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ECONOMICS
CLASS OF 2024
Theme 1 – Introduction to Markets and Market Failure
Essay 1: Vlad Melnyk p.5
Using an externalities diagram, evaluate the imposition of an extra charge for vehicles in
cities, such as ULEZ, for high emission cars
Essay 2: Darcey Knight p.8
Evaluate the view that a minimum price on alcohol is likely to be an effective form of
government intervention to lessen externalities from drinking.
Essay 3: Joe Cooper p.10
Using a diagram, evaluate the microeconomic impacts of Ofgem’s decision to increase its
the price cap on energy.
Essay 4: Jacob Read p.12
Evaluate whether tradable permits on major carbon polluting firms are an effective means
of reducing carbon emissions.
Essay 5: Freddie Stewart p.14
To what extent are governments justified in offering subsidies to consumers and producers
of electric vehicles.
Theme 2 – The UK Economy: Performance and Policies
Essay 6: Monty Wallace p.17
With reference to the 2023 cost of living crisis, evaluate the effectiveness of higher interest
rates to bring down inflation.
Essay 7: Harry Saker p.20
Discuss the possible impact(s) of AI on employment opportunities for both women and
people living with disabilities.
Essay 8: Sam Frisby p.22
Evaluate the view reducing inflation necessarily has trade-offs with other macroeconomic
objectives.
Essay 9: Oliver Smee p.24
Discuss the likely success of two demand-side policies of your choice in raising the level of
consumption in the UK.
1
Theme 2 – The UK Economy: Performance and Policies (continued)
Essay 10: Olivier Wrobel p.26
With reference to a country of your choice, evaluate the use of fiscal policy to reduce the
size of the national debt.
Essay 11: Edward Houghton p.28
Discuss the effectiveness of two interventionist supply-side policies the UK government
could implement to stimulate economic growth.
Essay 12: Ella Dickson p.30
Discuss the microeconomic consequences of defunding the police.
Essay 13: Alec Veitch p.33
Evaluate the extent to which recent levels of net migration have been beneficial overall to
the UK economy.
Theme 3 – Business Behaviour and the Labour Market
Essay 14: Lisanne Schoenmaker s p.36
Evaluate the view that a merger between Three and O2 would be beneficial for these firms
and their consumers.
Essay 15: Charlie Carey p.38
Evaluate the extent to which price discrimination can lead to an improvement in economic
welfare.
Essay 16: Zac Wilson p.40
Evaluate the extent to which monopolistically competitive firms are more efficient than
oligopolistic firms.
Essay 17: Ewan Pratt p.43
With reference to BASF or another firm of your choice, evaluate the benefits of economies
of scale.
Essay 18: Oliver Renwick p.45
Evaluate the extent to which the UK bookseller market can be described as perfectly
competitive or monopolistic.
Essay 19: Eddie Davey p.47
Discuss the extent to which price fixing behaviour is inevitable in highly concentrated
markets such as the European truck market.
2
Theme 3 – Business Behaviour and the Labour Market (continued)
Essay 20: Noah Sennhauser p.49
Evaluate the effectiveness of policies that can be used to resolve the market failure caused
by private water companies polluting rivers.
Essay 21: Ben Watkins p.51
With reference to an industry of your choice, evaluate policies that might be used to
improve competitiveness.
Essay 22: Noah Taylor p.53
To what extent has privatisation of the UK rail industry been a success?
Essay 23: Johannes Meiswinkel p.55
Discuss the extent to which the NHS's role as a dominant employer is always
disadvantageous to healthcare workers.
Theme 4 – A Global Perspective (Class of 2023)
Essay 24: Ben Staddon p.58
Evaluate the impact of globalisation on developing economies. Refer to a developing
economy (or economies) of your choice in your answer.
Essay 25: Jamie Macleod p.60
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 26: Richard Wang p.62
Evaluate the factors that might have caused an increase in the international
competitiveness of the UK’s goods and services.
Essay 27: Aaron Coleman p.64
Discuss the economic implications of the UK leaving the European Union.
Essay 28: Gordon Fitzgerald p.66
Evaluate the arguments that economies might put forward to justify the use of protectionist
measures.
3
Theme 1
Introduction to Markets
and Market Failure
4
Essay_1: Vlad Melnyk
Using an externalities diagram, evaluate the imposition of an extra charge for vehicles
in cities, such as ULEZ, for high emission cars.
An extra charge on vehicles in cities, such as ULEZ scheme (The Ultra Low Emission Zone is an area in
London, England, where an emissions standard based charge is applied to non-compliant road
vehicles), will cause a decrease in the side-effects from emissions on society.
Externalities are negative or positive side effects on third-parties caused by production or
consumption. In the diagram above, P1Q1 is market equilibrium (Em1) before the government
expanded the ULEZ zone in UK in order to reach the social optimum equilibriuim at Popt,Qopt
(Eopt). At the free market quantity, Qm, MPB is greater than MSB. This shows the existence of
external benefits missing to society. When the government expands ULEZ there is a shift inward
Dmpb1 to Dmpb2, and a new market equilibrium (Em2). This is because drivers prefer do not use old
cars and change them to new ones in order to avoid paying £12.5 a day for driving in the London
ULEZ area in high emission cars. Therefore, some drivers will switch to public transport in order to
avoid paying the charge. As a result of shift of Dmpb1 to Dmpb2, Qm2 is closer to the social
optimum quantity, Qopt, and there is less pollution, which is better for society. As a consequence, by
reducing traffic pollution it can help to decrease external costs (paid by third parties) such as
thousands of deaths each year (between 28,000 and 36,000 UK deaths a year caused by diseases
such as cancer and lung disease). Furthermore, it would help to decrease different types of lung
disease such as asthma, etc. In addition, it would decrease pressure on NHS. The cost to the NHS and
social care of air pollutants was estimated to be £1.6bn between 2017 and 2025.The government
faces an opportunity cost (the value of the next best alternative foregone) as this money could be
spent on other public goods, such as roads or education.
However, ULEZ or similar projects might cause disproportionate impact on low income individuals.
For example, in Cambridge there are some discussions about making a Cambridge Congestion
Charge. Drivers would be charged £5 on a daily basis for driving in the Cambridge congestion zone.
Many people who live just a bit outside of Cambridge during discussions explain that by making the
5
CCC they would need to pay quite a lot, as they need to drive children to school, drive to work and
see their families. This means that that this extra charge for low income households will have a
detrimental impact on them compared to high income households, because the charge for low
income households is a proportionately larger part of their income than it is for high income
households, as the £5 charge is the same for everyone. Some households would be deterred from
driving their children to school or driving to work, which will affect school and work attendance, so
productivity might decrease. In addition, increased inequality is a problem because it might cause
social tension, economic inefficiency, and an increase in crime rates. So, by making more ULEZ and
similar projects it will increase the cost of living for many people, increase inequality, decrease
productivity and thus decrease standards of living.
In addition, after the imposition of an extra charge on vehicles with high emissions , the private costs
for businesses with older vehicles may increased as they cannot meet ULEZ standards. Private costs
are costs paid by consumers or producers. Some businesses have no other alternative than to go to
ULEZ, because they need to transport the cargo, etc.
ABCD the initial profit that was made by delivery firms before imposition of the extra charge. Once
the extra charge was imposed it caused upward shift of AC and MC curves (AC1 to AC2 and MC1 to
MC2), because of the additional cost for each additional car journey. Therefore, profit for firm
decreases and the new supernormal profit (SNP) is shown by the box EFGH. Some delivery firms are
therefore worse off after the imposition of extra charge in terms of profit. They can potentially buy
new vehicles and therefore do not pay £12.5 in ULEZ, but what if a firm does not have this money to
invest in new vehicles? Besides, there is always an opportunity cost faced to business as they might
have instead invested their profit in their workers’ salaries to increase productivity. Also the increase
costs might be passed onto consumers by the firms increasing the prices of their delivery services.
