A-Level Economics Essay Plans GOOD ONES

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Correcting Market Failure - Monopoly Power

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Correcting Market Failure - Monopoly Power

Regulation
AO2 - ASDA/Sainsbury's merger blocked by the CMA. The US looked into breaking up Microsoft, but didn't because it is an extreme step and there is no guarantee that the new firms wouldn't collude.
AO3 - Blocking mergers prevents monopoly power from occurring. Breaking up monopolies helps to increase competition and lower prices, but it is rarely used.
AO4 - Danger of regulatory capture where regulatory bodies become too sympathetic to the business, so consumers are still charged higher prices. May restrict important innovation like the innovation by Microsoft in the 1990s and the early 2000s.

Nationalisation
AO2 - Transport for London cost £129 billion in fixed costs. Huge purchasing and technical economies of scale.
AO3 - Social welfare is now an objective, so consumer welfare increases and producer welfare decreases. Particularly beneficial if the monopoly is a natural monopoly because these benefit from huge economies of scale with a constantly falling LRAC curve, and are most efficient when there is only one firm in the market to pay the fixed costs.
AO4 - The lack of profit maximisation objective leads to X-inefficiencies and average costs rise, costing the public and resulting in government failure. Less likely to be considered by free-market economists for that reason. Could be used if shorter-term market based approaches don't work.

Maximum Price
AO2 - OFGEM introduced a price cap on energy in 2018. There are rent caps in Berlin.
AO3 - Leads to lower prices for consumers, increasing consumer surplus. Brings prices closer to a fair and competitive equilibrium.
AO4 - Leads to excess demand, so some people could go without it. More importantly, if the good is a necessity or with positive consumption externalities, like housing, this is particularly a problem. Although, is sup

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Correcting Market Failure - Negative Externalities

Indirect Taxes
AO2 - 57.95p per litre on petrol and diesel.
AO3 - Draw negative externalities diagram and the deadweight loss with overproduction. Negative externality gets internalised and the new equilibrium is MSB=MSC. Shift the MPC+tax curve to intersect where MSB=MSC.
AO4 - Inelastic demand for these goods means tax might not change behaviour in the short run. Although, in the long run, the generated revenue could be used to fund education. Regressive impact on incomes, so government failure.

Minimum Prices
AO2 - In February 2018, Scotland's government set a minimum price of 50p per unit on alcohol. Institute of Fiscal Studies suggested 70% of shop bought alcohol is priced below 50p per unit. But, black market sales of alcohol are costing £2 billion per year.
AO3 - It makes people pay the social cost for the good. Decreases consumption depending upon the elasticity.
AO4 - Government could be better off taxing because then the revenue would benefit society rather than the producers and sellers. Could encourage people to switch to black market alcohol, causing more violence and reducing tax revenues.

Nationalisation
AO2 - Private companies have transformed polluted rivers like the Wandle, near London, from open sewers into trout streams.
AO3 - Governments have the incentive to consider social welfare rather than just profits. They will pay for and prevent negative externalities, and will promote goods with positive externalities.
AO4 - Shouldn't assume that firms will not want to prevent negative externalities, with some having corporate social responsibility. This may be more likely in monopolistic competition and oligopoly markets where non-price methods and differentiated goods are features. The investment that private firms are able to do can lead to fewer negative externalities (use

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Government Policies to Alleviate Poverty

Taxation
AO1 - Increasing progressive taxation and reducing regressive tax.
AO2 - Coalition government increased tax-free allowance to £12,500. Gordon Brown lowered VAT from 17.5% to 15% in 2008.
AO3 - This should increase tax revenues which can then be redistributed to lower earners. Lower regressive taxes reduces the burden on low earners.
AO4 - Progressive taxation - have to make sure the tax rate isn't too high, otherwise it incentivises tax evasion and reduces incentives to work.
- Regressive taxation - major government revenue, so reducing this could cause long run impacts of decreased spending, austerity and potentially more poverty.

Welfare Benefits
AO2 - Universal Credit is a means-tested benefit supporting people of working age on a low income. Employment Support Allowance is for those under pension age who can't work due to a disability and are not receiving Statuary Sick Pay.
AO3 - They allow money to be targeted to those who need it the most. Means-tested are cheaper than universal benefits and reduce the burden on the taxpayer. Money directly in the hands of the poor means they have increased incomes.
AO4 - The poverty trap could occur where workers become reliant on benefits and the incentive to work decreases, so they become deskilled and trapped. Welfare dependency means a LR hit on government finances.

