PAPER 3 Flashcards
2023
Evaluate Micro + Macro policies that could be used to reduce inequality in the Uk
A01
DEFINITION
Economic inequality is the unequal distribution of income and opportunity between different groups in society
- The government can provide grants or subsidies to attract individual firms to create jobs in deprived areas.
+ subsidy diagram
- This increases the demand for labour and helps close the productivity gap in deprived areas. This helps to increase employment levels and relative poverty, as workers now have more disposable income.
- However, there is an opportunity cost for the government, as this grant/subsidy can be better spent to fund public services such as the NHS and education.
- Subsidies shift the supply curve to the right, which reduces the prices of goods and services, this helps increase the purchasing power of low-income groups as they are now able to afford more than before.
- Maximum prices on essential goods such as fuel and food may be a beneficial policy to implement to help reduce inequality in the UK.
= Maximum price diagram
- A maximum price is a fixed price (price ceiling ) enacted by the gov usually set below the equilibrium market price. An MP to encourage/ increase the affordability of necessity goods and services. MP causes prices to fall from P1 to pMAX leading to an expansion in demand (Q1 TO QD) and a contraction of supply (Q1 TO QS). Moreover, this excess demand creates a shortage, causing consumers to be unable to access it anymore. Not all consumers are able to see the same benefits which may lead to waiting lists, causing them to smuggle or source from the black market, these unintended consequences are undesirable and may require government intervention to intervene to correct it but with this comes a huge opportunity cost. The outweighs the gain from the MP.
- Raising government spending to improve the standards of education and training in order to increase the human capital of the unemployed, giving them more transferable skills which in turn increases the labour force’s disposable income can reduce inequality in the Uk.
However, this policy is subject to a very long time lag as it takes many years to obtain the necessary skills to become qualified in certain professions. In addition to this, it depends on the willingness of ppl to be educated, as ppl may ignore or be unaware of the positive externalities due to imperfect information, making the irrational decision of not fully utilising the education that is offered to them. Furthermore, this policy requires a high amount of expenditure from the gov in the short term in the hope that the current and future generations of the UK will have no or minimal inequality in the long term.
- Implementing progressive taxes (tax rate increases as individual earn higher incomes) on high earners
so the burden of paying for gov services and infrastructure doesn’t fall disproportionately on those earning lower income, this helps create equity in the tax system.
However, the main disadvantage of a progressive tax is that it may disincentivise ppl from working hard and innovating in the economy. A tax on consumers would decrease AD and place inflationary pressure on goods and services, this counteracts the original policy.
- Conclusion for Evaluate Micro + Macro policies that could be used to reduce inequality in the UK
It is therefore logical to conclude that taxation alone does not reduce income equality and that the best option for doing so may be a combination of policies. It depends very much on what is causing the income inequality in society. there are various factors which may affect it such as low wages, which raising the national minimum wage or lowering taxes for those on lower income are ideal solutions. However, if income inequality has been caused by a lack of education it is logical for the government to increase its expenditure on education and training to limit the inequality in the UK.
micro and macro effects of Tax Cuts in the UK
1. A tax cut represents a decrease in the amount of money taken from taxpayers to go towards government revenue. A reduction in income tax means that households are taxing less of their income, meaning they will have higher disposable income to spend.
- cancelled out by high interest rates
- This would increase their purchasing power and allow them to afford to purchase more goods and services, therefore improving their quality of life and economic welfare. However, this will depend on their Income elasticity of demand and marginal propensity to consume, as some people would choose to save instead of spending.
Nevertheless, However, even if the tax cut makes a significant impact this can be cancelled out by high interest rates. Higher rates will increase the incentive for foreigners to hold their money in British banks as they can see a high rate of return.
- This can be shown in an AD/AS diagram with a rightward shift of the AD curve.
The effect of this on the economy would be a rise in real GDP from Y1 to Y2 and a rise in the general price level from P1 to P2. This shows that a rise in AD leads to rising real GDP so increased output for an economy due to higher consumption, meaning greater levels of output are needed to match this rise in demand. It will also lead to inflation, due to demand pull inflationary effects. This will conflict with the macroeconomic objective of having a target of 2% low inflation. This will cause the cost of living to increase, and can therefore have negative effects on people’s quality of life. The higher prices in the UK will also mean exports will decrease and imports will rise, which will damage the country’s current account, causing a deficit.
