Topic 6 - Government and the Economy

Question 1

Why do Governments intervene in markets?

Answer 1

Markets consider private economic interests, not broader social interests. Government intervention can be required but balance is needed.
Too much may stifle innovation, efficiency and growth
Too little may leave us exposed to instability, inequality and a lack of basic community facilities

Question 2

Provision of Goods and Services

Answer 2

Markets may fail to provide certain necessary goods and services, or it is more desirable for them to not be provided by the private sector.
Public goods are an area of market failure.E.g clean air, street lighting, national defence and public parks.
To be a public good it must have two characteristics- Non-excludable- Non-rival
Merit goods – Produce positive externalities such as health care or art. These goods benefit all of society beyond just the individual who enjoys them directly

Question 3

THE PUBLIC GOODS PROBLEM?Free riders?

Answer 3

Individuals who benefit from a good or service without contributing to the cost of supplying the good or service.

Question 4

Natural monopoly?

Answer 4

A market structure in which goods can only be efficiently provided by one supplier, usually because an enormous investment in infrastructure is required.
E.g A rail network or water and electricity networks.
The government tries to control monopolies like these in order to keep the prices fair, ensuring consumers cover the costs of providing the good or service but are not exploited by excessive prices

Question 5

The distribution of income?

Answer 5

A market economy left on its own will tend to create inequality in the distribution of income. Wealthy people will over time become wealthier as their wealth generates more wealth.

Question 6

What are externalities?

Answer 6

Externalities refers to situations when the effect of production or consumption of goods and services imposes costs or benefits on others which are not reflected in the prices charged for the goods and services being provided.

Question 7

Example of a negative externalities?

Answer 7

Contribution to increased carbon dioxide and global warming caused by the burning of fossil fuels, such as coal-fired power stations and motor vehicles

Question 8

Abuse of market power?

Answer 8

Monopolisation
Price discrimination
Exclusive dealing
Collusion and market sharing

Question 9

Monopolisation ?

Answer 9

Monopolisation refers to attempts by a dominant firm or group of relatively large firms to maintain or increase market control through various anti-competitive practices such as predatory pricing, pre-emption of facilities, and foreclosure of competition.

Question 10

Price discrimination ?

Answer 10

the action of selling the same product at different prices to different buyers, in order to maximize sales and profits.

Question 11

Exclusive dealing?

Answer 11

when one person trading with another imposes some restrictions on the other’s freedom to choose with whom, in what, or where they deal.

Question 12

Instability due to business cycle

Answer 12

Government can utilise macroeconomic policies (fiscal and monetary) to counteract the business cycle and try to achieve sustainable economic growth.

Question 13

Structure of Government

Answer 13

1. The commonwealth (federal)
2. State
3. local

Question 14

The commonwealth (federal) Government ?

Answer 14

Has overall responsibility for the economy and has the most influence on economic performance.

Question 15

State Government?

Answer 15

Develops infrastructure, delivers services such as health and education.

Question 16

Local Government?

Answer 16

This role relates to local planning, community facilities and roads.

Question 17

Taxation system?

Answer 17

Largest revenue source for State governments is the Goods and Services Tax (GST)
State governments rely on other taxes like payroll tax, stamp duty, licenses, taxes on gambling and land ownership.

Question 18

Size of public sector?

Answer 18

Refers to the parts of the economy that are owned or controlled by the government. Contains all tiers of government as well as gov controlled enterprises like Australia Post

Question 19

Fiscal?

Answer 19

government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy.

Question 20

Direct tax?

Answer 20

a direct tax is a tax that you directly pay to the authority imposing the tax.

Question 21

Indirect tax?

Answer 21

the tax imposed by the government on a taxpayer for goods and services rendered. Unlike direct taxes, indirect tax is not levied on the income, revenue or profit of the taxpayer and can be passed on from one individual to another.

Question 22

Progressive tax?

Answer 22

progressive tax means the more you earn, the higher the percentage you’ll pay. This is typically implemented by introducing tax brackets that categorise people into earning groups so that the highest earnings pay the highest percentage of tax. This usually only applies to income that goes over a specified amount, so everyone pays the same rate on their base income, except in cases of tax exemptions.

Question 23

Regressive tax?

Answer 23

A regressive tax is a tax applied in a way that the tax rate decreases with the increase of the taxpayer’s income. This type of tax places more burden on low-income demographics rather than the high-income population. The imposed burden is determined by the percentage of the tax amount relative to income.

Question 24

Proportional tax?

Answer 24

A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income. A proportional tax is the same for low, middle, and high-income taxpayers.

Question 25

Monetary Policy?

Answer 25

Monetary policy consists of the management of money supply and interest rates, aimed at meeting macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity.

Question 26

Tight monetary policy?

Answer 26

If the government wished to slow down the level of economic activity; it could do so by tightening monetary policy and putting upward pressure on interest rates. High interest rates reduce demand for money and dampen consumer spending, resulting in a lower level of economic activity.

Question 27

Loosen monetary policy?

Answer 27

If the government wanted to increase the level of economic activity, it could do so by loosening the monetary policy by putting downward pressure on interest rates. Lower interest rates would increase the demand for money and boost consumer and investment spending, resulting in high levels of economic.

Question 28

GBEs

Answer 28

Government business enterprises (GBEs) are businesses owned and managed by a government at either the commonwealth or state level

Question 29

The budget?

Answer 29

Is the tool of the government for the implementation of fiscal policy. It shows the government’s planned expenditure and revenue for thr next financial year.

Question 30

expenditure?

Answer 30

Expenditure is a reference to spending.

Question 31

Deficit?

Answer 31

Deficit financing, practice in which a government spends more money than it receives as revenue.

Question 32

An expansionary fiscal policy stance?

Answer 32

The government might reduce taxation revenue or increase government expenditure, creating either a smaller surplus or bigger deficit that it had previously. Expansionary fiscal policy aims to increase the level of economic

Question 33

A contractionary fiscal policy stance?

Answer 33

Here the government would be planning to increase taxation revenue or decrease government expenditure, creating a smaller deficit or larger surplus than previous. This should decrease the level of economic activity by dampening aggregate demand.

Question 34

A neutral fiscal policy stance?

Answer 34

This occurs when the government does not change the budget outcome from the previous years level.