the price elasticity of demand.
An indirect has no effect on price if demand is perfectly elastic.
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What are examples of indirect taxes?
```
Value added tax
Plastic bag charge
Fuel duties
Alcohol duties
Tobacco Duties
Sugar tax
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If the co-efficient of price elasticity of demand is greater than 1, then who absorbs the burden of an indirect tax?
The supplier will absorb the burden of indirect tax as the good is elastic this means that its more likely to be in a competitive market and as a result if they passed on the cost they would loss more demand than the increase in price.
241
If the co-efficient of price elasticity of demand is smaller than one, who absorbs the burden of an indirect tax?
Most of the indirect tax can be passed on to the final consumer, as there isn't many alternatives meaning if there is an increase in price consumers are unlikely to switch custom.
242
If price elasticity of demand is perfectly inelastic then who absorbs the burden of indirect tax?
All of the tax is paid by the consumer.
243
If Price elasticity of demand is perfectly elastic supply who absorbs the burden of indirect?
All of the tax is paid by the consumer.
244
What is an Ad valorem tax?
An ad valorem tax imposes a tax on a good or asset, depending on its value. The tax is usually expressed as a percentage. For example, in the UK, VAT is charged at 20% on most goods offered for sale.
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What does Ad valorem mean?
Ad valorem means – according to value. Thus it is a tax which is flexible and depends on the value of the asset or the price of the good. In this regard, it is likely to be more progressive than a specific tax. If your house is worth more, you will pay a higher amount of stamp duty. Therefore, the wealthy tend to pay more stamp duty than those on a low income.
246
What is the effect of an ad valorem tax?
The effect of an ad valorem tax is to cause pivotal shift in the supply curve.
This is because the tax is a percentage of the unit cost of supplying the good or service.
So something that could be supplied for a cost of £50 will now cost £60 when VAT of 20% is applied.
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What are the advantages of using indirect costs?
It is easier for firms to pay indirect taxes than consumers
Indirect taxes can be used to overcome market failure and make people pay the full social cost. For example, excise duties like cigarette and tobacco tax can internalise the external cost of smoking and drinking alcohol.
248
What are the disadvantages of using indirect costs?
Regressive nature of indirect taxes. Indirect taxes tend to take a higher percentage of income from those on low income
Can encourage tax evasion. Cigarette taxes can encourage a black market in bootleg cigarettes.
249
Evaluate the effects of indirect taxes?
The effect of a tax depends in part of price elasticity of demand.
Does an indirect tax generate substantial revenue?
How is the tax revenue used?
There might be a possible loss of jobs and or less capital investment
An indirect could possibly negatively affect competitiveness and trade.
Indirect taxes can have a regressive effect on lower income families.
250
What are the benefits of implementing a sugar tax?
External costs of sugary drinks are a market failure, so reducing the demand helps reduce the failure.
Information failures- people under-estimate long term costs
Sugar tax raises revenue for other projects
Tax encourages producers to re-formulate drinks to make them healthier.
251
What are the drawbacks of implementing a sugar tax?
Might be regressive on lower income families
Other policies might be more effective in cutting consumption
People might simply switch to other sugary products
Risk of lost jobs in pubs and shops that rely on drink sales.
252
What is a subsidy?
A subsidy is any form of government support -financial or otherwise- offered to producers and occasionally consumers.
253
What does a subsidy do?
A subsidy leads to an increase in the output sold of a good.
It also will increase producer and consumer surplus.
254
Who pays for subsidies?
The government
255
What are examples of subsidies?
Bio fuel subsides for farmers
Solar panels
Apprenticeship schemes
Aid to businesses making losses
Subsidies for wind farm investment
Food / fuel subsides for consumers
Child care for working families
Subsides to the rail industry.
256
How does a subsidy paid to a produce affect the supply curve?
A subsidy paid to producers causes an outward shift of the supply curve leading to a lower equilibrium price and an increase in the quantity traded.
257
How do you calculate the total spending on a subsidy?