Government Spending on Education and Healthcare
AO2 - Out of the G7 countries, the UK healthcare spending in 2017 was the second lowest. Share of national income spent on education has also been falling.
AO3 - Better healthcare means that more people are able to work. Better education means that more people are highly skilled, increasing employment and wages. This is all about tackling the route to poverty and breaking the cycle of poverty.
AO4 - It is expensive and it incr

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nationalisation

government objective-maximise societal welfare
AO2 public transport has positive externalities such as reducing pollution and congestion. pharmaceuticals provide a better workforce and less strain on public services
AO3 governments aren't profit maximisers and so produce at a socially optimum level considering positive externalities - DWL
considers inequalitites in access and opportunity cost of lower production. nationalisation therefore leads to an allocative efficient outcome breaking market failure of mono
AO4 socially optimum level is value judgement. govern failure-debt and high tax?

*no profit max so reduced funds for reinvestment
AO2 high funds to reinvest back into business. e.g. pharmaceuticals dedicate around 17%
150m for national express
AO3 able to invrst in r and d, better quality and choice e.g. more rails, diff pharmaceuticals. wouldn't see this in govern as wont have as much funds as a profit maxmising firm. lots of x inefficiencies further reduce funds for reinvesting.AO4 rev=lower tax, 2 priv train franchises failed required govern to step in. when govern managed made decent profits. pharma revs are falling

*prevents natural private monopoly forming.
AO2high eos and infrastructure requirement e.g.... AO£govern wont ecplot this due to little incentive to reduce x inefficiencies and not ran as efficient as profit max. profut max will exploit eos, lower prices, more consumer surplus, without going into debt like govern. more equitable. govern get more tax rev.
AO4: will reinvest> £144m dividends in british gas

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Benefits and Costs of Full Employment

Benefit - Improves Standards of Living
AO2 - The 2010s saw living standards grow at their lowest rate, even though employment grew at a record rate. GDP per capita growth was less than half of post-war level.
AO3 - More employed people means that people have higher incomes across the economy. They can spend more because they have more disposable income, allowing them to buy more necessities. Government spending on welfare should decrease and tax receipts will increase, so the budget deficit decreases.
AO4 - Employment could hide poor quality jobs and zero hour contracts, which might not raise living standards (see AO2 point). However, jobs in the gig economy (such as Uber) are seeing more government intervention to pay minimum wages and holiday pay.

Benefit - Increasing Productive Capacity
AO2 - Output per person only grew at a rate of 0.6% annually, compared to 1.1% in the 2010s and over 2% in previous decades.
AO3 - Allows for sustainable growth, meeting another objective. More output means there is more to trade, so GDP rises. Sustainable growth encourages investment, further improving infrastructure and productivity. There may be less wastage and the negative output gap will reduce.
AO4 - This depends on labour productivity which has recently been low in the UK. Without this, productive capacity isn't going to increase by as much (see AO2 point).

Cost - Labour Shortages and Inflation
AO2 - UKs full employment during the 1950s meant companies struggled to fill vacancies and immigration was encouraged. Harder to fix this way after Brexit. During Lawson Boom when employment was high, inflation increased to 11% for some months.
AO3 - Because firms need to employ more labour, they need to increase wages to incentivise labour, resulting in wage inflation and cost-push inflation. This could then l

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Benefits and Costs of Economic Growth

Benefit - Lower Unemployment
AO2 - During the Lawson Boom of the late 1980s, growth was well above the long run trend rate of 2.5%. Unemployment fell from 11.4% in 1986 to 6.9% in 1990.
AO3 - A rise in AD means that the firm has more demand for its goods, so it has to increase supply to meet the demand. This means that more labour is demanded by firms and so unemployment falls. Could reduce poverty and inequalities.
AO4 - In the last 40 years the world has experienced the fastest growth in human history, yet the OECD said that unemployment increased. It may not reduce poverty because since 2008, consumer debts have risen and average incomes have stagnated or fallen. The Lawson Boom was a time of widening inequalities - helped by tax cuts for the rich.

Benefit - Higher Investment in Public Services
AO2 - Deficit under Trump increased by 74% even though growth was high.
AO3 - Higher GDP means the government collects more taxes because as incomes rise and people spend more they will pay more income tax and VAT. Government can use this to reduce government borrowing or finance public services/investment. Can improve long run performance of the economy. Better infrastructure enables a lower cost of trade, so can create a virtuous cycle of higher investment leading to higher growth.
AO4 - If the growth is not sustainable and is above trend growth then the investment may initially increase national debt and the budget deficit when the recession (economic cycle) arrives. See AO2.

