Roles of government in the modified market economy (ME15

Question 1

Public sector means

Answer 1

Government sector

Question 2

Public sector outlays

Answer 2

refer to the total expenditures made by the government at all levels (local, state, and federal) to fulfill its various functions and obligations.

Question 3

influence of keynesian theory on governments of industrial countries

Answer 3

• stated that government spending could accelerate economic activity and help to achieve full employment levels- stabilisation role of government

Question 4

how did covid 19 influence the involvement of public sector on economy?

Answer 4

significantly increased it.

Question 5

how did increased wealth of people influence want for government involvement?

Answer 5

Increased wants for infrastructure

Question 6

What is the main issue pushing for government involvement these days?

Answer 6

significant externalities relating to the environment

Question 7

What are some forms of government intervention?

Answer 7

1. Changing resource allocation through taxes:-

• Raising or lowering a tax on something changes the price charged for it in the market (more on this later).
• change the quantity of the good or service bought or sold
• thus changes how much of our scarce resources we allocate to the production of the good or service.
  -> taxes can discourage the production of goods with negative externalities – thus encouraging allocative efficiency.

2. Changing resource allocation through government spending in the private sector:-

• More government spending on a public good or a good with a positive externality will cause more resources to be allocated to such goods, thus encouraging economic efficiency.
• Government can give money to private individuals to produce such goods in the form of:-
• Funding;
• Grants;
• Subsidies;
• Cash payments.

3. Government provision of goods and services.
   Sometimes governments take the ‘direct route’ and produce the good or service themselves. This may be a public good, a good with a positive externality, or a ‘natural monopoly’ (to avoid the private sector exploiting the monopoly.

This type of government production has decreased (because of privatisation).

Question 8

What is a specifically reduced rate of tax called and what is its impact?

Answer 8

• tax concession
• attract resources towards specific sector

Question 9

Compare direct and indirect taxes.

Answer 9

Direct
- those paid by individuals and business firms the way they are levied- cannot be passed on
- personal income tax, company tax, capital gains tax

Indirect
- still levied onto individual and business but can be passed onto someone else
- attached to a good or service rather than to an individual or company
- gst: levied on seller but passed onto consumer in form of higher price

Question 10

Specific examples of using taxation to influence resource allocation to certain goods

Answer 10

• indirect taxes on items like tobacco and cigarettes
• ’’ on lead petrol in 1980s to encourage shift to modern vehicles that has less environmental consequences
• variable road pricing for less congestion at peak hours (charging higher road tolls

Question 11

specific examples of government spending to directly reallocate resources to particular sector of economy.

Answer 11

• funding for australian film production that otherwise wont be profitable
• grants for start up businesses that might lack finance
• subsidies for telecom companies to provide services to regional areas that otherwise wont make profit, venture capital investment
• cash payments to private employment search businesses to find jobs for the unemployed

Question 12

How did attitudes of government provision of goods and services change overtime? (provide specific examples)

Answer 12

• in the past, considered better able to provide important goods and services to a larger number of people at a lower price- often as monopolies- as government ensured no overpricing and exploitation of consumers
• in the late 20th century, attitudes shifted that they’re inefficient, as they increased costs for consumers as they do not have strong incentives to make a profit
• result in privatisation and reduction in direct involvement in provision of goods and services
• though exceptions include: nationalisation of European energy companies facing collapse after enormous increase in gas prices following russia’s invasion of ukraine

Question 13

Describe example of government intervention in nbn.

Answer 13

• went against trend of privatisation
• support: regional aus would never get fast broadband if it is a purely commercial model
• against: displaces possible private sector investment, should not support as it could become outdated
• great long term benefits: positive externalities
• still attract huge controversy

Question 14

describe government intervention for income inequality/

Answer 14

• taxation and social assistance benefits
• progressive tax system

Question 15

Tax base

Answer 15

the total value of all of the assets, income, and economic activity that can be taxed by a taxing authority, usually a government.
- 3 main bases for the imposition of taxes- income, wealth, consumption
- income forms main tax base in Australia

Question 16

ART

Answer 16

Average rate of tax
- proportion of total income earned that is paid in the form of tax

Question 17

MRT

Answer 17

Marginial rate of tax
- refers to the tax rate applied to the last portion of income earned by an individual or business

Question 18

What indicates whether the tax is a progressive, regressive, or proportional tax?

Answer 18

How the average rate of tax changes

Question 19

Progressive tax

Answer 19

• high income earners pay a greater proportion of their income as tax than low-income earners (ART rises as a person’s income rises)
• e.g. personal income tax in australia

Question 20

What is regressive tax? Provide an example.

