IB Econ SL/HL Examples

Format: - key info - pros - cons Many RWEs are from Hong Kong to make it easier for me lol

Pigouvan tax for negative consumption

• NY soda tax, $0.01-0.02 per ounce

• Encourages alternatives

• People travel to neighbouring states to avoid tax

Education/awareness creation for negative consumption

HK cannabis ads in MTR/TV

• Discourages consumption of the demerit good

• Addictive - will not reduce consumption

Legislation/regulation for negative conumption

Cigarettes in HK

• Prohibits the sale of tobacco products to people under the age of 18

• Bad for ciggie sellers ig??

Subsidizing the alternative for demerit, subdizing merit

PTFS, 30% subsidy on all transport spending above $400

• Increases consumption of public transport, decreasing congestion, shifts D from MPB to MSB

• Regressive, high min. threshold limits the benefit

Legislation/regulation for positive consumption

Hong Kong babies required to recieve a series of vaccinations within the first few years

• Shifts D from MPB to MSB, reducing the welfare loss

• Ethical concerns, potential of breaking the rules, opp cost of funding, deadweight loss

Direct provision for positive consumption

Hong Kong provision of 10 masks to each household during COVID

• Improves health and consumption of this merit good

• Costly to import and distribute masks, additional manpower was needed, not transparent about funding (was it through income taxes?)

Tradeable permits

EU emissions trading system (ETS!!)

• “Transformed environmental responsibility into a business opportunity”

• Oversupply and price volatility causes uncertainty for firms

International agreement for CPRs

Kyoto Protocol, 1992

• Expectations of countries is proportional to the amount they emit

• Requires full commitment to work, HEDCs exploit LEDCs

Collective Self Governance

• Plastic-Free Challenge, social media trend encouraging people to be more responsible about their plastic consumption

• Put social pressure on people to be more mindful about the environment (a CPR)

• No legal bearing, no requirement, social pressure not that strong

Direct Provision of a public good

HK Highways Department maintains thousands of LED streetlights

• Private sector would not provde otherwise, allows economy to continue into night, massive positive externalities

• Cost to taxpayers and opportunity cost (LEDs are expensive)

Contracting out for public good

HYW Highway / Lung Shan Tunnel contracted to Leighton/Dragages

• Project was completed eventually, linked to China, greater trade and advantages for the HK economy

• Was 2 years late and 8 billion HKD over budget, shoddy construction

Legislation for negative production externalities

Noise pollution in HK - no noisy equipment between 7pm and 7am, sundays and PH, fines start at 100k

• Decreased noise pollution and therefore increased quality of life

• Decreased productivity, lax enforcement

Regulation for positive production externalities

Compulsary 12 year education in HK

• Increases quality of human capital, benefits for whole economy

• Burden to government and therefore taxpayer

Direct provision for positive production externalities

HK School vaccination program

• Healthier population, benefits to whole economy

• Opp cost

Subsidies for positive production externalities

U.S. subsidies for renewable energy producers more than doubled between 2016 and 2022, reaching $15.6 billion in fiscal year 2022

• Funded by decreasing oil subsidies, offsets the costs of producing clean energy

• opp cost and decrease gov revenue

Natural monopoly

MTR

• Used to have KCR as well, but it was inconvenient and inefficient

Antitrust laws

US Sherman Antitrust Act and Clayton Antitrust Act

• has been used to break up monopolies like Standard Oil and AT&T

Privatisation

British railroads in the 80s - British Rail was dissolved

• Increased competition in the transportation industry

• More inefficiency and lower quality of service, government continued to spend on subsidies, prices have risen faster than inflation

Merger review

EU merger review process

• The EU has legislation that prohibits mergers that would significantly reduce competition

• There are two phases, 90% are cleared at phase I but some go onto phase II which is a more in-depth investigation

• the Commission has 90 working days to make a decision, reducing inefficiency and beuracracy

Fine against monopoly

Taobao fined 500k RMB for not declaring concentration of business operators per legal requirements. All to do with M&A deals including Alibabas acquisition of Best Inc.