The subsidy per unit multiplied by output.
258
What are the main justifications for a subsidy?
There is 8, but they are quite weird so just name like 3/4
Helping poorer families with food and child care costs
Encourage output and investment in fledgling sectors
Protect jobs in loss-making industries hit by recession
Make some health care treatments more affordable
Reduce the cost of training and employing workers
Achieve a more equitable distribution of income
Reduce some of the external costs of transport
Encourage arts and other cultural services
259
What are the disadvantages of subsidies?
It would be expensive, the government would have to raise a significant amount of tax revenue.
It can be argued that when the government subsidies firms it reduces incentives for firms to cut costs.
Once a pressure group starts receiving a subsidy it becomes very difficult politically to remove that subsidy, even though there is a net welfare loss.
260
What points should the government consider before issue subsidies?
Will they achieve the desired stimulus to demand / consumption
Subsidies for investment and research can bring positive spillovers, but firms may become dependent on state aid / financial assistance.
Will the subsidy create significant tax revenue or will create an extra burden for tax payers.
Does the subsidy actually help to correct a market failure?
Do more people find work with child care subsidies?
261
How does a subsidy affect a good with inelastic demand?
A subsidy has a large effect on the equilibrium price.
262
How does a subsidy affect a good with elastic demand?
A subsidy has a strong effect on the equilibrium quantity demanded.
263
What are maximum prices?
A maximum price occurs when a government sets a legal limit on the price of a good or service – with the aim of reducing prices below the market equilibrium price. For example, the government may set a maximum price of bread of £1 – or a maximum price of a weekly rent of £150.
264
What happens if the government set a maximum price above the equilibrium price?
It will have no effect
265
What happens if the government set a maximum price below the equilibrium price?
It will cause a shortage – demand will be greater than supply.
266
What are the reasons for maximum prices?
If the good is essential for daily living, without a maximum price some people may be unable afford the good. By reducing the price it can help reduce relative poverty.
If there is monopoly exploitation and a firm is charging high prices than the marginal cost of production and higher than in a competitive market. A maximum price can be a way of reducing monopoly prices and also increasing allocative efficiency.
If the good is has inelastic supply then a maximum price will not reduce the supply of the good.
Resource allocation, if rent was very high it may cause investors to concentrate on building new houses and ignoring other aspects of the economy. This can leave the house market vulnerable to correction in prices. A maximum price limits the resources flowing to houses and enables a more balanced economy.
267
What are some examples of maximum prices?
Maximum prices for train tickets
Maximum price for rent
Maximum price for food.
268
What are the potential problems with maximum prices?
Shortage, a maximum price distorts the market and leads to disequilibrium. D is greater than S and many consumers won't be able to get the product at all. Cheap rents are no good if it leaves many people homeless.
Encourages black market because of the shortage it creates the incentive to develop a place where people illegally trade the good.
It can massive queues of people trying to get the good before it sells out.
The market will become less profitable for firms in the long term. This may lead to less investment and also decrease supply in the long term
269
What is a minimum price?
A minimum price is a price floor - suppliers cannot sell the product legally at a lower price.
To be effective, a minimum price must be set above the normal free market equilibrium price
270
Is minimum price only for when suppliers sell to individuals in the market?
No, in some cases a minimum price is a guaranteed price at which the government or purchasing agency will buy products of farmers or other suppliers
271
What are the arguments for a minimum alcohol price?
Reduces some externalities from pre-loading of alcohol at home.
Pubs may benefit from higher minimum prices in supermarkets
Can target cheaper, high strength drinks used by younger drinkers
272
What are the arguments against a minimum price?
Minimum price is a tax on responsible drinkers- inequitable.
Producers can agree voluntary policies on alcohol price / strength
Better to raise alcohol which will raise extra tax revenues.
273
What is information failure?
Information failure is a type of market failure where individuals or firms have a lack of information about economic decisions.
274
What are ways that are in place to try and overcome information failure?