Answer 20

• high income earners pay a smaller proportion of their income as tax than lower income earners (ART falls as a person’s income increases
• e.g. GST tax

Question 21

Proportional tax

Answer 21

• all income earners pay the same proportion of their income as tax (ART remains constant as an individual’s income increases)
  e.g. company tax, with exception of lower rate for businesses with low annual turnovers

Question 22

PAYG

Answer 22

• pay as you go
• main instrument of taxation used to redistribute income
• tax payments regularly deducted from employee’s wages
• requires almost instant tax payments from self-employed persons and individuals who derive a large proportion of their income from investment

Question 23

Means tested

Answer 23

A means test is a determination of whether an individual or family is eligible for government assistance or welfare, based upon whether the individual or family possesses the means to do without that help

Question 24

Policies designed to smooth fluctuations in the business cycle are called

Answer 24

macroeconomic policies

Question 25

impact of stabilisation policies on economic activity

Answer 25

• reducing fluctuations in business cycle and raising the longterm rate of economic growth

Question 26

What is the business cycle?

Answer 26

The business cycle, also known as the economic cycle or trade cycle, refers to the recurring pattern of expansion and contraction in economic activity within an economy over time.

Question 27

What are the two types of macroeconomic policies?

Answer 27

• monetary policy
• fiscal policy

Question 28

Explain the monetary policy.

Answer 28

• involves action by the reserve bank of Australia (government)
• influence level of interest rates and supply of money
• use of domestic market operations for buying and selling of government securities in order to affect the cash rate in the short term money market and influence level of interest in the economy

Question 29

What is the cash rate?

Answer 29

• interest rate at which banks lend to and borrow from each other on an overnight basis in the money market
• Financial institutions use the cash rate as a benchmark for setting their own lending and deposit rates

Question 30

Tight monetary policy

Answer 30

• when government want to slow down rate of economic activity, e.g. during inflation
• increase interest rate (more people save money, dampen consumer and investment spending-> less money in market-> lower level of economic activity
• this drop in aggregate demand would reduce inflation pressures, but may lead to rise in cyclical unemployment

Question 31

Loose monetary policy

Answer 31

• when government wants to increase level of economic activity
• putting downward pressure on interest rates
• lower interest rate= increase demand for money, less people save money into bank
• rise in aggregate demand reduces cyclical unemployment, may lead to rise in inflation

Question 32

How long does it take to feel change in monetary policy?

Answer 32

• not immediately
• depends on what aspect and what size of economy

Question 33

Briefly explain fiscal policy.

Answer 33

Fiscal policy refers to the use of government spending and taxation to influence the economy.

Question 34

GBE

Answer 34

government business enterprises

Question 35

Key examples of major government busiensses that have been privatised.

Answer 35

medibank private, commonwealth bank, qantas, telstra

Question 36

Why does privatisation occur?

Answer 36

it was felt that companies would be run more efficiently as private rather than gbes.

Question 37

Corporatisation

Answer 37

• when the government encourages public trading enterprises to operate independently from the government as if they are private businesses in order to improve efficiency and profitability.

Question 38

difference between privatisation and corporatisation

Answer 38

privatization entails transferring ownership to private investors, whereas corporatization involves transforming government entities into corporate entities while retaining government ownership.

Question 39

main remaining gbes

Answer 39

• australia post
• australian rail track corp
• state rail, bus, ferry

Question 40

Roles of government in the economy

Answer 40

• ensuring workable level of competition
  competition policy: ensuring max level of competition compatible with the market structures and specific conditions of industry
• protecting consumers from unfair business conduct
• protecting natural environment

Question 41

What are the most important means by which consumer interests are protected?

Answer 41

• Competition and consumer act
• ACCC (Australian competition and consumer commission)

Question 42

roles of ACCC

Answer 42

• monitoring prices and conducting inquiries into pricing structures
• recommending changes to industries
• giving a firm or industry negative publicity where it finds there is overcharging

Question 43

Two underlying issues in the environmental debate and what they’re solved.

Answer 43

• use of renewable and non-renewable resources
• price mechanism does not reflect externalities involved in production
  e.g. air and water pollution, pollution through industrial output, toxic waste, chemical spills

–> direct government subsidies
- permits

Question 44

Indirect taxes

Answer 44

An indirect tax is a tax imposed on items that are bought or sold in the market place. It is called an indirect tax to distinguish it from an income tax. Indirect taxes may be:-
Sales tax - tax on ordinary products at the retail level;
Excise duty – tax imposed on the manufacturer, usually associated with cigarettes and alcohol;
A tariff – a tax on imported goods (we’ll deal more fully with tariffs in Unit 3)