But this might make situation even worse if the consumers then switch to another delivery cargo
company. In this case, the extra charge will be more harmful for small and medium enterprises, as
the cost for them is likely to be too high. Therefore, it might be controversial to expand or create
more ULEZ in UK.
6
However, there are also some potential private benefits for delivery cargo companies after the
imposition of extra charge. Private benefits are benefits received by consumers or producers. As the
government is aware of private costs borne by small and medium enterprises, they might provide
extra benefits, like subsidies. A subsidy is support given by the government that lowers cost for
producers. This is type of government intervention is aimed at promoting competition. As a result,
firms can replace their old delivery vehicles at reduced cost and therefore increase their efficiency,
productivity and profit, as the new vehicles do not need to be constantly repaired, consume less fuel
and do not have to pay the ULEZ charge. This means that AC and MC won’t shift upwards, or not by
much, so the profit for firms will improve. Thus, if governments can subsidise SMEs, then firms can
benefit and be more productive, and emissions can fall at the same time.
Expanding ULEZ to lower carbon emissions has pros and cons, however, I think that expanding ULEZ
in London and creating new ULEZs in other cities is really beneficial for society as it would make the
nation healthier, by decreasing lung disease and decrease the number of premature deaths. All of
these advantages listed above outweigh any private and external costs, as there is nothing more
important than people’s lives and health. Health and life are often considered intrinsically valuable,
making it ethically sensitive to reduce them to mere monetary figures. The intrinsic worth of human
life goes beyond economic considerations and is deeply rooted in moral and philosophical beliefs.
7
Essay_2: Darcey Knight
Evaluate the view that a minimum price on alcohol is likely to be an effective form of
government intervention to lessen externalities from drinking.
A minimum price is a form of government intervention used to solve market failure – the overprovision
of de-merit goods. If the price of a demerit good, like alcohol, is too low then it makes it
easily accessible for consumers to buy, and so the government can impose a price floor which is the
lowest price the product can be legally sold. An externality occurs when the actions of consumers or
producers cause negative or positive third-party side effects. Alcohol is an addictive demerit good
and can cause negative externalities on third party members, including health issues, reckless
behaviour or possible injuries. Negative consumption of demerit goods can cause welfare loss, which
is the consequence of a market not operating at social equilibrium. This can be reduced through
government intervention to produce the socially optimal amount.
A minimum price on alcohol would be an effective form of intervention to lessen externalities from
consuming alcohol as it would discourage consumption. This is because alcohol won’t be able to be
sold at a low-price level therefore consumers who can’t afford to pay as much may be put off
purchasing – particularly younger or under-age drinkers as they may not have a job or could have
student loan debts therefore will be more likely to have lower disposable income, and so will only
buy cheap alcohol. As a result, the quantity demanded for the product will decrease which will help
in lowering the quantity consumed closer to the socially optimal level.
In this diagram a minimum price floor has been set above the previous price (P1). The minimum
price means that suppliers must charge a higher price than before. The higher price can put off
customers buying therefore there is a contraction in demand. As many social problems are blamed
on the over consumption of alcohol, this can therefore help reduce welfare loss as well as the
negative externalities that occur from its consumption. After Scotland’s health organisation
introduced the minimum unit price there were reduced deaths, hospital admissions and alcohol
consumption in Scotland by 3%. The greatest reductions being in sales for products that increased
the most in price.
However, alcohol is an addictive substance and therefore, despite a higher price, consumers may still
be willing to purchase the substance. This is determined through price elasticity of demand which is
the responsiveness of quantity demanded when there is a change in price. This factor makes alcohol
a relatively price inelastic good so consumer are unwilling to change their habitual behaviour of
purchasing when price changes. This means that consumption will not go down as much, and so the
social welfare loss will remain. The externalities from consuming alcohol will not be affected
8
significantly. This can cause a waste of time for the government as little change will occur and, due
to administrative costs to put the minimum price in place, there is a risk of government failure – net
welfare loss due to government intervention.
A minimum price could be effective in reducing externalities as it would encourage drink
manufacturers such as Heineken or the largest global producer, InBev SA/NV, to modify their
product so that a price increase for consumers is limited. For example, in 2012 InBev reduced the
alcohol content of their beers for the UK market from 5% to 4.8%. This reduced the price floor put
on the product as it was set that higher alcohol content drinks would have a higher minimum price.
This was beneficial as the reduced alcohol content meant that it would take longer for a consumer to
become under the influence as they would have to keep buying alcoholic drinks until they get to that
point which they may not be willing to pay for. This action potentially reduces the externalities of
health issues, injuries and reckless behaviour caused from over consumption of alcohol.
A negative externality diagram with a minimum price imposed.
In the externalities diagram above, at the private market equilibrium where MPC = MPB there is a welfare loss
because at Qm the MSB is less than the MPB, and it is not the socially optimal amount of production (Qopt -
the social equilibrium where MSC = MSB). In order to reduce the welfare loss, with the minimum price
imposed, it will cause a contraction along the MPB curve, therefore causing the level of output to fall to Qopt
and remove the welfare loss.
However, some producers may choose not to follow the minimum price and sell on the black market – an
illegal trade for goods or money. As can be seen in diagram 1, the minimum price creates a surplus of
supply of alcoholic drinks (QS – QD). According to the EUROCTIV underground alcohol trade is estimated to
represent around 7% of the market. This can pose a serious risk to the consumers – particularly the poorest
and heaviest drinkers as they are more willing to turn to a cheaper alternatives. Alcohol can therefore be sold
at lower prices which encourages the consumption and fuels addictions therefore not helping in reducing
externalities and social welfare loss. This could also result in a loss of the government’s tax revenue as the
sales that should be bringing in that revenue are now in the shadow economy.
In my judgement I believe placing a minimum price would not be a beneficial government intervention. This is
because alcohol is a highly addictive good therefore consumers will not be willing to stop purchasing because
of a higher price. Also, if the government were to set a too high price floor, then it could encourage the growth
of the black market which is hard to abolish and regulate, again due to the addictive nature of the good. It
might be a more effective form of government spending to focus on other ways of reducing the externalities
caused by alcohol such as increased police enforcement so that drunk people can be taken care of safely so
that injuries and reckless behaviour do not occur as much as they already do.
9
Essay_3: Joe Cooper
Using a diagram, evaluate the microeconomic impacts of Ofgem’s decision to increase
its the price cap on energy.
A price cap is when the government sets a legal minimum price for a particular product, Price caps are
designed to protect against over-charging and ensure that energy suppliers cannot charge an unfair rate on
each unit of energy used.
One impact of Ofgem's price cap on energy bills is the likely decrease of people in fuel poverty. This
is because the price of energy will be legally set at a price below that of the free market. This is
shown in the diagam above, which starts at the market equilibrium (price=G, output=B). After the
price cap is introduced, the max price is at F. Therefore, consumers will be better off as the price
they pay for energy will decrease. This will decrease the number of people in fuel poverty which will
mean standards of living increase and lead to fewer negative externalities such as health problems
caused by under heating of homes. When the price cap was first introduced on the 1 January 2019
the maximum price was at £1137. This shows the reasoning behind the introduction of the energy
price cap, which was to reduce the number of people in fuel poverty.
However, an increase in price cap would reduce these effects even though it remains lower than the
free-market equilibrium price. An increase in the price cap will reduce disposable incomes, and
lower average living standards. It will especially affect consumers in the current economy where
inflation is very high (11.1 percent in October 2022). Fuel poverty happens when a family needs to
spend more than 10% of income to maintain an adequate heating regime. In October 2022 the
maximum price went up to £3.459 for an average household, which was much higher than previous
years, meaning many consumers could not afford the new price. The wholesale gas price had risen
rapidly because of many reasons including the conflict between Ukraine and Russia. This was caused
because of the supply restrictions and sanctions forced onto Russia meaning Germany had to find
alternative suppliers. This led the government to subsidise and introduce a new price guarantee
(£2500) where the government paid the difference in prices. This was an acknowledgement by the
government that the price cap was too high for many consumers.