Compulsory labeling on products (cigarettes)
Improved nutritional information on food and drinks
Campaigns to raise awareness of risks of drink-driving
Gambling addiction awareness campaign
Performance league tables for schools and colleges
Consumer protection laws
Guarantees for used products such as second hand cars
Industry standards/certification e.g. in building industry
Requirement for vehicles to have regular MOT tests.
275
What is Carbon trading scheme?
Carbon Trading is a scheme where firms (or countries) buy and sell carbon permits as part of a programme to reduce carbon emissions.
Usually firms are given a certain quote to pollute a certain amount. If they wish to pollute more than their allowance then they have to buy more permits.
If they pollute less than their quota they can sell their spare permits on the market. Thus there is an incentive to reduce pollution and find the most efficient way of dealing with pollution.
276
What is Carbon tax?
A carbon tax is a tax on the consumption or production of goods and services, which cause carbon emissions.
It is a policy designed to make the polluter pay for the externalities created.
277
What is the impact in economic theory of carbon tax?
A tax on carbon increases the private cost of emitting carbon in theory this will cause output to contract towards social optimum.
It will also raise tax revenues that might be used by the government to fund other projects or use as rebate to those affected.
278
What are examples of regulations to correct externalities?
Smoking bans
Minimum age laws
Maximum Co2 Emissions
Recycling directives
Speed limits
Fishing quotas
279
What is the case for regulating activities that are causing negative externalities?
Regulations act as a spur for business innovation e.g. to cut the level of carbon emissions
Regulations may be more effective if demand is unresponsive to price changes
Regulations can be gradually toughened each year. This will help stimulate capital investment.
280
What are the disadvantages of adding extra regulation of industries that are causing negative externalities?
High cost of enforcement / administration
Regulations can lead to unintended consequences / government failure
The cost of meeting regulations can discourage small businesses and also lead to less competition in markets.
281
What is Government failure?
This occurs when government intervention in the economy causes an inefficient allocation of resources and a decline in economic welfare.
282
What are the reasons for government failure?
Lack of incentives, in the public sector there is limited or no profit motive. Because workers and managers lack incentives to improve services and cut costs it can lead to inefficiency.
Poor information, politicians may have poor information about the type of service to provide.
Decisions made for short-term political gain rather than sound economics. Politicians may take the short-term view rather than considering the long term effects.
No consistency, change of government often leads to change of approach and new political initiatives.
Moral Hazard
Regulatory capture, when government agencies become too friendly with business groups they are trying to regulate
283
What are examples of government failure that have happened in real life?
Tax on rubbish leading to fly-tipping
Prohibition strengthened the mafia, when the government banned alcohol in the US it caused the mafia to supply alcohol leading to a rise in organised crime
284
What are things the government can try and do to overcome government failure?
Give performance targets/ profit incentives
Competitive tendering- where public sector bodies face competition from the private sector for the right to run a public service
Employing outside private sector consultants to make decisions about how to cut costs
Delegating certain decisions to non-political bodies
285
Evaluation of government failure. READ NO QUESTION
It should be remembered many public services are not subject to the same profit goals. It is difficult to give a profit motive in health or education because the goal is not profit but the quality of service.
Also, although government failure is a real issue, it is often much less than the problems arising from market failure.
Just because government intervention may be inefficient doesn't mean we should not try to tackle problems of pollution e.g
286
What are unintended consequences?
These are outcomes that are not the ones foreseen and intended by a purposeful action.
287
When can unintended consequences occur?
In government intervention in markets there is usually at least one and often many unintended consequences partly because economics is a social science and we cannot predict accurately how producer and consumers will react.
288
What are examples of unintended consequences?
Minimum wage leads to a reduction in staff non-wage benefits.
Smoking ban encouraged widespread use of patio heaters
Tariffs on steel causes damages to car makers
Price caps on texts leads to higher prices for mobile handsets
Targets for treating patients might lead to a lower quality of care.
289
What are the advantages of implementing pollution taxes?
