Paper 3 - policies Flashcards
Indirect taxes
Pro: tax revenue
Con: Regressive impact
Carbon taxes
Pro: tax revenue
Con: Firms may move to a country with low carbon tax → no net emissions cut globally + less investment in country + unemployment
Subsidies
Pro: Lower prices for consumers
Con: Opportunity cost/ budget strain
Education and awareness
Pro: lifelong behavioural changes
Con: Opportunity cost because it must be paired up with subsidy/provision
Price ceiling
Pro: Increases affordability to low income consumers
Con: Shortage in quality and quantity + emergence of black markets.
Price floor
Pro: Protects important industries
Con: Surplus + government cost
Direct provision of goods
Pro: Equal access
Con: inefficient with low innovation
Progressive taxes
Pro: act as automatic stabilizers. increase during booms to lower inflation and decrease during recessions to maintain consumption.
Con: Tax evasion - brain drain where skilled workers will move out of country.
Contractionary monetary policy
Con: Risks decline of GDP growth
Expansionary fiscal policy
Pros:
Tax Cuts: Increases disposable income for households and businesses, encouraging spending and investment.
Keynesian multiplier
Cons: Crowding out
Depreciation of currency
Pro: boost exports + reduce imports
Con: Inflation + capital flight
How to depreciate currency
Lowering interest rates (reducing capital inflows and weakening the currency).
Directly selling the domestic currency in foreign exchange markets.
Implementing quantitative easing (increasing money supply, which can weaken the currency).
Managed exchange rate system
Pro: Stability - prevents extreme fluctuations > business certainty.
Con: Requires Large Reserves - not easy for poor countries that do not trade as much.
Government ownership
Pro: Socially optimum output rather than at a profit maximizing point
Con: Inefficiency + slow decesion making due to bureaucracy.
