ECONOMICS

The Class Of 2023

Essay 1: Max Noble p.5

“Regulation is less effective than increased taxation in addressing market failures caused by increased motor vehicle emissions in the UK”. To what extent do you agree with this statement?

Essay 2: Eison Sheng p.7

Evaluate whether tradable permits on major carbon polluting firms are more effective than government subsidies to renewable energy firms as a means of reducing carbon emissions.

Essay 3: Joseph Rogers p.9

Evaluate the likely market failures associated with the building of a new airport on the outskirts of London.

Essay 4: Charlie Moss p.12

Evaluate the view that command economies are necessarily less successful than market economies.

Essay 5: Brandon Bland p.15

Evaluate the view that higher inflation in a developing economy might be advantageous.

Essay 6: Anzie Baiden p.18

In an economy with weak growth, evaluate the likely impacts of a government attempting to reduce a significant budget deficit.

Essay 7: Lottie Payne p.20

Evaluate the likely positive impacts of a recession on a developed country.

Essay 8: Declan Teevan p.22

Evaluate the economic conditions under which an aggressive monetary stimulus will be most effective.

Essay 9: Matthew Jones p.25

Evaluate the effectiveness of the UK’s monetary policy in improving the performance of the UK economy since 2008.

Essay 10: Taj Angell p.28

Evaluate the likely microeconomic impact of government intervention to control monopolies.

Essay 11: Luke Byca p.32

Economic efficiency will always increase as a market becomes more contestable. To what extent do you agree with this statement?

Essay 12: Sam Gillen p.34

Evaluate the view that profit maximisation will always be the objective of private sector firms.

Essay 13: Alex Wilson p.37

Evaluate the extent to which integration always leads to economies of scale and therefore the conclusion that small firms have no place in a modern economy.

Essay 14: Josh Harvey p.39

Evaluate the extent to which government intervention in the labour market can be effective in tackling labour market failure caused by the immobility of labour.

Essay 15: Harrison Harper p.41

“In the long-run, economic efficiency is more likely to occur in a perfectly competitive industry than one which is more concentrated. To what extent do you agree with this statement?

Essay 16: Izzy Wood p.44

Given criticisms over the sewage management of water companies, and price increases in many energy companies, to what extent has privatisation in the UK been a success?

Essay 17: Freddie Middleton p.46

Evaluate the factors which influence the supply of labour to nursing or to another occupation of your choice.

Essay 18: Max Hepburn p.48

“Oligopoly is the market structure most likely to promote consumer welfare.” To what extent do you agree with this statement?

Essay 19: Ned Floyd p.51

Discuss the extent to which a monopolistic industry of your choice exhibits the characteristics of this market structure.

Essay 20: Ben Staddon p.54

Evaluate the impact of globalisation on developing economies. Refer to a developing economy (or economies) of your choice in your answer.

Essay 21: Jamie Macleod p.57

Evaluate the economic factors that might act as a constraint on the economic growth and development of a developing economy. Refer to a developing country of your choice in your answer.

Essay 22: Richard Wang p.59

Evaluate the factors that might have caused an increase in the international competitiveness of the UK’s goods and services.

Essay 23: Aaron Coleman p.61

Discuss the economic implications of the UK leaving the European Union.

Essay 24: Gordon Fitzgerald p.64

Evaluate the arguments that economies might put forward to justify the use of protectionist measures.

Theme 1

Introduction to Markets and Market Failure

Essay 1: Max Noble

“Regulation is less effective than increased taxation in addressing market failures caused by increased motor vehicle emissions in the UK”. To what extent do you agree with this statement?

Market failures occurs when the price mechanism is not allocating resources efficiently. The government may have to step in to solve market failures and the government can do that in the form of regulation or taxation. Motor vehicle emissions create negative consumption externalities due to the fact firms produce these vehicles and when consumers use them there is a negative thirdparty effect that is not paid by the consumer.