10
Another microeconomic impact of Ofgem's decision to increase its price cap on energy bills is that
energy suppliers will stay in business. In the diagram you can see there is a negative effect on the
firm of the rising prices of gas caused by the war in Ukraine. The diagram shows British Gas at profit
maximising output. This occurs when MR = MC. Initially, before the increase in the price of wholesale
gas, British Gas is making a profit of box (A,B,C,D). After the cost increase but before the price cap
increase, the profit box is (A,B,C2,F). At Pmax1 the firm is making a loss. The profit box of firms like
British Gas have shrunk because of the increase in price of wholesale gas. Unless the price cap
increases, energy suppliers might not be able to stay afloat, there will be a lack of energy suppliers in
the UK. In 2021, 26 energy suppliers went bust, including Bulb Energy. After the price cap is
increased to Pmax2, the new profit box is (E,F,G,H) and British Gas is able to make a small profit.
Without the increase in the energy price cap, firms will go bust and remaining firms will decrease
potential investments. This will shift the aggregate demand curve to the left by an amount equal to
the negative multiplier times the change in investment.
However, as energy prices increase as seen in the diagram, energy firms will make profits but it will
mean an increase in fuel poverty. To deal with this the government could nationalise the energy
market. Nationalisation is when a market in the private sector changes to the public sector, so the
government has control. This will make it possible for the prices to remain low and the sector can be
run at a loss in the short run because it is owned by the government. The French government owns
the majority of the French energy market. The French government introduced a maximum increase
in the price cap of 4% per year to try and match inflation. This costs the France government 39
billion pounds per year, but keeps energy prices much more affordable that the prices experienced
in the UK in the last few years.
The increase in the energy price cap was a good idea as without it, many firms may have struggled to
break even and it is crucial for an important market like the energy sector to remain competitive.
However the government should introduce a limit to the amount the price cap can increase each
year, as we have seen in France. The government subsidy to help consumers pay their bills was the
right thing to do for a short period of time so that households could deal with the increase in price.
Wise government intervention will balance the needs of consumers with the needs of firms.
11
Essay_4: Jacob Read
Evaluate whether tradable permits on major carbon polluting firms are an effective
means of reducing carbon emissions.
Tradable permits are government issued licenses allowing firms to emit a specific number of
pollutants in return for payment. The most common pollutant would be carbon dioxide. One
example is the European Trade Scheme (ETS), which operates in countries across Europe. Firms of
respective nations may be forced to pay fines if environmental targets are not met. Therefore, firms
are incentivised to be environmentally responsible with their production to keep their costs low. We
assume their main aim is to maximise profit.
Car production in the UK
Carbon tradable permits may be an effective way to reduce carbon pollution as it pushes costs up for
car manufacturing firms. The diagram above shows that there is an external cost in the production of
cars. MSC is greater the MPC at the free market quantity, Qm, proving the existence of external
costs. However, there is no external cost at the socially optimum quantity, Qopt. In order to
eradicate the external cost and subsequent welfare loss, the government must shift the MPC curve
inwards until it is equal to MSC. It does this by introducing the permit scheme. The MPC curve shifts
inwards because tradable permits are an additional cost to the car manufacturing firms. As permit
prices increase over time, the MPC will continue to shift inwards until it reaches MSC. This happens
as governing bodies, such as the EU, buy back the permits to increase the permit price and gradually
reduce the levels of carbon emissions. CO2 in g/km produced in the UK by all firms has decreased
from 171.4 in 2004 to 124.7 in 2014 in part as a result of being in the ETS. Furthermore, the UK aims
to reduce carbon emissions by 80% by 2050. This is beneficial for the UK economy as carbon
emissions causes negative externalities of production, third-party costs caused by production of a
product, such as contributing to the effects of climate change and subsequent costs to the NHS.
However, carbon permit schemes may be ineffective if the price elasticity of demand (PED) for a
product, such as cars, is inelastic. A price inelastic demand means that there is little responsiveness
in quantity demanded to a change in price. In the diagram above, the D=MPB=MSB curve would be
much steeper, meaning that any inward shift in the MPC curve would have a limited effect on the
quantity of cars being produced. Even though producing cars is more expensive due to the cost of
the permit, the quantity demanded of cars may only change a little in response. This means that the
car industry will continue to over produce compared to the social optimum quantity and the welfare
loss will still be relatively large. This could be seen as a government failure, which occurs when
government intervention leads to a net welfare loss.
12
Market for carbon permits
Another reason tradable permits might be effective in reducing carbon emissions is that it
encourages firms to switch to alternative means of production. Carbon permits can be traded on the
open market, which means price changes after a change in supply or demand. If the EU reduces the
number of permits in the scheme, prices for permits will rise. This means that firms can boost their
profits by switching to cleaner methods of production and selling the permits they no longer need. In
the diagram above, the price of the permit goes up from €10 to €20 after the number of permits is
reduced by the EU by buying back permits from firms in the ETS and then withdrawing them from
the market. This is shown by the inward shift of the vertical supply of permits curve (S1 to S2). The
government has an incentive to reduce the supply of permits to decrease carbon emissions over
time. Switching to alternative means of production could be done by using renewable energy which
does not produce pollutants. For example, renewable energy contributed 44.5% of the UK electricity
generation in 2023, which was around an 8% increase since 2022. Renewable energy creates a
positive externalities of production as it prevents pollution. As firms switch to more renewable
energy in the UK, the government will be able to reach their environmental goals more easily and
faster.
However, it is hard to set the right limit for carbon permits. The misallocation of permits could lead
to a government failure as well. It is hard to set the right level because too many carbon emissions
per permit could be ineffective as firms will still be incentivised to profit from producing pollution.
On the other hand, allocating too few permits will mean that firms cannot produce at the right
quantity to meet the market price. This is because if there is a scarcity of permits, then there will be
too much of a burden on carbon production that firms may not be able to profit and may go
bankrupt. This hurts the market as more firms will leave the market because of the lack of profitmaking
ability. The ETS was criticised at the start of the scheme for setting the price of its permits
too low and thus being relatively ineffective in reducing emissions.
I do not believe that tradable permits are the most effective means of reduce carbon production.
This is because the difficulty of setting the right amount in permits may lead to them being
ineffective or damaging firms. Since the permit scheme will only be effective in markets with price
elastic demand, their effectiveness will also be limited to those markets. Tradable permits can be
effective in incentivising firms to use renewable energy; however, firms may need subsidies from the
government to switch to renewable energy, and these can be costly in the long-run.
13
Essay_5: Freddie Stewart
To what extent are governments justified in offering subsidies to consumers and
producers of electric vehicles.
A subsidy is support given by the government that lowers costs for producers and lowers price for
consumers. This is currently being used by the UK government through their (plug in grant)
movement, where prices are discounting for charging electric vehicles. One reason that justifies the
government subsidising electric cars would be the fact it will reduce pollution and cut back on the
negative externalities of petrol car usage.
The diagram above shows the negative externalities caused by the consumption of petrol cars. These
are the costs to 3rd parties such as pollution into our environment. At quantity, QE, we are
producing too many petrol cars compared to the social optimum. Through the plug-in grant
movement, more consumers will purchase electric cars causing the MPB curve for petrol cars to shift
inwards closer to the MSB curve. This then results in a fall in the quantity of petrol cars and causes
the welfare loss to shrink. This justifies the government subsidising electric vehicles as it will allow
for a reduction in negative externalities caused by pollution. This could also benefit not only the
everyday consumers but pre-existing firms too. For example food delivery services such as Ocado
could significantly reduce unit costs by switching to these subsidised electric vehicles, due to there
being no congestion tax on electric vehicles and a much cheaper cost to fuelling their trucks.
