Econ 1

The 25 Mark Question

Discussion 25 marks

• Think structure– Interesting introductions– Effective issues (x2)• Identify and develop• Dynamic diagram• Validate and evaluate

– Challenging conclusions• Complements / contradictions / complexities• Government failure• Cost benefit analysis

Where we want to be

Examiner Code

Avoid the caps

Key Market Failures

• Volatility in Commodity Markets– How?

• Inelastic in demand and supply in short run• Supply side / demand side shocks• Output this season based on price last season

– Why?• Uncertainty

– Incomes for producers » Household (small) survival and living standards» Commercial (big) - revenues, profit and investment» LDCs export revenues and growth

– Expenditure for consumers» Household (small) – key foodstuffs and living standards» Commercial (big) – input prices, cost levels, pricing and profitability

Volatility 2

• What?– Buffer Stock – single price guarantee– Price Ceiling / Floor– Compromise

• Acceptable range

• Who?– EU and CAP– OPEC? ICA??

• Hard to control global markets with key demand side and supply side drivers

Nanny State

Demerit Goods• Negative Externalities of

Consumption• Overestimation of Private

Benefit

• Tax + Price Floor• Education and Advertising• Command and Control –

bans/age limits

Merit Goods• Positive Externalities of

Consumption• Underestimation of Private

Benefit

• Subsidy + Price Ceiling• State Provision• Quality and quality

legislation (eg National Curriculum + Leaving age)

Inequality

Labour Markets• Wage Determination• Wage Differentials

– Globalisation hits lows skill low wage

– Globalisation helps high skill high wage

• Immigration

Policy• National Minimum Wage

• Progressive Tax Systems

• Regressive Tax System?

• Benefits Systems

Monopoly

Negative• Allocative Inefficiency –

restricting output and forcing up price to maximise profit

• X- inefficiency – organisational slack allows costs to creep above lowest possible levels

Positive• Economies of Scale – big is

better?

• Dynamic Efficiency through invention and innovation with profits spent on R+D

Environment

Problem• Negative Externalities of

Production and consumption

• Global Public good – why suffer the cost of clean up when you can benefit from the actions of other?

Policy• Taxes – green / pigouvian

reflecting external cost

• Trade (EMTS EU) - a failed system due to over allocation of permits and low prices for carbon

• UN Global talking shop with little action

Key Contexts

Transport• Private v Public Transport

• Infrastructure as a public and merit good

• Diesel v Bio-diesel

Housing• Affordability

– Market price drivers– Buyer subsidies– Social Housing– Price ceiling in rental market

• Externalities of new development