Topic Six: Government and the Economy Flashcards
Why do governments exist? More specifically (4)?
They exist because of market failure
More specifically, they;
Provide public and merit goods
Prevent the development of monopolies
Redistribute income and wealth to prevent inequality
Intervene in the business/economic cycle to prevent it from fluctuating too much
What is market failure?
Market failure, in economics, is a situation defined by an inefficient distribution of goods and services in the free market.
What are public goods? What is an example?
A public good refers to a commodity or service that is made available to all members of a society. An example of this is national defence
What are merit goods?
A merit good is a good which when consumed provides external benefits, although they may not be fully recognised as beneficial, thus the good is under-consumed
I.e. Education and healthcare
Why does the government provide public and merit goods? How?
Because the merit good will be under consumed and under producd in a free market economy due to:
not being profitable enough for private enterprises
Why are monopolies bad for the economy?
Undermines consumer sovereignty. The company which is monopolising can also raise prices or lower quality of product or service to whatever they want all dependent on how much money they want to make.
Reduces the economic wealth of the economy as well.
How does the government prevent the development of monopolies? (3)
Removing or lowering barriers to entry through laws
Promote competition
Regulating prices that monopolies can charge
How does the government redistribute income and wealth to prevent inequality?
Through taxation, and thus welfare payments. Initiating programs which allow for redistributing income
Why does the government intervene in the business/economic cycle?
Intervenes through fiscal policy, and aims to reduce volatility of the economic cycle. Don’t want volatility in economy because consumer loses confidence, and governments thus stabilise business cycle through reducing the impacts of booms and surpluses, in which they implement countercyclical policy
Counter-cyclical fiscal policy refers to the steps taken by the government that go against the direction of the economic or business cycle. Thus, in a recession or slowdown, the government increases expenditure and reduces taxes to create a demand that can drive an economic boom.
What is the role of social welfare for society?
Help promote social equality
What is the role of social welfare for an ageing population?
Social welfare gives a form of income for an increasingly dependent ageing population. As they can no longer work they may be considered ‘disadvantaged’ and have various welfare benefits such as various senior pensions. Furthermore, they have access to their super which they have saved over the years
What are various sources of revenue for governments?
Mainly taxes including:
Personal income tax
Company tax
GST
State and local taxes
What is the progressive tax system?
A progressive tax is based on the taxpayer’s ability to pay the tax, and thus imposes a lower tax rate on low-income earners than on those with a higher income, (typically through the use of tax brackets). This is also a form of distribution of wealth
What is the PAYG system?
PAYG is a single integrated system for reporting and paying withholding amounts and tax on business and investment income. The system brings income tax instalments and withholding tax obligations together in one system, which for most businesses means one set of payment dates and one form to complete.1
How do taxes affect the distribution of income and wealth on business?
Because of Australia’s Progressive tax system, it attempts to close the income gaps between the richest and poorest quintiles, and try to strive towards a more equal economic distribution (but does not strive for absolute equality), massive taxes to rich people can then be distributed to others who need it.
Furthermore, taxes
How do taxes affect the allocation of resources in the economy?
As Australia utilises a progressive tax system, it allows for the high rates of taxation towards those who are richer, which is then reallocated to those who are with lower incomes through welfare payments, etc.
What is free market?
A system in which prices are determined by unrestricted competition between privately owned businesses
How does the operation of free market without gov intervention affect the distribution of income?
The free market without gov intervention will severely handicap all the already socially disadvantaged people of Australia. This is because free market encourages pure supply and demand interactions, and in this scenario, it will be hard for those who have disadvantages such as disabilities to enter the market, and thus aren’t able to make an income and living due to the gov not introducing various policies to protect them
How does the operation of free market without gov intervention affect the quality of life of individuals?
There will be an increasing disparity in the quality of lives of individuals. This is because the richer will continue getting richer because the government isn’t applying any tax to them, and they aren’t restricted to what the government says, however, the poorest will struggle to make it into the economy due to the high barriers of entry because of the already established industries, which thus lower their income and worsen their quality of life, ultimately contributing to the quality of life disparity
What are monopolies?
A monopoly is a market with the absence of competition, where a specific person or enterprise is the only supplier of a particular good or service