Demand curve for electric
vehicles.
However, in practice it could be argued that petrol cars are price inelastic, meaning that the quantity
demanded from the consumer will not decrease significantly as consumers will still be buying petrol
cars and not be switching to electric cars. Price elasticity of demand is the responsiveness to quantity
demanded after a change in demand is to change in price. As shown in the diagram below, there
14
may be only a small reduction (Q1 to Q2) after the subsidy on electric vehicles causes the consumer
price to fall from P1 to p2. Firms like Ocado may be unlikely to change to electric vehicles as it may
be too costly to change their whole fleet of vans in one go. This suggests that an extremely large
subsidy would be needed to incentivise firms to move away from petrol cars.
Another point that justifies the subsidy on electric vehicles would be the benefit it has to producers.
By introducing a subsidise it will allow for firms to cut down their costs and may even leave for the
opportunity of expansion, encouraging them to invest there extra profits into research and
development. This could result in opportunities for dynamic efficiency, where firms reinvest their
retained products in developing products that meet the changing needs and wants of consumers
over time. As shown in the diagram below, the introduction of a subsidy means the firm can buy an
EV at a cheaper price (Pm to Pc). Lower costs can increase profits since total profit equals revenue
minus costs. If firms such as Ocado take advantage of these cost savings they will have more
supernormal profit to reinvest in the growth of their business, which may translate into further cost
savings via economies of scale.
However, it could be argued that this money spent by the government on subsidising electric
vehicles could be better used solving problems such as the lack of funding in the NHS. Opportunity
cost is the cost of the next best alternative forgone. As shown by the shaded red area in the diagram
above, the government has to spent a lot to subsidise these vehicles. The NHS might be a more
recipient of this finding as it is one of the key parts of the UK infrastructure that has lacked funding
during the austerity years. Many economists would argue that it would be a more effective was of
using government in comparison to subsidising electric vehicles.
Nonetheless, I believe that it is justified for the government to subsidies electric vehicles as it
provides benefits to both the consumer and producer and helps contribute to the reduction in
pollution that needs to be a top priority of governments today. In the grand scheme of things, the
subsidisation of electric vehicles will not only have a long term positive effect on pollution levels but
also will lessen the future burden on the NHS. This is because with lower pollution levels it will
reduce the number of respiratory infections and lung cancers caused by polluted air, which will in
turn reduce the numbers of patients admitted to hospitals.
15
Theme 2
The UK Economy:
Performance and
Policies
16
Essay_6: Monty Wallace
With reference to the 2023 cost of living crisis, evaluate the effectiveness of higher
interest rates to bring down inflation.
Inflation is the increase in the average price level of goods and services in an economy. Increasing
interest rates is an example of contractionary monetary policy. Contractionary monetary policy is
the use of interest rates and quantitative tightening to shift AD inwards. The cost-of-living crisis in
the UK, has caused significant micro and macro-economic effects. Inflation rates have skyrocketed,
being above 10% in 2022, causing huge disbenefits for consumers and businesses.
Higher interest rates will discourage borrowing for consumption and therefore encourage saving.
This could help subside the effects of the war in Ukraine and sanctions imposed on Russia. This
caused the increase in gas prices and food prices, as Ukraine is the ‘breadbasket of the world’, which
caused the cost-of-living crisis and the high inflation rates due to the increased cost of production,
shifting SRAS inwards and pushing the price level up from PL1 to PL2 on the diagram above. Interest
rates are the cost of borrowing money and higher interest rates would cause an inward shift in AD,
as shown in the diagram. This is because as the cost of borrowing has gone up, consumers are less
likely to borrow to spend and more likely to save, as consumption is a component of AD, AD will fall.
This would then decrease the price level to PL2 to PL3, on the diagram. Such a disinflationary effect
could allow people to buy the necessities that they need to survive, like food and heating, that they
could not afford before. The Bank of England increased the base interest rate from 0.1% in January
2022 to 5.25% in August 2023. This was done to desensitise consumer borrowing and bring down
inflation. Inflation has decreased inflation to roughly four percent in January 2024.
However, increasing interest rates could cause standards of living to decrease, as people are less
able to buy goods and services. This is shown on the diagram by the decrease in national output (Y1
to Y2. Additionally, people that have unfixed mortgages will be severely worse off, as the standard
variable rate (SVR) has been 8.17%, since February 1 st , 2024, rising from 6.44% at the same time last
year. Due to this substantial cost increase, people will have less disposable income. This could lead
to higher levels of inequalities, showing macro-economic goals in conflict. This could go on to cause
social problems, such as increasing crime rates or having a negative effect on mental health caused
by the stress of being unable to buy the things they need.
17
The higher interest rates will also discourage borrowing by firms and therefore encourage them to
save. This will also cause an inward shift in AD, as shown in the diagram above, because investment
is a component of AD. This would then also contribute to the price level falling from PL2 to PL3. This
is because as the cost of borrowing has gone up, businesses are less likely to take loans for their
investment. For example, a water company would be less incentivised to take out a loan to stop
pollution, due to the higher interest rates, as the cost of borrowing has increased. This may make
the project too expensive, hurting the society. Investment is a component of AD, and as investment
falls, so does AD, causing the inward shift of the AD curve. This, once again, causes a disinflationary
effect. Due to the negative multiplier, there could be more disinflation lowering the PL more, helping
consumers further. The multiplier is the ratio between the initial injection into the economy and the
actual change in Real GDP. It is shown in the diagram below: the initial withdrawal of investment
shifts AD1 to AD2 and causes the price level to fall from PL1 to Pl2. The negative multiplier shifts AD2
to AD3 as further rounds of spending are withdrawn. The price level falls from PL2 to PL3 as a result.
However, a negative effect of an increase in interest rates might be a lower long run capacity in
Britian. This is shown in the diagram below with LRAS1 being the starting potential, LRAS2 being the
potential capacity after higher interest rates, and LRAS3 being the potential capacity with lower
interest rates. Due to the lower levels of investment, both foreign and domestic, caused by higher
interest rates, the potential output of the economy is lowered. This is because higher interest rate
discourage investment. The lower total output in the long run could cause the British international
competitiveness to decrease. The lower long run potential of the economy might lower the provision
of employment opportunities, as firms are no longer hiring as many workers due to the lower levels
of output.
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Overall, while I think that contractionary monetary policies such as increasing interest rates would
bring down inflation, however, due to the decrease in real GDP, the people of the UK might end up
with lower standards of living. Additionally, as the cause of inflation is supply-side (cost-push
inflation), with it mainly being caused by the increase in wholesale gas prices, interest rates would
be only semi-successful. Higher interest rates could lead to less capacity in the economy in the longrun,
and slowing of growth in the long run might mean that people suffer more than if they just had
to deal with higher inflation, which may have come down naturally after world markets had settled. I
believe that in the long run, the people will be worse of as the disbenefits of high interest rates could
lead to less investment, both domestically and abroad, hurting the economy even more than the
inflation.
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Essay_7: Harry Saker
Discuss the possible impact(s) of AI on employment opportunities for both women and
people living with disabilities.
When discussing the possible impact(s) of AI on employment opportunities for both women and
people living with disabilities it is important to understand that the employment rate is the number
of workers in work, divided by the population of working age expressed as a percentage. The labour
force is the number of people of working age who are able, available and willing to work. AI
(Artificial intelligence) is the intelligence of machines/or software.
One possible of impact of AI technology is, that it allows for a more accessible workplace. For
example, Microsoft have brought in the use of AI and technology to create an accessible working
space and present hiring opportunities to people with disabilities. People with poor vision can use a
larger and brighter screen, the colourblind mode or a narrator to read text. For people with hearing
issues, they can use live transcript. Workers with disabilities are workers with any physical and/or
mental conditions which can make it more difficult to work and do certain activities. If firms can
become more accessible to them it will decrease long-term structural employment; this is when
there is a change in the economy which causes unemployment, or in this case, a positive change can
lead structural employment. This leads in a boosted labour force because there is an increase in the
number of people of working age that are able, available and willing to work. If firms fail to become
more accessible, it can lead to an increase in discouraged workers, who are people of working age
who have stopped looking for work. A more accessible workplace allows more people with
disabilities to look for work. This increases the labour force and the diversity of it, and therefore
creates more revenue for the government as they will gain income from taxes and will pay less in
benefits.
