micro evaluations

Question 1

evaluation on the effect of a tax, subsidy, maximum price or minimum price -
or for price elasticity of supply and cross-price elasticities of demand

Answer 1

the effect of a tax depends on the price elasticity of demand (PED) for the good being taxed. if the demand is price-inelastic, then the tax will lead only to a small fall in quantity and a larger rise in price, which would mean there’s little effect on consumers’ health. for example, sugar can be addictive and is likely to have an inelastic PED, so the quantity of sugar consumed falls very little. therefore the tax is likely to be ineffective at improving consumer health

Question 2

evaluation for market structure essays

Answer 2

however, this depends on the objectives of the monopoly firm. instead of maximising profits as traditionally assumed, if the monopoly firm is looking to maximise social welfare or has a satisficing objective looking to achieve an acceptable level of profit, the price set may be lower than p and so the degree of social welfare loss may be reduced. for example, if firms just maximise profits then workers may feel unfairly compensated and consumers ripped off, which could reflect badly on the firm’s image and affect future sales

OR

these effects depend on how the firm allocates its profits. if profits go towards dividends for shareholders instead of investment, this may reduce the extent of dynamic efficiency benefits. for example, apple allocates 25% of its profits to dividends, which is quite a high share, which reduces the amount available to invest in quality improvement or cost reduction. so consumers may benefit from dynamic efficiency to some extent

Question 3

evaluation in response to economies of scale - can also be used in most market structure essays

Answer 3

so, this depends on the size of the firm. if the firm grows too large there could be diseconomies of scale in some industries. for example, larger output could mean more difficulty monitoring employees, communicating within a firm or coordinating between different workers within the firm. in this case having one large firm could be undesirable, with higher long-run average costs. this could mean the quality of service is worse, and/or higher costs could be passed on to consumers in the form of higher prices

Question 4

evaluation for externality arguments leading to intervention (e.g. taxes, subsidies, max/min prices, regulations, state provision)

Answer 4

however, this depends on the government identifying the socially optimal level of healthcare correctly. in practice, it’s difficult to estimate the size of externalities. the government uses cost-benefit analysis to do this, including assumptions on the size of externalities and the value of productivity and human life, which may be subjective. so state provision may underestimate the socially optimal level of healthcare, so a welfare loss from the externality still remains. this is government failure – when government intervention leads to a misallocation of resources

Question 5

evaluation of minimum wage, trade unions and also business objectives (whether firms need to cater more to worker objectives by satisficing)

Answer 5

this depends on the density of trade unions. while 48.6% of public sector workers are in trade unions, only 12% of private sector workers are in trade unions in the UK. so a trade union in the private sector will have less bargaining power than on average. for example, a strike in the private sector would not lead to many workers going on strike and may be less effective. so workers cannot raise their wages or improve working conditions as much through trade union membership in some sectors

Question 6

evaluation of level of a policy can be used with any policy, including taxes, subsidies, max/min prices, regulations

Answer 6

this depends on the level of the price cap, if it’s set too high, then the maximum price has little effect on preventing abuse of market power. this could occur because of regulatory capture, where regulators are incentivised to water down regulation because of a promise of future work with the regulator. price caps can also be effective in controlling market power, if set correctly

Question 7

evaluation for market structures such as monopolistic competition and perfect competition, where the market changes from the short run to the long run

Answer 7

this depends on the time frame considered. in the short run, the PED for sugar may be inelastic due to addictive property, but the PED could change over time, as more substitutes may enter the market, where the PED would become more elastic and the quantity fall would be greater for sugary drinks. this improves the effect of the tax consumers’ health and reduces external harm. so taxes may be more beneficial in the long run than in the short run