- Reducing corporation tax for firms will lead to higher retained profits and investment.
- There may be negative externalities of this increased production. Pollution may increase, contributing to global warming.
This will encourage foreign firms to invest in the UK causing increased economic growth. In contrast, there is no guarantee that a lower tax rate will encourage firms to invest as it depends on expectations of future growth. Due to higher profits, businesses are able to offer higher wages to their workers and hire more workers, this reduces relative poverty in the UK and helps the UK achieve its macroeconomic objective of low employment, and also reduces the amount of unemployment benefits, such as job seekers allowance, that the government has to give. Higher levels of productivity also result inhigher rates of economic growth, since the rate of production in the economy increases, and as a result, GDP increases. This policy is also beneficial for smaller firms as lower production costs for smaller firms help them to reduce their prices and become more competitive in the UK and internationally. Moreover, this makes UK domestic goods and services cheaper, increasing its demand and export revenue to improve the current account deficit.
There may be negative externalities of this increased production. Pollution may increase, contributing to global warming. This can increase natural disasters in the future, such as flooding and heat strokes. This may be expensive for the country to fix as the damage may be too high. Also more non-renewable resources will be used in the production, limiting the future generations access to these resources. Overall, these will cause Marginal social costs to be higher than the marginal social benefit.
- However, reduced tax revenues make it difficult to supply and maintain high-quality public services such as education and the NHS, this increases the burden to provide certain treatments due to longer waiting times.
This change in taxation may be temporary, taxation may rise again because firms are becoming more profitable and higher tax revenues are needed to fund public goods. Also, the magnitude of the tax cut is necessary to take into account because if the tax cut is minimal then it makes a minimal impact on the economy and consumer welfare. However, lower tax rates reduce the incentive for firms to use tax avoidance schemes.
One benefit of cutting taxes as opposed to raising taxes is that the Laffer curve shows raising taxes does not always raise tax revenues.
It shows that beyond a certain point, tax revenues will not rise when the tax cut rises. A rise in taxes may disincentivise working or high productivity as people have less income to spend. As a result, lower productivity causes costs and prices to rise leading to fall in AD, in the long term this will reduce tax revenues.
conclusion for - micro and macro effects of Tax Cuts in the UK
In conclusion, lower taxation will have positive microeconomic impacts on the producers and consumers, however, they will have the opposite effect on the government budget and environment. Therefore the government should be careful when changing tax rates, considering the magnitude of the change and the time which the tax change is imposed for, as is these are small changes, then the effects will be minimal.
Micro and macro effects of falling house prices
1. A major advantage of falling house prices creates an opportunity for first-time buyers to purchase houses at a lower price.
Any drop in house prices helps to make homeownership more affordable and means that those for whom it was previously too expensive. Falling property values can signal a weakening housing market and dampen overall economic sentiment. This can affect investor confidence and business investment decisions, leading to a slowdown in economic growth due to delays in purchasing decisions. Conversely, a combination of high-interest rates and falling house prices tends to cause a fall in bank lending.
- Secondly, a slowdown in the housing market can have implications for the construction industry.
Falling house prices reduce the incentive to build new homes for construction companies as they will receive lower profits. This leads to a leftward shift for AD for new housing projects and renovations can lead to a decline in construction activity and GDP. This can result in reduced employment opportunities within the sector, affecting jobs and income for construction workers and related industries. This decrease in the supply of labour for construction workers causing a high unemployment rate can lead to lower household income, reducing demand for property thus leading to a further drop in property prices.
- Furthermore, falling house prices can affect government revenue and spending.
Lower property values can lead to reduced property tax revenues, which can impact government budgets and their ability to fund public goods such as education, the NHS and flood defence. In contrast, there are positive externalities of production of falling house prices. Decreased demand for houses lowers production therefore decreasing pollution and global warming. Also, non-renewable natural resources are in joint demand for houses this therefore lowers the magnitude of resource depletion.