However, AI can replace jobs which were taken by people with disabilities. For example, the airport
smart gates and self-check outs in shops have taken jobs away from workers. These are jobs which
could be taken up by people with disabilities because it involves little physical and mental stress. But
they have been replaced by AI and other technology because it is cheap and quicker. This is cause of
structural unemployment because there is a change in the economy which leads to unemployment,
and this results in more people becoming economically inactive. Increases in AI technology leads to
to an increase in unemployment because firms don’t have to pay AI a wage, which lowers their total
cost and therefore increases profits. This incentives firms to increase their usage of AI which will
continue to lead to people with disabilities being made unemployed.
AI can also impact the flexibility for women in the workplace. For example, Goldman Sachs have
incorporated AI technology into their business to make it more accessible and to make it easier to
track trends in the market. The introduction of remote working tools and AI-enabled technology,
which can track and compute data and models in a fraction of the time, allows people to work
remotely. This makes jobs more accessible for workers because they can choose flexible working
hours and accommodate personal responsibilities. This is especially important for female workers
who have traditionally committed themselves to childcare or managing the household. This means
women who might have struggled to balance work and personal life can now participate in the
workforce. This leads to less people being economically inactive as they will be able to look for work
because they can be more flexible with working hours. If they have other commitments, then they
will still be able to work. AI technology allows people to work remotely and allows more flexible
hours, allowing a more flexible workforce and more workers, increased national income and
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increased government revenue. On top of this, firms can cut back on cost because if people are
working remotely, they don’t have to pay to power office blocks and they can focus spending
elsewhere, leading to economic growth.
However, when AI can do the same job for lower cost, this can lead to job displacement. For
example, self-check-in kiosks in hotels like the Premier Inn and the Hilton have led to the
displacement of workers. Because jobs such as receptionists have traditionally be done by females
(87.5% of female workers and only 12.5% of male workers) jobs being taken up by AI may
particularly affect female workers. This leads to more unemployment because there will be less
women working and there will be a smaller and less diverse labour force as it becomes more male
dominated due to female workers being displaced. This is because of the increase in AI technology
that can match what human workers do and at a cheaper price. This then leads to female workers
becoming unemployed and more economically inactive, which can put more stress on the
government because they have to pay benefits and gain less from taxes.
AI can create both opportunities and challenges and governments need to ensure AI can benefit
everyone equally. Although AI poses challenges such as potential job displacement, it can massively
benefit the workforce and economy by increasing inclusivity and improving access to employment
for women and individuals with disabilities. Balancing these challenges and opportunities will be
hard and it requires technology development that ensures that AI priorities inclusivity and
accessibility to improve workforces and standards of living, rather than prioritising profit and
efficiency, and this should be addressed by government policy makers.
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Essay 8: Sam Frisby
Evaluate the view reducing inflation necessarily has trade-offs with other
macroeconomic objectives.
Inflation is when the general price level in an economy has risen over two consecutive quarters.
Unemployment is when people who do not have jobs but are able and willing and actively seeking to
get a job but have been unable to find job opportunities. Policies that aim to reduce inflation could
have trade-offs with other macroeconomic objectives such as low unemployment and
environmental goals.
One policy used to combat inflation is increasing interest rates which is an example of contractionary
monetary policy as it is intended to reduce monetary expansion. The diagram below shows that
there is a conflict between increasing interest rates and falling unemployment as Real GDP falls from
Y1 to Y2 when the AD curve shifts inwards due to the higher interest rates. Businesses will receive
less revenue due to the smaller AD, so there may be redundancies since the demand for labour is
derived from the demand for goods and services.
Australia is currently facing a “two-year high” in unemployment due to high interest rates.
“Employers barely added anymore jobs” as rising interest rates leads to higher costs for the business
and less incentive for firms to expand their business and hire more workers despite the fact that
“more people started to look for work”. Therefore, the unemployment rate rises which is a
macroeconomic objective to try to reduce it.
On the other hand, it may not lead to higher unemployment as the government could adjust wage
controls to support firms. Minimum wage is the lowest wage legally permitted. In Australia it is
currently US$23.23 per hour, one of the highest in the world. The government could lower minimum
wage from MinWR1 to MinWR2 to allow firms to reduce their costs as shown on the diagram below.
Therefore, there is a contraction in the in the quantity of labour supplied from Q2 to Q4 as workers
might not be willing to work for so little and would rather unemployment benefits. There would be
an expansion in the quantity demanded of labour from Q1 to Q3 as firms are more willing to employ
more workers as their costs would not be as high. This could reduce the unemployment rate since
the surplus labour has reduced from Q2-Q1 to Q4-Q3. This means that higher interest rates to
reduce inflation does not have to lead to higher unemployment if there are other policies used such
as wage controls to counteract the negative effects.
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Another macroeconomic objective trade-off with reducing inflation could be protecting the
environment. This is because regulation might increase costs for producers which might be passed
onto consumers in the form of higher prices. Therefore, inflation increases. The UK and US have
setup mandates to protect the environment for example the UK has implemented the Environment
Act. This will make illegal deforestation harder and therefore according to the principle of supply and
demand, the market is out of equilibrium as the supply of wood will decrease due to the
government intervention. Any resulting shortage may result in firms raising prices due to the
rationing of the limited supply. The increase in costs could be passed onto consumers in the form of
higher prices so therefore there would be inflation.
On the other hand, reducing inflation might not impact environmental goals to a great extent.
Government might delay policies which conflict with another policy if the other objective is not as
time sensitive. This has happened recently when Rishi Sunak delayed the plan to ban the sale of new
petrol and diesel cars by 5 years in order to remove “unacceptable costs” during a cost-of-living
crisis. Additionally, firms might not pass costs onto consumers when costs increase. They can absorb
the costs if they are making supernormal and protect their market share. Therefore, reducing
inflation may have limit trade-offs with other macroeconomic objectives, such as protecting the
environment.
Overall, I do not believe that the reduction of inflation has to incur trade-offs with other
macroeconomic policies as the government can use multiple policies to reduce inflation and pursue
other macroeconomic objectives at the same time. The impact of a conflicting policy to a reducing
inflation might not be that severe depending on how high inflation is and therefore how long the
policy has to be in effect before it can be reverted. If it can be reverted quickly, there may not be
much impact on other macroeconomic objectives.
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Essay_9: Oliver Smee
Discuss the likely success of two demand-side policies of your choice in raising the level
of consumption in the UK.
Expansionary demand side policies are economic policies which aim to increase aggregate demand
(AD) to influence Real GDP, employment or the price level in an economy. AD is made up of
Consumption (C), investment (I), Government spending (G) and exports minus imports (X-M).
Demand side policies can be categorised as fiscal and monetary policies. Demand side policies will
boost AD and cause a outward shift in the AD curve. This will increase the level of Real GDP (Gross
domestic product adjusted for inflation) and since the demand side policy is able to boost
consumption. As shown on the diagram below, when boosting AD from AD1 to AD2 can close a
negative output gap and make the UK economy more efficient.
One way that the government can use a demand side policy to increase consumption is through the
reducing of taxation. Taxation is when the government enforces a compulsory charge on goods,
services, income or capital. Reducing direct tax is a type of expansionary demand side fiscal policy.
