Topic 6 - Government and the Economy Flashcards
Define what the ‘price mechanism’ in a free market is.
3 Factors
Price mechanism involves the decisions made on what goods to produce, the quantity and the price it is set at.
Explain what market failure is.
Also, state what it accounts for and doesn’t account for. (B&C)
The inefficient distribution of goods and services in the free market.
- Accounts for private benefit & cost of production, but does not account for social benefits or costs.
Explain what Private Costs and Private Benefits are in the free market.
(Relates to G&S, consumers, production)
Private costs: The expenditure to produce G&S, and the costs incurred on consumers when purchasing these G&S.
Private benefits: The profits made when selling G&S, as well as the satisfaction gained by consumers from purchasing/consuming these G&S.
Explain what Social Costs and Social Benefits are in the free market.
State an example for each of these.
Social costs: The external costs imposed on society.
E.g.: Pollution caused by private industrial output.
Social Benefits: Positive spillover effects of private production on the community.
E.g.: Shopping Centre car parks - Used internally and externally of SC.
Define externality within the ‘free market’
Why are negative externalities a market failure? State an example for this.
Externality involves the indirect costs and benefits provided to society.
A form of market failure due to not being captured in ‘market transactions’
E.g.: Tax = Negative externality as no extra benefit comes from paying extra money.
Explain what Negative Externality is and its effect.
State an example of this.
The adverse ‘spill-over’ effect on the environment and society from economic activity.
E.g.: Unintentional air and noise pollution from planes.
Explain what Positive Externality is.
State an example of this.
The beneficial ‘spill-over’ effect from economic activity, helping society indirectly.
E.g.: Education directly benefits students and indirectly creates more informed & productive citizens long-term.
Do Negative Externalities affect the supply or demand of the market?
List the 2 costs associated with this curve.
Affects the market SUPPLY:
1) Social Cost
2) Private Cost
Do Positive Externalities affect the supply or demand of the market?
List the 2 benefits associated with this curve.
Affects the market DEMAND:
1) Social Benefit
2) Private Benefit
Explain the difference between excludable and non-excludable goods.
State 2 common examples for both.
Excludable: Possible to prevent someone from enjoying its benefits.
E.g.: Theme Parks, Concerts.
Non-Excludable: Impossible/Extremely-costly to prevent someone from benefiting from it.
E.g.: Fish in the ocean, specific-TV channel.
Explain the difference between rival and non-rival goods.
State 2 common examples for both.
Rival: Can only be used by one person at a time and its overall quantity decreases.
E.g.: Food/Drink, Cars
Non-Rival: If a person uses it, its overall quantity does not decrease.
E.g.: Police-service, Television-Channel.
Explain what a private good is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A private good is both RIVAL and EXCLUDABLE. Only used once at a time and decreases each time.
E.g.: Drink/Food.
Explain what a public good is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A public good is both NON-RIVAL and NON-EXCLUDABLE. Does not decrease in quantity and can be shared by everyone.
E.g.: National defence.
Explain what a common resource is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A common resource is RIVAL and NON-EXCLUDABLE since it can only be used once, but is not restrictive.
E.g.: Ocean fish.
Explain what a natural monopoly good is.
(Rival / Non- & Excludable / Non-)
List 1 common example.
A natural monopoly is NON-RIVAL and EXCLUDABLE since it can be used by many people, but is restrictive due to price or quantity.
E.g.: Paid movies.
List the 5 main limitations that cause the ‘Free Market’ to fail.
(Note: 2 are causes of limitations, the other 3 are effects).
1) Inadequate provision of G&S, public and merit goods.
2) Inequality in the distribution of income – disadvantaged groups, relative poverty
3) Leads to externalities and the environment – pollution, climate change
4) Leads to the formation of monopolies, privatisation, corporatisation = greater competition.
5) Leads to fluctuations in economic activity – adverse effects of booms and recessions.
Explain the main limitation free markets have / negative externality.
(P_____)
Limitation: Does not account/cater for long-term effects such as the surrounding environment or people.
E.g.: Air & Noise pollution - Not owned or controlled.
Outline why the free market fails to provide public goods and services
The free market involves the ‘free-rider’ problem - Many public G&S are being exploited for profits and vandalised.
State the 2 ways that the government takes to overcome the limited supply of public goods and merit goods in society.
What do both factors reduce? (F__-r___ P___)
1) Allocates incentives and fees for public G&S to be used.
