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
What are government owned monopolies?
A government monopoly or public monopoly is a form of monopoly which a gov agency or corporation is the provider of a particular good or service, and legislation does not allow for competition in these areas
I.e. Sydney Water
What is privatisation?
The transfer of a business, from public to private ownership and control
What is corporatisation
Recognising a government owned entity into a legal entity
What is the business cycle?
A period of time, typically through two booms, in which the economy fluctuates, with various recessions, booms etc.
What are the effects of booms?
Higher GDP
Lower unemployment
Higher Inflation rate
Rising asset prices
What are the effects of troughs?
Higher unemployment
Low GDP
Lower inflation rate
How do monetary policies stabilise the economy?
Helps control demand side issues, by reducing demand (through introducing high interest rates, which is thus a contractionary stance), when there is too much inflation, which thus stabilises the economy.
This is similar vice versa, where there is an expansionary stance through introducing low interest rates when there is too little AD, to attempt to increase EG
How do fiscal policies stabilise the economy?
They can be used to stimulate the economy if needed. As seen in the various fiscal policies of the government during the covid pandemic
What is a surplus budget?
A budget surplus occurs when income exceeds expenditures in a government
What is a balanced budget?
A situation where the government budgets that the total expected revenues are equal to total planned spending
What is a deficit budget?
A budget deficit is when it is forecasted in a government budget that the expenses will exceed the revenue, and indicates increased government expenditure
What is monopoly power?
Refers to a firm’s ability to charge a price higher than its marginal cost
What are some of the disadvantaged groups of Australia? (4)
Migrants
Ethnic Minorities
People with disabilities
Elderly people or children
What is relative poverty?
Circumstances where people can’t afford to actively participate in society and benefit from activities and experiences that most people take for granted
WHat is proportional tax?
A proportional tax is an income tax system that levies the same percentage tax to everyone regardless of income
What is regressive tax?
Regressive tax is on where the average tax burden decreases with income. Low income taxpayers pay disproportionate share of tax burden whilst middle and high income tax payers pay a small tax
What are government business enterprises?
A government business enterprise (GBE) is essentially a gov organisation which is a separate entity, and are created to partake in commercial activities for the government. Acts as a form of revenue for Aus gov. For example the postal services
What is the significance of social welfare payments with reference to the redistribution of income?
Social welfare acts as a form of being able to redistribute income, this is because it utilises the taxes that is received from the higher income tax brackets and funnel it to those in lower tax brackets
What are direct taxes?
A tax such as income tax which is directed towards the income or profits of the person who pays as opposed to goods or services
What are indirect taxes?
A tax on goods and services rather than on income or profits
I.e. Excise tax or GST
What is the difference between a merit and public good?
Merit goods are excludable (excludable meaning that producers can prevent some people from consuming good or service based on ability or willingness to pay, i.e. private health services)
Public goods are non excludable
What are natural monopolies?
This is a type of monopoly that exists due to the high start up costs and the other barriers to entry to the industry. For example the utility industry (such as water and sewer services) require a high start up cost, and typically businesses do not want to risk it. Normally these natural monopolies come from the government because noone else wants to enter the industry
What are welfare payments?
Refer to a range of government programs that provide financial or other aid to individuals or groups who cannot support themselves
What are five examples of welfare payments?
Income support payments such as pensions and allowances
Family payments such as Family Tax Benefit
Paid Parental Leave Pay
JobSeeker
Centrelink payments
What is 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 are the three ways the government intervenes?
Reallocation - maximise efficiency of resources in an economy (achieved through taxation and subsidies)
Redistribution - attempts to reduce gap between top and bottom income quintiles (achieveed through redistribution through the PAYG taxation)
Stabilisation - Stabilisation of eco activity preventing too high of booms and troughs
What is a contractionary stance? when does it happen?
Can be applied to both fiscal and monetary, and is used to attempt to contract the economy. This occurs when the economy is in a boom, or if there is a budget surplus
What is a neutral stance? When does it happen?
Government avoids making eco decisions because everything is already meeting the target inflation rate
What is a expansionary stance? When does it happen?
When the economy is not meeting the target inflation rate (too low), then gov or RBA want to stimulate the economy through various eco packages.
What is fiscal policy?
Use of government spending and tax policies to influence economic conditions
What is monetary policy?
Macroeconomic policy laid down by central bank, and it involves management of money supply and interest rate