Pollution tax internalizes the externality and makes the polluter pay
Tax uses the price mechanism to change incentives and choice
Raises extra tax revenue which might be used for social benefit.
290
What are the disadvantages of implementing pollution taxes?
Low price elasticity of demand- the tax may not change behaviour, there might be more effective alternative policies
Risk of tax evasion and avoidance
May hit lower income families most and cause some social unrest -e.g. taxes on cigarettes are seen as regressive in their impact.
291
What are different ways the government could intervene in the cigarette market?
Smoking ans in public places
Higher taxes
Banning point of sale displays
Ban on cigarette advertising and sponsorship
Standaridised packaging
Prohibition of smoking in cars carrying children
Laws to cut levels of nicotine in cigarettes
NHS funding to help smokers quit.
292
What are the arguments against increasing tax on cigarettes?
Smokers already pay a lot of tax £7 billion. Also, they do not cost the government much because they die early and save pension and health care spending
Demand is very inelastic and therefore increasing price will only cause a small fall in demand
Higher taxes will increase inequality because the poor will pay a higher % of tax than the rich who are more likely to have given up (However the government can use other taxes to reduce inequality if it is concerned about this)
Higher taxes will encourage people to smuggle illegal cigarettes and avoid paying the tax.
293
What intervention / strategies area there to tackle road congestion in urban areas?
Bus priority measures
Road pricing
Parking schemes
Cycling and walking infrastructure
Street- running trams
Innovative traffic management technologies
294
What intervention / strategies are there to encourage an expansion in the supply side capacity of the UK renewable energy industry?
Minimum carbon price floor for emissions trading
Feed in tariff schemes for solar and biomass
Regulating emissions limits for power plants
Relaxation of planning restrictions for onshore wind farms
Interest free loans for purchase of renewable energy equipment.
295
What market failure is there in the housing market?
Information gaps between buyer and seller
Empty housing and homelessness
Inequalities of wealth (Widening property divide)
Externaltities from building homes
Labour immobility due to high house prices and rents
Chronic under-supply of homes creating excess demand.
296
When do markets fail?
When they don't achieve a socially efficient / equitable outcome.
297
What policies/ways can be used to increase housing supply?
End the affordable housing requirement for new build estates
Targeted government funding of skills training in the building industry
Government provides direct funding to build a lot more social housing / affordable homes
Building firms given tax incentives to build new houses
Simplifying the housing planning process
Loans to building companies backed by the government
298
How would ending the affordable housing requirement for new build estates increase house supply?
Builders can charge higher average prices creating a stronger profit motive
299
Evaluate ending the affordable housing requirement for new build estates to increase housing supply?
Big problem is affordability more luxury homes built won't help millions of people hoping to buy.
300
How would targeted government funding of skills training in the building industry increase housing supply?
Expands the human capital available to the construction sector.
301
Evaluate targeted government funding of skills training in the building industry to increase supply?
Will take several years to have a significant effect (long time lags)
302
How would government providing direct funding to build a lot more social housing / affordable homes increase house supply?
The funding would most likely go to local councils who would build more affordable homes.
303
Evaluate the government providing direct funding to build a lot more social housing / affordable homes to increase house supply?
More council houses might cause average house prices to fall - negative wealth effect.
304
How would building firms given tax incentives to build new houses increase house supply?
Increases profitability from construction which would stimulate investment.
305
Evaluate building firms given tax incentives to build new houses to increase house supply?
Might be more effective to tax undeveloped land i.e. reduce land banks
Will builders construct enough affordable homes
306
How would simplifying the housing planning process increase house supply?
Shortens the time frame for building therefore increases price elasticity of supply.
307
Evaluate simplifying the house planning process in increasing house supply?
Lax planning might cause a worsening of the quality of new housing estates.
308
How would giving loans to building companies backed by the government increase housing supply?
A subsidy to encourage housing investment when the banks are reluctant to lend.
309
Evaluate giving loans to building companies backed by the government?
Likely to be an expensive option that is only a short term policy it doesn't address long term issues.