2) Regulating and managing public goods with government funds.
Both factors reduce the ‘free-rider’ problem.
Distinguish between ‘relative poverty’ and ‘absolute poverty
Relative poverty -Income earners who earn below the average income barely maintaining a proper standard of living.
Absolute poverty - Income earners who earn below the minimum wage, making it impossible to meet basic needs in life (Food, water, education)
How do monopolies occur in the free market?
Monopolies arise when firms provide G&S that do not have close substitutes.
These ‘monopolistic’ firms control the industry supply for a specific product - gaining almost full market share.
Explain the process of privatisation.
By privatising, companies become more ____.
Privatisation - Sale and/or transfer of a ‘public trading enterprise’ (PTE) into the private sector. By privatising, companies will be more “responsive to consumer demand” in order to make profit.
Explain the process of corporatisation.
What is maintained about the firms structure?
Corporatisation constructs PTE’s into more financially independent firms which prioritise efficiency of labour and capital over profit-based operations.
Maintains its public ownership so that commercial practices are carried out in a regulated manner.
Explain the 2 steps that government bodies (ACCC) take to prevent monopolies from occurring in the free market.
The ACCC :
1) Delegates taxation rates based on a firm’s market share.
2) ‘Price cap/limit’ company G&S - Reduces barriers of entry.
Describe the problem with fluctuations in the free market.
(Enters different business cycles rapidly)
Hint: 3 Rates are affected
Affects economic growth rates, unemployment rates and inflation rates.
Unexpected Fluctuations make it difficult to forecast future economic trends, lowering disposable income, and GDP growth.
Distinguish between Direct Taxation and Indirect Taxation.
Direct: Levied onto individuals and firms that first receive the G or S, and can not be passed on.
Indirect: Tax can be passed fully/partially onto the final consumer of the G or S.
State the formula for Average Rate of Tax (ART)
ART = [Total Tax Paid / Taxable Income(initial)] x 100%
State the formula for Marginal Rate of Tax (MRT).
Only calculated when extra income/monetary benefits is provided
MRT = (Change in Tax Payable / Change in Taxable Income) x 100%
Define Progressive Taxation.
State 1 advantage and disadvantage.
Higher-income earners pay more tax than lower-income earners.
Advantage: Counterbalances rise in economic inequality.
Disadvantage: Disincentive to seek more education and work hours.
Define Proportional Taxation.
State 1 advantage and disadvantage.
Requires all taxpayers to pay the same % of their income.
Advantage: Quick and fair method to calculate tax payable.
Disadvantage: Larger income gap between rich and poor.
Define Regressive Taxation.
State 1 advantage and disadvantage.
Lower tax rates for high-income earners, whereas lower-income earners must pay more interest.
Advantage: Encourages people to work harder.
Disadvantage: High inequality of income distribution.
State the relationship between longer life expectancy and the Government’s budget revenue.
List 2 ways to overcome this.
As the population rises (64-100+), budget revenue decreases.
The amount payable for aged care and age pension rates tripled by almost 3 times.
1) Employees and Employers invest more into superannuation.
2) Increase the no. of aged care provider services.
What type of taxation is GST classified under in the short-term and long-term?
(Proportional, Progressive or Regressive)
Explain your answer.
In the SHORT TERM, GST = PROPORTIONAL tax since it charges the same percentage of the G/S price, and is not a compulsory good.
In the LONG TERM, GST = REGRESSIVE since it takes a LARGER PROPORTION of low incomes and less from high incomes.
During a downswing of the business cycle, state the 3 effects on:
Aggregate demand - ↑ / ↓
Government Spending - ↑ / ↓
Cash Rate - ↑ / ↓
Aggregate demand = ↓ | (Inflation also ↓ while unemployment ↑)
Government Spending = ↑
Cash Rate = ↓
During an upswing of the business cycle, state the 3 effects on:
Aggregate demand - ↑ / ↓
Government Spending - ↑ / ↓
Cash Rate - ↑ / ↓
Aggregate demand = ↑ | (Inflation also ↑ while unemployment ↓)
Government Spending = ↓
Cash Rate = ↑
If the economy faced a downturn in the level of economic activity;
Fiscal Policy - Expands/Contracts
Monetary Policy - Tighten/Ease
During economic downturn,
Expansionary Fiscal Policy and Easing of Monetary Policy.
Governments provide national-defence because…
Of the free-rider problems that result in underproduction by private markets.