Regulation is one way for the government to intervene and solve market failure. Regulation is when rules are imposed by the government to modify the economic behaviour of individuals and firms. The government can impose certain policies to reduce motor vehicle emissions. Firstly, the government can reduce or prohibit the purchase of fuel inefficient cars. For example, the UK government has announced that the sale of new petrol and diesel cars will be banned by 2030. Secondly, the government can also enforce regulation through no-idling zones. No-idling zones will force people to not let their engine running when stationary or parked. Road traffic is estimated to contribute more than 64% of air pollution recorded in towns and cities. This can be prevented by turning the engine off while in traffic and in these no-idling zones. Regulation is a very quick and an easy fix for market failure in comparison to taxation. Regulation can simply be imposed by the government at any time. Rules can be extremely detailed which helps to cover all problems concerning emissions as a whole. Furthermore, it can also be used for both short-term and longterm fixes. As seen by the law in 2030 it is a very good way of ensuring action by setting a date. However, regulation can cause firms to have their profits reduced. For example, some firms in the motor industry will no longer be able to produce their main product, for example diesel cars. Furthermore, consumers will begin to steer away from fuel inefficient cars as the government imposes more and more regulation causing the demand curve for petrol and diesel cars to shift inwards. Therefore, firms will not make as much revenue while maintaining the same costs leading to a loss in profit. The businesses also lose potential dynamic efficiency as they can no longer innovate. As a result, investment into the economy decreases. Many of these firms may switch to another industry, like the electric vehicle industry to expand their product range and stop selling fuel inefficient cars. However, with these markets becoming so competitive it makes it hard for businesses to enter the market especially when there is so much money needed for research and development in the EV industry. These businesses may simply cease to exist. This leads to a loss in jobs, creating higher unemployment

Taxation is another way for the government to intervene and solve market failure. Taxation is a payment collected by the government from consumers or producers. If the government were to increase corporation tax or income tax, it would improve the government budget. This would allow them to use that money to solve the emissions market failure. Firstly, the government can use that money to subsidise the electric vehicle industry, making it more enticing for the motor businesses to move to that market. Furthermore, lowering the electric vehicle businesses' costs will allow them to produce more, and sell these cars at cheaper prices meaning more consumers will purchase these products. This means less fuel inefficient cars on the road. Furthermore, the government can use that money to research types of renewable energy. In the long-term, if more money is put into research and development, this creates better technology, which can then be put to use on creating better/healthier transportation for the environment. One example is the Network Rail which is a publicly owned company that owns most trains across the UK. The government controls the Network Rail which means they have full control of switching these trains to full electricity using tax revenue and reducing the amount of emissions in the environment

However, increasing tax often is frowned upon by the public. This is due to the fact it leaves consumers with less disposable income, and businesses with less profit. It leads to a fall in consumer and producer surplus. Consumers already pay significant amounts of their income back to the government in the form of tax, as well as indirect taxes, such as VAT. If producers also pay higher taxes, they may pass this extra cost onto consumer in the form of higher prices. There is also opportunity cost for the money used from taxes. The government is collecting payments from the people and could be using their hard-earned money for better opportunities. For example, the UK may need improved infrastructure in the short term but instead it is being spent in the long term on the environment. Furthermore, less disposable income leads to a lower standard of living in the UK as people cannot buy the products they want.

In judgement, using a mixture of regulation and taxation would be best. Regulation is very easy to implement, while it may not be possible to raise taxes straight away without taking too much away from the consumers and businesses within the economy. Taxes need to be raised slowly over time. Using both gives the government more flexibility and options depending on the time frame to solve the market failure.

Essay 2: Eison Sheng

Evaluate whether tradable permits on major carbon polluting firms are more effective than government subsidies to renewable energy firms as a means of reducing carbon emissions.

Tradable permits might be considered more efficient than subsidies in terms of reducing carbon emissions in the short run. Tradable permits are so-called cap and trade schemes. The government gives companies the rights to pollute a certain amount per fixed time span. Tradable permits can be bought and sold but this does not affect the total amount of pollution made in an economy as the total stays the same. Without the government using tradable permits there would be no limit for carbon pollution so in the short run the most effective way of reducing carbon emissions is by using tradable permits. An externality occurs when the action of consumers or producers give rise to negative or positive third-party side-effects, in this case reducing carbon emissions is an example of reducing negative externalities. For example, if there were two shoe factories there would be a set amount of carbon the two factories can produce. If one wants to have the right to produce more, firm 1 will have to buy permits from firm 2, but even then, the amount of pollution stays the same because after firm 2 sells its permits they lose their rights to produce carbon. In the diagram below the free market equilibrium before tradable permits (Qm, Pm) represents how much carbon pollution the shoe industry produces. The social optimum equilibrium (Qt, Pt) represents production after implementation of tradable permits. The amount of carbon emissions decreases as output decreases from Qm to Qt.

However, if tradable permits are brought into the economy regulatory capture could occur. Regulatory capture is a form of government failure, it happens when government agency/workers operate in favour of producers rather than consumer. For example, to check and record the carbon emissions, government workers are sent to the shoe factories to inspect them. If the workers get bribed and hides the fact that the companies are over polluting it would mean the tradable permits weren’t effective and a waste of money as it is expensive to employ inspectors for permits. In this case, there is a net welfare loss die to excessive administration costs.