Anti-monopoly legislation

See EU merger review process. Also, Thailand has a rule that mergers cannot go ahead if it will lead to control of more than half of the market. Fine is 0.5% of transaction value

Product differentiaion

MacOS and Windows, Nike, McDonald’s Coconut Milk latte

Monopoly setting prices

Deebers company in South Africa mine 50% of the world’s diamond - their price sets the market price

Legislation to prevent abuse of market power

HK Competition Ordinance

• Prevents collusion (cartels, price fixing etc.)

• Prevents market power abuse (limiting production, predatory pricing etc)

Regulation to prevent abuse of market power

MTR Fare adjustment mechanism - MTR has no authority over fares, the formula does

• Accounts for changes in inflation and productivity

• Allows MTR to raise fair regardless of social responsibility and affordability. Also takes the decision away from its shareholders (76% the government). Also risk of an inflationary sprial as other transport fares rise

Transport Department also sets fares for GMBs and buses, and awards licenses. But no new licenses have been issues since 1976

Government ownership in response to abuse of market power

British railway renationalisation

• They had geographic monopolies in the franchise system, so the government is taking them into ownership of DFTO Ltd. as their contracts expire

• Concern that the move is more political than economic and will lead to minimal savings - profit margins are already very low

Monopoly leading to welfare loss

Luxottica controls much of the glasses market, several prominent optometry chains and the second-largest vision care insurer in the state

• Frames cost only $40 to make but sell for hundreds - restricting output and charging a higher price (MC=MR instead of MC=AR=MB)

Collusive oligopoly

OPEC - they collude very openly to set the price of oil.

HK: Construction idustry. Twenty people were fined a total of $180 mil for bid rigging in a building maintenance project on HKI.

Non-collusive oligopoly

Car industry - they engage in fierce competition but do not collude to set prices

Price competition

Grocery stores having sales. Wellcome’s “Low Prices Locked” campaign etc.

Non-price competition

Cafe de Coral’s “Club 100” membership scheme offers customers weekly rewards (if they meet spending requirements), birthday rewards, electronic vouchers and points that can be redeemed.

Monopolistic competition

Pizza chains - Pizzaexpress, PizzaHut, Paisano’s and Dough Bros all offer slightly different pizzas but they’re all pizza (slight product differentitation)

Price war

Keeta vouchers and campaigns during their first year - helped them gain a 44% market share and drive Deliveroo out of business

Monopoly being good and bad

Hong Kong Jockey Club. They are the only ones legally allowed to operate a lottery.

• Provides massive revenue for the government and NGOs, reducing inequities and poverty

• Sometimes the revenue is used for projects the government should do anyway (schools etc.), so there’s less transparency

Just a monopoly

Garden Bread supplies basically all of HK with bread, from supermarkets to fast food to high end restaurants.

GDP vs GNI stats

Bangladesh GDP 2017: 250 billion USD

Bangladesh GNI 2017: 120 billion USD

Difference is caused by foreign-owned factories (e.g.H&M) owning productive capacity

High economic growth

India, referred to as the world's fastest growing major economy, around 7%. Growing population, privatisation of oil, coal and airline, tax reform, all helped increase growth.

Low economic growth

Japan - 1.1% in 2022

Economic has been stagnating generally since the 90s

Real wages have stagnated

Government response to asymetric info

Ingredient and nutrition information labels, calorie labels in Canada

But menu costs for producers

Private response to asymetric info

AIA and other insurance comapnies making prospective customers take medical tests to understand the risk

Economic growth and living standards

China

Economy grew at an average of 9.91% per year from 1979-2010, poverty fell by 800 million

Economic growth being bad for the environment

China

• World’s second largest polluter, coal-dominated economy

• Smog in Beijing so bad that it cancelled schools sometimes

• But they are also the biggest producer of solar panels

Economic growth and income distribution

Hong Kong has very high GDP per capita (US$50000), but 23% of households are in poverty

Transfer payments to reduce inequality

CSSA

• Reduces inequality by reducing the living costs of the poor

Cons:

• Family members are incentivised to move out because it’s calculated on a household basis

• Government bureaucrats handling applications were swamped, making them more inefficient and less able to make a good judgement of people’s needs