This was done after the 2008 financial crash where current PM Gordon Brown got rid of the starting
10% tax on income up to 12,500 pounds and reduced the 22% average tax down to 20%. As a result
of this, by reducing tax, consumers will have more disposable income (which is the income
remaining after all deductions of taxes and fixed charges have occurred such as income tax). AS a
result, consumers are likely to spend more, which increases AD. Due to the mutliplier effect a
greater AD shift will occur as the injection of money will be respent in rounds so the value of the
injection will be greater. This is shown in my shift from AD2 to AD3 on the diagram below.
Reducing income taxes therefore has a high chance of increasing consumption in an economy.
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However, due to the loss of tax revenue, the government may struggle to provide public goods
and services at the same level as they did previously. For example, the UK government may
struggle to run the NHS at the same level which may lead to a welfare loss as the number of
patients receiving inadequate treatment could increase. In the long run a reduction in tax
revenue might result in other negative effects such as rising unemployment rates in the UK as
the cuts back on public sector workers. The need for government services is why some level of
taxation is essential and therefore we cannot boost consumption just by removing tax all
together.
The second way you can increase average consumption in the UK is through increasing
government spending. This is because government spending (G) is a component of aggregate
demand. This was done in the “Eat out to help out” scheme where the government subsidised
50% of restaurant food and drink on Mondays through to Wednesdays during a period of the
COVID 19 pandemic. Increasing government spending injects into the circular flow of the
economy through projects such as road repairs or labour funding for service providers such as
doctors and nurses. Since G is a part of AD, an increase in the level of government spending
would cause a outward shift of the AD curve. Along with the effect of the multiplier, the increase
in G would boost GDP to increase and therefore could eliminate a negative output gap.
However, as shown in the diagram above, the outward shift of AD from AD1 to also leads to
inflation as shown by the rise in the price level from P1 to PL2. Inflation may discourage
consumption and dampen any growth effects. It is also important to mention that if you do not
invest enough into a scheme like this you may undershoot your target and therefore you could
still incur a negative output gap. This is due to the difficulty of pinpointing the level of
investment needed into the economy to achieve the correct shift in AD. This therefore could be
considered a waste of money as the opportunity cost of increasing consumption using money
on the demand side could be the improvement of infrastructure and therefore an outward shift
of the LRAS curve potential long-run economic growth.
Overall whilst both demand side policies can boost consumption, the extent of their
effectiveness depends on consumer confidence as consumers would most likely choose not to
consume if they expect a recession or high inflation. Therefore, these policies rely on
predictable consumer confidence to be effective.
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Essay_10: Olivier Wrobel
With reference to a country of your choice, evaluate the use of fiscal policy to reduce
the size of the national debt.
National debt is the accumulated debt of the government yet to be repaid. The stock of debt has
risen in many countries. In 2018, Japan had a gross nation debt of 237% of GDP, Greece 174% and
Italy 133% contrasted with Germany (56%) and the UK (87%). There are many ways that the
government can help reduce the size of national debt, such as fiscal policy. Fiscal policy is the use of
government expenditure and taxation to change aggregate demand.
One possible fiscal policy to reduce the size of national debt is a cut in government spending. A
government might target a fiscal surplus in order to reduce national debt because rising debt can
lead to slower economic growth. Therefore, by cutting government spending they can create a
budget surplus and decrease the national debt over time. Crowding out theory argues that increased
government spending and borrowing increases the supply of bonds, driving bond prices lower which
in turn causes the yields on the bonds to increase, which leads to higher interest rates in the market
for loans. If interest rates rise, then this might cause a decrease in private investment because
borrowing costs have become more expensive. For example, in the 1980s in the UK, bond yields
were at around 16% in comparison to February 2024, which are at around 1.5% - lowering the risk of
crowding out. As seen in the diagram below, the interest rate is at R and quantity of loanable funds
at Q1. When the government wants more loans, it increases demand for loanable funds from D to
D2, thus pushing up interest rates from R to R2.
As a result, weaker investment causes a fall in aggregate demand as well as having an impact on the
maximum capacity of the economy (Yp). A cut in government spending therefore reduces the
demand on loans, creates downward pressure on interest rates and encourages consumption and
investment. All of these things can help reduce the national debt.
However, Keynesian economists argue that state borrowing to fund infrastructure will increase trend
growth and create extra tax revenue for the repayment of national debt in the long-run. This can be
see on the Keynesian diagram below. By borrowing, governments can target there spending in ways
that will encourage long run growth. The PL and the maximum output of the economy is shown by
PL and YP1 respectively. After the government spends borrowed money on infrastructure or other
things that boost long run economic growth, Aggregate Supply will shift from AS to AS2. This will
likely cause an outward shift of AD as workers and firms are earning more. The PL here stays the
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same, but output changes from YP1 to YP2, thus showing long-run economic growth. This in turn
would generate higher incomes and higher tax revenues, therefore allowing the UK government to
reduce national debt.
Another reason for fiscal austerity is that very high levels of debt cost billions of extra pounds in
interest payments. For example, in the US the annual interest on debt is nearly $500 billion. In the
UK where national debt is around 90% of GDP, nearly 5% of government spending goes on paying
back interest on bonds which amounts to over £800 million a week. Some economists believe that
this puts in place a large opportunity cost on government spending since there is significantly less
money to spend on the NHS, education and other public services. Economists also argue that lower
debt would decrease the interest payments on bonds as well as in the medium term it will allow a
reduction in indirect taxes and direct taxes, therefore shifting AD and LRAS outwards.
However, modern monetary theory (MMT) argues that a budget deficit is not necessarily bad. A fiat
currency is money declared by a government to be legal tender though it is not convertible into
anything of equivalent value. This means governments can print as much money as they would like,
as they are not tied to the gold standard. MMT suggests that governments can create money for
public works and employment without inflation as long as there is spare economic capacity.
Therefore, governments shouldn’t budget like households. If the economy has spare capacity,
running a budget deficit in order to borrow and boost AD, will boost the economy and reduce
unemployment because it is increasing the money supply in the economy. For example, most of the
debt from 2010-2016 was incurred due to the bail-out of banks by the UK government and the UK
did not suffer high inflation as a result.
In judgment, the government should be asking themselves if there is a need to reduce the national
debt in the first place, as every action of the government comes with an opportunity cost. A high
level of debt could be problem if bond yields in the UK start to rise again, however this is unlikely.
Brexit may have caused exchange rate for the pound to depreciate sharply and cause a lack of
confidence among investors. However, in reality, yields have been low for a long time and ¾ of the
UK national debt is owned by insurance companies, banks, pension funds and the B of E. The interest
received back most likely stays in the circular flow of money. Therefore, a high national debt is not
necessarily bad in achieving good macroeconomic outcomes, especially if we are to accept modern
monetary theory.
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Essay_11: Ed Houghton
Discuss the effectiveness of two interventionist supply-side policies the UK government
could implement to stimulate economic growth.
Interventionist Supply Side policies aim to increasing productivity and efficiency within the economy
through government expenditure and intervention. For example, improving infrastructure allows for
firms in the market to be more productive and increase output to boost the economy. This is in
contrast to market based supply-side policies that aim to free up the free market with little to no
government expenditure required. For example, increasing incentives and promoting competition,
which requires very little direct intervention but should help to increase output from key firms.
One interventionist supply-side policy is improving infrastructure. This is when the government
makes improvements to the basic physical systems in the market, for example, giving Heathrow
airport a 3rd runway. Improvements to infrastructure lead to a production capacity increase due to
an increase in the firm’s FOPS (factors of production). The more productive capability the firms have,
the more they can produce. This means that there is an increase in the potential to supply – having a
3rd runway means more flights can be scheduled – and therefore the long run aggregate supply
curve can shift outwards as capital has been increased. This can be seen on the diagram below.
Originally the graph shows that the economy is operating with a maximum output potential of Yp1,
in line with LRAS1. With the addition of a runway to Heathrow, this increases the maximum output
of the airport as more planes can be flown in and out of the airport at one time. This causes a
change in the maximum potential output, causing an outward shift of the LRAS curve shown below,
from LRAS1 to LRAS2 and a growth in potential output from Yp1 to Yp2 .