On the other hand, subsidies given to renewable energy firms could be more effective in the long run. Subsides are a direct or indirect payment to firms by the government for support. To save the environment we will eventually need to have a renewable energy source to rely on so pollutions isn’t constantly produced as we move away from dependency on non-renewable energy. Investment in renewable energy firms would need at least 5 years to see obvious progress made which means in the short run it isn’t the best way of reducing carbon emission but in the long run it will be much more beneficial to the environment. For example, if the government gives subsidies to solar panel manufacturers, the firms could be producing cheaper and more efficient solar panels in two years, but in those two years the price and efficiency stays the same. In the diagram below, the market private cost is where firms want the supply curve to be. The market private cost + subsidies is where it is after subsidies are applied, and the market social cost is where the society wants the supply curve to be.

However, the ability of the government is limited. The renewable energy business is an expensive business. If the government invests and gives subsidies to firms, the subsidies might not be enough to be able to see a significant rise in output or fall in prices. If renewable energy remains overpriced compared to non-renewable energy, consumers may not be able to afford to switch, which means the effects of the subsidies would be minimal in terms of reducing carbon emissions. For example, if the firm needs £400k per year to operate but the firm is only earning revenues of £300k per year, £100k of subsidies will only allow the firm to operate at normal profit, which may not cause a decrease in the price of renewable energy.

In this case, if the government wants to reduce the carbon emissions in the short run, they should use tradable permits. If the government wants to reduce carbon emissions in the long run, they should give renewable energy firms significant subsidies. However, both tradable permits and subsidies can be applied at the same time as one works the best in the short run and the other in the long run. Subsides will take time to have an effect and the government can use the money raised from the tradable permits to fund the subsides. Therefore, I recommend implying both policies at the same time.

Essay 3: Joseph Rogers

Evaluate the likely market failures associated with the building of a new airport on the outskirts of London.

Market failure is where there is too much or too little of a good being produced compared to the social optimum. A form of market failure is externalities; through evaluating the cost and benefits of these externalities it becomes easier to establish the extent of the market failures that are created. A negative externality is where the effect on a third party is harmful, and an external cost must be added to the private costs of the producer or consumer. A positive externality is where the third party effect is beneficial, and the external benefit must be added to the private benefit of the producer or consumer.

There are likely to be private benefits experienced from the building of a new airport. In the first six months of 2022 a similar London airport, Heathrow, made £183m profit after tax. This displays the lucrative nature of building an airport in London which is brings significant private benefits to firms involved in funding a new airport. Furthermore, duty free shops within Heathrow made £143m in revenue in 2022 also adding to the private benefit of the airport. The diagram below displays the possible supernormal profit that can be achieved through building a new airport. The diagram shows the airport operating at a profit maximising point MC=MR. The supernormal profit box (SNP) shown in the diagram is part of the private benefits to the firms involved. This allows for firms to pay dividends to shareholders or reinvest retained profits into improving their products. The rewards of dynamic efficiency can attract further investors and help them grow organically.

However, there are also extremely high private costs of building a new airport. The proposal of the Thames Estuary Airport shows that building cost would be £11.5bn and the connecting railways and roads would cost £1.8bn. This shows that the upfront costs of the construction are extremely high which will be extremely hard to find investors to fund such a project. Furthermore, there will be extremely large costs to the government. Firstly, if they were to subsidise the project it would cost them upfront a lot of money, which at the moment is a poor decision due to the amount of national debt they are in, at 84.5% of national GDP (£1.86 trillion)> Borrowing to fund this project would increase the national debt and therefore increase the interest payments on the debt. Secondly, they must fund public services such as schooling and healthcare in close proximity of the airport for the workers and their families. Finally, they face opportunity costs when funding of the airport as there are needs from a struggling NHS who need investment to cope with the increasing strain on capacity. Therefore due to the economic state of the UK right now, building a new airport would most likely be a project for the future as there are other objectives that should take priority over the government spending and solve the current market failures.

Thirdly they are huge external costs associated with the building of a new airport. Figures show that around 400,000 flights take off from Heathrow each year. In the newly proposed airport, they will be able to provide 24 hours a day flying possibilities which will increase yearly flights substantially. These flights will cause huge amounts of air and noise pollution especially in the nearby area which will have a detrimental effect on the environment. The diagram below shows the market failure of the overproduction of air travel in the UK. The output where MSC=MSB gives us the optimal output of air travel in terms of emission output. However, the diagram displays that the current output (Qm) is greater than optimal output. Therefore, it Is evident that there is market failure in the air travel industry as there is an overprovision of air travel leading to welfare loss in the form of environmental damage as shown on the diagram. Such environmental damage includes destruction of wildlife, worsened air quality and other quality of life issues. For example, the worsened air quality in the UK has been estimated to be linked to around 28,000 deaths. Most importantly it speeds up climate change which is arguably the world's biggest issue at the moment. Therefore, building a new airport could reduce quality of living for animals and humans.