Expansionary monetary policy

Crowding out

Expansionary fiscal

Obama post 2008 Putting America to Work campaign

Spent $220 billion in unemployment benefits, allocated $275 billion to federal contracts to create jobs. Helped build consumer confidence after the recession and reduce

Contractionary fiscal

Defaults (nudge)

Opt out organ donation HK

• 25-30% increase in participation rates, 30-50% reduction in wait times

• Increased organ donation rates, good for these goods with “positive production externalities”, alleviates the decision-making burden

• Ethical concerns

Non rationality

Costco memberships - the low prices entice people, but the cost of the membership may make going to Costco more expensive than other supermarkets

Corporate Social Responsibility

Apple carbon neutrality program

• Already carbon neutral for corporate emissions, now making whole supply chain carbon neutral by 2030

• Less accessories come with products for the same price though, reducing consumer welfare

Market share maximisation

Costco $1.50 hot dog

• Loss leader, increases customer loyalty

• But they have raised prices of other food items like pizza

Business Growth

Keeta following the withdrawal of Deliveroo

• Higher commissions (25%) or operate exclusively with Keeta

• When it first entered, it offered considerable discounts, pursuing growth before profit

• Secured a 44% market share within a year

• Workers face higher requirements and worse rights

Moral Hazard

2008 Financial crisis and bank bailout (AIG)

• Spent substantial government money on bailing out banks that had made bad business decisions (subprime loans)

• Opportunity cost for the government and society (could have been used on transfer payments / SS policies)

Signalling (rationality)

Carousell item description feature

• Still possible to lie

Screening

Carousell chat feature, product descriptions, and photographs

Importance of YED for firms

• Kraft Heinz has expanded its portfolio to include essentials like ketchup discretionary products like plant-based meat

• More able to adapt to fluctuations in the business cycle, able to increase revenues in a boom and cut losses in a recession

• Difficult to calculate YED of their products and it doesn’t change that they will lose revenue in a recession, just how much

Importance of YED in explaining structural changes

China! Secondary and tertiary sectors have grown massively, which both have higher YEDs.

• As incomes rise, economy grows by much more than if they stayed a primary-dependent economy

• They are now more at risk in a recession as spending on secondary/tertiary goods will fall more than proportionate to fall in income

Importance of PED for firms

Uber surge pricing

• Higher price incentivises drivers to go to regions with more demand → more efficient distribution of resources

• Rideshares (depending on the place) are demand elastic so some would switch to public transport, costing Uber revenue

Importance of PED for governments

Hong Kong charges an tax of around 300% on cigarettes

• Highly income inelastic so this raises a lot of revenue for the government while reducing consumption of this demerit good

Nudge theory

• UK government sent letters explaining how taxes improve their local services

• This led to 210m GBP of overpaid taxes being paid

Choice architecture

Cookie buttons on websites - the “accept all” is big and bold, the others are tiny and faded

• This makes it harder but still possible to opt out of cookies, meaning consumers could have their data collected when they don’t really want to

• But still legal since a choice is still there, showing how nudges can be used for good and bad

Bounded selfishness

The global charity industry was worth $330B in 2021

Social enterprise / corporate social responsibility

iBakery

• They hire and train people with disabilities → less structural unemployment

• Supported by a TWGHs and also the government (opportunity cost? could be more efficient hiring able bodied people)

Price floor

UK NMW was raied in April 2025 to £12.21 per hour for adults over 21

• Good for workers

• Bad for firms and employment, could cause a larger underground labour market (illegal workers/migrants)

Price ceiling

• Rent control in the Netherlands - max rate of increase in rent is linked to inflation. In 2023 the maximum rent increase was 4.1%. Acts as a price ceiling

• Can help people save and get a mortage, increases their welfare and good for consumption long-term

• Landlords could withdraw their properties from the market (worsening scarcity)

Carbon tax

Sweden carbon tax, 102 EUR/tonne

• Provides an incentive for business to cut emissions and revenue for the government which can be used for other things like green energy subsidies

• Simplified by taxing the amount of fuel, not emissions, since they’re proportional anyway

• But regressive and increases costs for firms