Other economic policy objectives

Question 1

Governments try to Distribute Income more Equally

Answer 1

1. In any economy, there is a wide range of earnings. Earnings depend on a number of things, including:
   - Labour skill, training and education raises a person’s labour productivity and, usually, their pay rate.
   - Market forces in the labour market - shortages or surpluses of various kinds of labour influence the wage rate, e.g. a shortage of electricians may increase an electricians wage, a surplus may reduce it.
   - Geography, in less prosperous areas of the country, earnings are lower.
   - Level of responsibility, in general, the greater the authority and responsiblity of a job, then the higher the pay.
2. Government’s may want to distribute income more equally to increase overall welfare or reduce poverty so there’s a better overall standard of living. Governments may also consider too much inequality in society to be unfair.
3. The redistribution of income can also benefit the economy. High earners tend to save more of their income and low earners tend to spend most or all of it - so income redistribution will increase overall consumer spending, and raise aggregate demand, output and employment.
4. The government can redistribute income by reducing the net income of high earners and increasing the net income of ppl with no or low incomes - this can be done by:
   - tax -esp income tax
   - welfare payments -paid to those on no, or low, incomes.
5. However, redistributing income carries a risk, as some income differences are beneficial:
   - The reward of higher wages acts as an incentive to hard work, training and risk-taking - so too little inequality would mean these incentives are lost and ppl will not work as hard.
   - wealth creation can produce employment and income opportunities for others.
   - Spending by ppl with high incomes creates jobs for others.

Question 2

Governments try to protect the environment

Answer 2

Environmental protection has become more important to governments. Two of the main factors governments recognise is:

1. DAMAGE/POLLUTION TO THE ENVIRONMENT
   - The role of the government is to:
   a) identify environmental damage caused by firms/individuals, e.g. carbon emissions from factories or cars.
   b) measure the cost of this damage
   c) use financial penalties or certain restrictions or bans to reduce environmental damage and provide an incentive for firms/ individuals to decrease the damage they cause. These might include:
   - Non-market policies: outright bans or limits on polluting practices. e.g. banning cars which produce unacceptable levels of carbon dioxide.
   - Market policies - influencing the cost of polluting and therefore changing the behaviour of firms/ individuals. E.g. tradable pollution permits - these put at restriction on the amount of pollution a firms can produce, but firms are allowed to buy/sell permits between themselves.
2. DEPLETION OF FINITE RESOURCES CAUSED BY CONTINUOUS ECONOMIC GROWTH
3. Some governments feel its necessary to use non-renewable resources, such as oil and copper, more wisely to either avoid a future without them, or just to make them last for longer.
4. e.g. governments might want to encourage the development and use of non-renewable energy resources, so that non-renewable resources such as coal and oil can either be replaced or will last for longer. They might try to achieve this by giving financial incentives to firms to develop or use renewable energy.

Question 3

Governments try to ensure Economic stability

Answer 3

1. Economic growth tends to fluctuate up and down. This involves periods of high growth (booms) followed by periods of low or even negative growth (slumps)
2. If the fluctuations are frequent or particularly big then there will be economic instability. This will:
   - Discourage firms from planning any long-term investment, which harms the economy in the long run.
   - Discourage foreign firms from making investments, which means that the country misses out on extra money being brought into the economy and the creation of new jobs.
3. Governments try to reduce the fluctuations in growth and avoid both slumps and booms. They try to do this through a combination of fiscal and monetary policies.
4. Governments also try to avoid volatility in the rate of inflation, unemployment and exchange rates - big fluctuations in any of these will also discourage investment and make it hard for governments and firms to plan for the future.
5. Economic stability will also depend on how politically stable a country is. Then the country’s economy will be unstable too.

Question 4

Governments try to improve Productivity

Answer 4

• Improving a country’s productivity will help future economic growth.
• Governments don’t have much control over the productivity of private companies they might offer financial help to firms so they can buy more efficient equipment, or they could introduce regulations to increase competition between firms so that they’re forced to improve their productivity
• In the public sector, the government has a more direct control over productivity. E.g. UK government could improve the NHS’s productivity by introducing procedures that might be cheaper and/or more effective.
• Governments can also improve the productivity of society in general. E.g. the government could increase spending on schools and improve education, which will help to develop a better trained and more productive labour force.