However, a weakness of this supply-side policy is the cost to the government. Improving
infrastructure, such as adding an additional runway at Heathrow airport, comes at a significant cost
to the government. In the short-run, there is a large opportunity cost – the value of the next best
alternative foregone - as the money needed for the runway could have potentially been better spent
elsewhere, for example funding education programmes or investing in SMEs, etc. The money used
for the infrastructure improvements also has the potential to negatively impact the government
budget, assuming that this money is borrowed. Borrowing money from the banks to pay for such a
big operation and investment will consume a large majority of a bank's loanable funds. This
crowding out of loans has a negative impact on borrowers as it reduces the amount of money
available to them in loans, and increases the rate of interest on loans, as they become scarcer. This
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may negatively impact consumption and investment in the short run. The higher cost of borrowing,
would cause an inward shift of aggregate demand in the short run, which would weaken GDP and
economic growth.
Another interventionist supply-side policy is improving labour force productivity. This means an
improvement in the output per worker per hour. If we give the workers training then they can be
better, quicker and more efficient because of an increase in skills and expertise. Increasing the
quality of FOPS (here, human capital) increases efficiency and productivity. In 2020, the UK
government increased spending on education by 5%. The government funding of education is aimed
at strengthening the potential human capital and future labour force, by helping them become more
productive and efficient, which will cause shift long run aggregate supply outwards, as shown in the
diagram above, as relative productivity improves.
However, a weakness of this policy is the “brain drain”, which happens if the new highly educated
workers chose not to work in our economy. If they choose to work elsewhere, then this investment
into education and the economy is of little benefit to the UK aggregate supply and therefore does
not stimulate growth in our country. For example, in 2023 a record number of 170,000 NHS staff left
work in England. This means that these trained staff members were taking their skills elsewhere and
contributing to another country’s economy. This means that there is no additional boost of
productivity and output per worker per hour and therefore limited stimulation to economic growth
in the UK.
In judgement, I believe effectiveness of a policy depends on its relative costs. I believe that on the
surface, a policy revolving around infrastructure improvements is more promising. I think this
because improving infrastructure has a clearer relationship with shifts in productivity and therefore
supply, meaning there is supposedly a higher certainty that the investment will be worth it.
However, if the cost of improvements is high, or perhaps in times of greater economic uncertainty,
then investing in the labour force may be a better choice. This is because improving our labour force
and the productivity of the workers will never be a bad investment and almost always pay off,
whereas some infrastructure investments may be harder to justify, afford and use in times of
uncertainty. For example, the cost and application of HS2 has changed so much during its building
process that it has become too expensive, and the world has seen such a dramatic change in
lifestyles, that longer commutes are being replaced with working from home, meaning an
investment like the production of HS2 railway would not have been as useful if finished anyway.
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Essay_12: Ella Dickson
Discuss the microeconomic consequences of defunding the police.
During 2010, the UK government introduced a government strategy of ‘Austerity’ to reduce national
debt. This worked by the government cutting spending towards public services like the NHS,
business subsidies and the police force. During the 9 years of ‘Austerity’ the government cut funding
to the police by 19%.
Defunding the police could lead to a decrease in standards of living and increase welfare loss. This is
because policing is a public good, a good which is non-excludable and non-rivalrous. Being
unprofitable it is likely to be under provided by the free market. This is a type of market failure. By
having less policing people will feel less safe as there are fewer officers, a higher crime rate and less
investment into public safety. This may cause a decrease in standards of living as this causes stress
and anxiety. An increase in inequality may form as firms and individuals that can afford private
security and insurance will do so, while due to the price mechanism some firms and individuals who
aren't willing and able to won’t do this. This makes for a bigger difference between the rich and the
poor. We can see this on a positive externalities of production diagram which shows welfare loss due
to the under provision of police.
Figure 1: Public safety due to levels of policing
In the diagram showing the supply and demand of labour to the police force, we can see how Qm
(what the market actually is) is much lower than Qopt (what society wants). At Qm, MPC > MSC
meaning that there are potential external benefits that society is missing out on. The positive thirdparty
effects are a lower crime rate, less stress, and less inequality.
However, it could be argued that by defunding the police, the government would have greater
resources to target the reduction of the root causes of crime e.g. unemployment, inequality and a
lack of education. This would mean the problem is prevented in the first place rather than treating
the symptoms of the problem. Not only would this be more cost effective in the long run but also
will fix problems which affect other areas of the UK’s economy. An example is unemployment, which
if lowered, would mean the government has met one of its macroeconomic objectives. It is also a
measure of standards of living and so if reduced would have a positive impact on the UK. This is an
opportunity cost of the money being spent on the police. Opportunity cost is the value of the next
best alternative foregone. Others can argue that if the government saves money on policing, they
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can spend more money on other public goods e.g. infrastructure, public transports. These are
important as they boost productivity in an economy. Good public transport allows for people to
travel further for work and reduces geographical immobility. This will mean there is less
unemployment. Increased economic efficiency leads to LRAS shifting outwards and higher potential
output.
Another consequence of defunding the police is the effect on wages in the labour market. Defunding
the police may mean there will be wage cuts.
We can see this happen in a demand for labour market diagram. We start with a simple demand and
supply labour market, but the demand for labour curve shifts inwards because the government
demands less police officers as there is less funding for their wages. They now only have the money
for current officers and not new ones. This causes wages and the quantity of the workers in the
police force to decrease. This causes the box (w2- q2) – which shows expenditure on police wages -
to be smaller than the box of w1-q1. This might stifle productivity as police officers stop doing extra
work, don’t meet the required work expectancies or protest as a result. Officers may become less
motivated to work as hard and might not take on the same roles and tasks in a community. As well
as that police may be under-employed. This is when people in the labour force are employed less
than full time or with jobs which are below their training. For example, a trained police officer might
work part time and so their abilities and training is not being fully utilised.
However, you could argue that there has been too much spending on the police force in recent years
and that they have become inefficient. This is shown on a x-inefficiency diagram. AC1 is the actual
cost of running the police force which we can see is higher than the attainable cost (the cost needed
to run the police force with all necessities covered and no excess money). After shifting the AC curve
down (AC2), which is the defunding of the police, x-inefficiency is significantly reduced (the
difference between AC2 and attainable cost). Therefore, reducing funding could help to make the
police department more efficient by getting rid of people who don’t add much, positively impacting
time management and spending. This principle is explained by the law of diminishing marginal
returns – as the number of additional factors of production increases so does output up to a point.
Then as productive factors increase output decreases. Too many police officers working in the same
area could have a negative impact as they get in each other’s way, communication gets affected and
a lack of things to do causes a waste of police officers.
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In this situation, reducing funding may force the police to become more efficient. X-inefficiencies will
be reduced as the police only spend on necessities e.g. technology, uniforms, vehicles. This leads to
them being more efficient with arrests and their responsibilities. Less policing means that the police
force can focus on things of top priority and things with the biggest effect on society. Police officers
are also more likely to become more productive after job cuts as they will feel more motivated to
perform well and work hard in order to keep their jobs. As the police force is government owned,
they may struggle to sack people who are not efficient. This is because they don’t want to lose votes
by upsetting people. This is a political constraint.
I think that overall, the negative consequences of defunding the police outweigh the costs of funding
the police. I believe crime rates will rise making the UK less safe. We saw this with the ‘Austerity’
programme started in 2010. Crime rates rose by 3.5% due to increased inequality and less spending
on police officers and the right equipment. Economic growth in the UK is affected as are
employment rates and standards of living. This will ultimately drive people out of the country as well
as high profit performing firms which compete internationally. This could damage the UK’s economy
in the long-run beyond the cost of defunding the police.
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Essay_13: Alec Veitch
Evaluate the extent to which recent levels of net migration have been beneficial overall
to the UK economy.