Cost - Inflation
AO2 - In the Lawson Boom of the late 1980s, economic growth reached an annual rate of 5% and it caused inflation to increase to 11% for some months.
AO3 - Cost-push inflation can occur because firms may find it harder to fill job vacancies, so wages rise and these costs are reflected in higher prices. Increased

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Benefits and Costs of Inflation

Benefit - Sign of Economic Growth
AO2 - During the Lawson Boom of the 1980s, economic growth was at 5% per year, but inflation increased to 11% for some months.
AO3 - Conflict between the macroeconomic objectives of economic growth and inflation will occur (assuming that the economy is not performing at the elastic part of the LRAS with a lot of spare capacity). This means inflation is needed in times of rising employment and living standards, which means it is less of a problem for Keynesian economists.
AO4 - Growth is not sustainable if a positive output gap is created where actual growth is above the potential. This creates inflationary pressures with a boom and bust cycle, which means inflation with growth is not always a positive sign because unemployment and recession may follow.

Cost - Creates Uncertainty and Lower Investment
AO2 - Investment represents only 17% of GDP Argentina who had very high inflation, whereas Chile and Mexico both have 23%. Argentina destroyed domestic mortgage market.
AO3 - AD is reduced, reducing economic growth. Households and businesses are reluctant to finance long-term investments with variable interest rate loans because a jump in inflation would cause interest payments to rise sharply. Higher interest payments means a higher cost, which reduces incentives. Consumers might also not be able to afford to invest because real incomes may fall.
AO4 - However, low inflation is said to encourage greater stability and encourage firms to take risks and invest because it is a sign of economic growth. It would be easier for predicting future costs, prices and wages.

Cost - Can Make an Economy Uncompetitive
AO2 - Particularly important for Eurozone countries who can't devalue to restore competitiveness.
AO3 - Relatively higher rate of inflation makes exports uncompetitiv

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Benefits and Costs of a Budget Deficit

Benefit - Stimulates GDP Growth and May be Self-financing
AO2 - Trump caused household median income to rise by 9.7% since 2016, but the budget deficit increased 74% in four years.
AO3 - Spending is higher than taxation so AD increases. This increases employment because more has to be supplied to meet the demand. Results in economic growth. This spending is particularly important if it is spent on capital projects or education, or other supply-side policies like cuts in corporation tax. It may be self-financing in the long run.
AO4 - Risk of government failure from state borrowing to finance infrastructure. HS2 was estimated to cost £5.6 billion in 2015 but has since risen to £106 billion because of management issues and unrealistic land valuations. There may not be uncertainty as to whether this is self-financing, or whether it will just increase the budget deficit and debt.

Cost - Spending Cuts and Higher Debt Interest Payments
AO2 - Eurozone countries between 2012 - 2016 has to use these austerity measures to reduce a budget deficit to comply with EU rules and it resulted in lower AD/growth and unemployment.
AO3 - If a deficit has risen too quickly then the government may be forced to adopt austerity measures and cut spending or raise taxation. AD falls, unemployment rises and so there are objective conflicts. The opportunity cost of debt interest payments may also lower spending in the long run, which could have been spent on education, welfare or healthcare.
AO4 - However, spending may be necessary at the time to get the economy out of a recession and to prevent the economy from worsening in the long run.

Cost - Lower Confidence and Investment Effects
AO2 - Coronavirus borrowing of £355 billion is the highest outside of wartime. In 2012, Eurozone countries saw a rise in bond yields becaus

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Benefits and Costs of Protectionism

Benefit - Protects Domestic Businesses and Workers
AO2 - South Korea and Taiwan are recent examples of rapid industrialisation and economic development with major government subsidies and high tariffs to promote selected industries. Renewable energy in developed countries is not ready for global markets, so it could be protected until it achieves economies of scale.
AO3 - Higher import prices with a tariff or cheaper domestic products with subsidies mean that a lower quantity will be imported, increasing AD and achieving economic growth. With infant industries, it can help them grow into a secure industry with high employment and income. With sunset industries, it protects a high level of employment.
AO4 - Infant industries - depends upon how long it lasts, because the longer it lasts, the more likely the firm will be dependent upon the protection and will become inefficient. Sunset industries - because the industry is nearing the end of survival, it may be more inefficient protecting employment because it is costly to keep the industry alive. It is inevitable that the industry will collapse anyway.

Cost - Higher Prices for Consumers
AO2 - Starting in January 2018, Trump imposed tariffs on steel, aluminium and white goods like washing machines. EU retaliated and imposed tariffs on American agricultural goods and Harley Davidsons.
AO3 - Pushes up prices for consumers because the cost of production is higher. Results in imported inflation if the demand is inelastic. Congressional Budget Office estimated the cost of trade barriers to the average American household in 2020 to be $580, including higher prices and lost economic growth. Less disposable incomes so consumption, AD and economic growth reduces. Regressive effect on income equality. Risk of retaliation may make this even worse because the price of e

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