Must know - economics topic 6 flashcards

What is the universal market failure chain?

Market failure → inefficient/inequitable allocation of resources → loss of economic welfare → government intervention → changes in incentives/behaviour → changes in resource allocation → potentially improved economic wellbeing.

What is the universal government-intervention argument?

Problem → cause → government response → mechanism → immediate effect → economic objective → limitation/trade-off → overall effectiveness.

What is the negative externality chain?

External cost ignored → private cost < social cost → price too low → quantity too high → over-allocation → government intervention → externality internalised → resource allocation improves.

What is the inequality chain?

Unequal market incomes → disadvantaged groups/relative poverty → government redistribution → progressive taxation + welfare/public services → disposable income becomes more equal → improved equity and economic wellbeing.

What is the public-goods chain?

Non-excludability → free-rider problem → insufficient private provision → under-allocation → government provision/funding → increased social benefit → improved allocative efficiency.

What is the merit-goods chain?

Under-consumption → loss of potential social benefits → government subsidy/direct provision → increased accessibility → increased consumption → greater economic wellbeing.

What is the monopoly chain?

Market power → reduced competition → higher prices/restricted output → lower consumer welfare → allocative/productive inefficiency → government competition policy/regulation.

What is the recession fiscal-policy chain?

Recession → weak aggregate demand → expansionary fiscal policy → ↑ government spending/↓ taxation → ↑ AD → ↑ output and employment → stronger economic activity.

What is the inflation fiscal-policy chain?

Excessive aggregate demand → inflationary pressure → contractionary fiscal policy → ↓ government spending/↑ taxation → ↓ AD → reduced pressure on productive capacity → lower inflationary pressure.

What is the monetary-policy chain?

Interest rate change → change in borrowing/saving incentives → change in consumption and investment → change in aggregate demand → change in output/employment/inflation.

What is the government borrowing chain?

Budget deficit → government expenditure > revenue → government borrows → ↑ demand for funds → potential ↑ interest rates → potential ↓ private investment → crowding out.

What is the taxation redistribution chain?

Progressive taxation → higher-income earners pay greater proportion → government revenue → welfare/public services → relative increase in lower-income disposable income → reduced inequality.

What is the housing evidence?

Housing prices increased from approximately 4 times average income to around 8 times average income; useful for population growth, demand, inelastic supply, price increases and affordability.

What is the matcha evidence?

The Guardian reported a 133% increase in commercial matcha orders; SBS reported wholesale prices rising from approximately $390/kg to $500/kg over 12 months.

What are the three economic functions of government?

Reallocation of resources, redistribution of income and stabilisation of economic activity.

What are the three questions I should ask for every policy?

1) What problem is the policy fixing? 2) Through what mechanism does it change behaviour/resource allocation? 3) What are the limitations or trade-offs?