On the contrary, there are many external benefits caused by the building of the new airport. Figures display 76,000 people work at Heathrow and many more around the airport as well. This displays one of the many external benefits of an airport. By building a new airport, a huge number of jobs will be created which can reduce unemployment in the UK and boost economic activity both locally and nationally. Furthermore, the construction will increase the possibilities for tourism. It is estimated that £131bn of the UK GDP is made up from tourism revenue. By building a new airport it will potentially increase tourism within the UK and therefore boost revenue for nearby retail shops and restaurants boosting economic growth in the area and the UK. Finally, it takes pressure off Heathrow, which is already operating at 98% capacity. Therefore, a new airport is likely to cause a huge increase in the amount of economic activity within the UK which will massively help boost economic growth.

In judgement, building a new airport cold provide many private and external benefits. By weighing up the private and external costs against the private and external benefits we can assess whether the construction of the airport would overall benefit the economy. However, in my opinion, the costs of the new airport outweigh the benefits as the priority of the world right now is reducing emissions in effort to slow down climate change. If the UK were to build a new airport it would increase emissions and be against the crucial global effort of stopping climate change, thereby creating an enormous long-term market failure, not only to the UK economy but the economy of the world.

Essay 4: Charlie Moss

Evaluate the view that command economies are necessarily less successful than market economies.

Command economies, promoted by Karl Marx, are economies that are controlled by the government meaning that they allocate the resources. Free market economies, promoted by Freddie Hayek, are economies with minimal government intervention and resources are allocated by market forces

Free market economies may be considered better as they are likely to promote innovation and long run efficiency. This is because they have strong incentives built into the system and as a result produce higher quality goods and services Inefficient companies will most likely be driven out by firms that are more efficient. This means that firms must be efficient to survive. This competition encourages innovation which can lead to cheaper and better quality products due to them trying to win over more consumers. This therefore leads to an increase in consumer surplus due to them benefiting more from the better product differentiation. An example of this was seen in North and South Korea. The North is a command economy with very little freedom which has led to very little innovation and poor consumer welfare. The South’s economy has grown much faster due to the fact that it has been more of a free market allowing them to innovate and become more efficient with better products leading to an increase in consumer surplus.

However, in the long run the free market can get stuck. This was shown by John Maynard Keynes after the Great Depression. On the 29th of October 1929 the US stock market crashed leading to a recession that lasted over 10 years. US president Herbert Hoover was a free market economist so believed that the market would self-correct. Firms carried on producing at their normal rates and this led to over production, which in turn led to less money being in the economy and a decrease in income, which further led to a decrease in investment and consumption. The US government eventually invested in infrastructure and employment to increase employment rates and increase standards of living. This historical example shows that without government intervention free markets may not be able to recover from major recessions Command economies are able to respond quicker due to economic crises due to already existing government allocation of resources, which helps avoid systemic collapse as they are not relying on the economy to self-correct

However, Hayek argued

that allocation of resources cannot be predicted due to information gaps

On a macroeconomic level, it takes too long for the governments to foresee what is likely to happen in individual markets and by the time it does the market might have moved on There is a real-world example of this when the Soviet Union between 1930 – 1950s implemented 5-year plans to try and improve the economy. They wanted to initiate rapid and large-scale industrialisation across the Union of Soviet Socialist Republics. However, these plans fell through due to lack of government information. Trying to update plans every 5 years made them unresponsive to changing needs and wants of consumers. The free market, however, relies on the invisible hand (i.e., market forces of supply and demand) to get rid of excess supply and demand. This is due to the free-market price mechanism in which price signals, incentivises and rations the market. When price is too high and there is an excess supply, the free market will bring the price down back to market equilibrium. When the price is too low there is excess demand and price will increase, coming back to equilibrium. The free market thus is naturally more allocatively efficient.

On the other hand, marked based economies can lead to an unfair distribution of income and wealth. Inequality is a type of market failure due to it not allocating resources fairly. This can be caused by many things, such as the tax system becoming less progressive as well as welfare cuts making it harder for poorer households. Marx argued that inequality can lead to increase in crime and decrease labour productivity. Therefore, government intervention is needed to allow for standards of living to be more equally distributed and for equal opportunities for all. Low standards of livings and incomes can also lead to decrease in health of the working population and firms will be less productive as a result In a command economy the government controls the allocation of resources, and an equitable distribution of income can be controlled. This means that command economies will not suffer from this kind of misallocation of resources.

In judgement, I think a mixed economy is the best option for a successful economy. This is due to them having a measure of government intervention if needed, for example if the economy falls into a recession. However, with a mixed economy, there is also the efficiency and innovation of the free markets. In today’s world, all countries have mixed economies aiming to gain from the benefits of both types of economic system.