Productive potential capacity is the maximum possible output that an economy can sustain at any
one time. In the UK there has been a record amount of net migration, with a major flow of just over
700k people, in 2022. The inflow of these workers has improved the effectiveness of government
public services, this then leads to an increase in long run economic growth as services work as
intended. This can be shown in the diagram below, in where the shift of LRAS outwards has resulted
in an increase in potential output and therefore leads to long run economic growth. Productive
capacity is the maximum possible output of an economy and productivity is the total amount of
goods/services produced per worker per hour. The use of selective immigration in the UK post Brexit
has allowed for productivity of workers to increase. The multiplier is the effect in where an initial
injection into the circular flow of income causes for a bigger increase in real national income.
Inward immigration into the UK economy can serve to increase the productive capacity of the UK
economy. One benefit of the net migration to the UK economy, is that it allows public services to fill
job openings and get an adequate number of workers. The use of public service jobs getting filled
allows for the economy to increase its productive capacity in the long run. This increase in
productive capacity is illustrated in diagram 1 above, where LRAS has shifted outwards, to LRAS 2.
This outward shift means that the productive capacity in the long run has increased. An example of
this could be through the social care industry, where over 150k immigrants in 2022 came to work in
this industry. The filling of these public services means that there are more workers, who can then
tend to more people, putting less pressure on families and meaning that they can find spaces to put
their loved ones in social care facilities, allowing them to go back to work, which boosts the UK
economy. This is important to the question as it shows that the influx of workers into the economy
both helps fill labour shortages and helps to free up existing labour.
However, immigration can increase the cost of public services as workers might bring their families
with them. These families could be economically inactive and not be contributing to the economy.
These families would still be able to use public services and could add a greater strain onto these
services. This would then require extra government funding, financed through either spending cuts,
tax increases or borrowing. This argument suggests that the economy could be worse off after high
levels of immigration.
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This effect of this is shown through the diagram below, where we see the increased burden on
public services causes the LRAS curve to shift inwards from LRAS2 to LRAS 3, and therefore reduce
the potential output of the UK. This is because the additional cost to public services leads to a
withdrawl from the circular flow of income as taxes are increased to pay for them.
Recent levels of immigration could be beneficial to the UK economy because selective immigration could boost
overall worker productivity. In the EU, the UK was not entitled to selective immigration and instead had to
allow freedom of movement for workers withing the EU. This meant that anyone from an EU country, despite
their education or expertise, could work in the UK. A common market is a type of trade agreement in which
member countries agree to remove tariffs and other trade barriers and allows the free movement of capital
and labour. Since Brexit, the UK can apply selective immigration, allowing UK employers to match job needs to
immigration. This means that workers coming to the UK are more specialised and overall productivity of
workers may increase. This is because employers spend less time training new employees and waste less
money on management. This then boosts overall productivity and helps the UK economy in the long run as the
boost to productivity means that businesses can invest more in growth.
However, the benefits of net migration to the UK economy may be limited due to remittances. Remittances
occur when immigrant workers send their wages to their home countries. Remittances are a withdrawal from
the circular flow of income. Because the income is leaving the UK economy, the money can’t be re-spent,
reducing the value of the multiplier. This then leads to slower economic growth in the UK, reducing the UK’s
aggregate demand and acting as a drag on short run economic growth.
Overall, we can assess that a high net immigration into the UK is good for the economy, but there
are minor adjustments that need to be made, the limitation of families coming into the UK would
mean that there would be less strain on services and this has partially come into effect after Brexit
with ‘selective immigration’ giving the UK more power on who we allow to come into the country,
but still needs to go further. Additionally, the need to limit workers sending money home would also
help to boost the Uk economy and help to reduce the current account deficit. In the long run the
ability to increase productivity and fill labour gaps in targeted industries can lead us to conclude that
migration is good for the economy and the increase in workers will help to create longer lasting
prosperity in the UK.
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Theme 3
Business Behaviour and
the Labour Market
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Essay_14: Lisanne Schoenmakers
Evaluate the view that a merger between Three and O2 would be beneficial for these
firms and their consumers.
A merger is when 2 firms become 1 and there are several types of mergers. There is organic growth,
horizontal growth, vertical growth, and conglomerate growth. Economies of scale are falling longrun
average costs as output rises. Being a larger firm means you can have access to benefits such as
bulk buying which may lower the costs. An example of this is the merger between the two Telecom
companies, Three and O2. This merger was blocked by the CMA due to the worry that it could create
too much market power. Economies of scale add benefits to firms such as higher profits and
increased value of shares for the shareholders.
The diagram above starts at output level C1,Q1. As the firm increases its scale, output increases from
Q1 to Q2. At Q2 level of output, long run average costs are lower (C2) due to economies of scale.
One example for O2/Three would be bulk buying. As the firm increases in size due to the merger,
more supplies will be needed. Bulk buying allows for there to be a discount on what is ordered
therefore making the cost per unit go down. The reason why discounts are placed on bulk bought
items is because it saves the supplier costs, e.g. shipping costs are reduced. If Three/O2 were to
merge they would have economies of scale when purchasing products, for example purchasing Sim
cards. This cost saving may be passed on to consumers and prices could become cheaper if these
two firms merge.
However, there are also diseconomies of scale. This is when there are rising long run average costs
as output rises, or in other words the disadvantages of being a large firm. If the mobile network
providers Three and O2 merged, there would be a movement along the LRAC curve of the new firm
as output increases. If output moves beyond Q2 to Q3, from the diagram you can see that this would
mean higher costs. This is due to diseconomies of scale. The areas within a firm that this could affect
would be communication, co-ordination, and co-operation. Communication becomes affected due
to the distance between chains of command increasing, this would be due to the merge between
Three and O2, and the firm getting bigger due to two firms becoming one. Co-ordination would
become affected due to it becoming difficult to monitor employees as the firm becomes so large,
after the merger, which leads to there being more individuals becoming employed by the new single
firm. And lastly co-operation at the merger of Three and O2 would become affected due to workers
not feeling a part of the company and could therefore reduce the productivity of the firm. As the
firm grows, more space is created between workers and managers, which can make staff feel more
separated. There is also a high risk of less efficiency, specifically allocative efficiency as the firm
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becomes less efficient. This would increase the average cost as total cost of the business increases,
which could get passed on to consumers. This would therefore lead to the merger between Three
and O2 causing a loss of consumer surplus.
The merger between Three and O2 could also cause lower prices for consumers. Lower prices for
consumers mean they must not pay as much which allows them to be able to save or spend it
elsewhere which could lead to a positive impact on the economy. It allows the consumers to
purchase goods and services at an affordable rate. If Three and O2 merged, this could lead to them
gaining greater market share and therefore more supernormal profit. This would allow for dynamic
efficiency, when the firm successfully meets the consumers’ changing needs and wants over time.
This is good for consumers because it can allow for lower prices andc better quality products
available to them in the long run.
However, there is always the risk that a merger between firms causes an increase in price for
consumers. This could be due to the monopoly power that large firms may have. Monopoly power is
when there is one dominant firm within a market and an example of this would be if Three and O2
were to merge. They would have more market power over all the other mobile network providers.
When firms have this much market control, they also have price setting power due to a lack of
competition. If a firm has these price setting powers, there would be less consumer surplus because
of higher prices for consumers. This creates more producer surplus which is the difference between
how much a firm would be willing and able to sell at for a given quantity of a good versus how much
they can receive by selling the good at the market price.
Overall, in the case of the merger between Three and O2 the risk of there being higher prices for
consumers and the firm gaining monopoly power, which would in turn lead to other firms not being
able to compete anymore and leaving consumers with very little options would be reason for the
CMA to block the merger. For this reasons I would suggest that the merger between Three and O2
doesn't happen.
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Essay 15: Charlie Carey
Evaluate the extent to which price discrimination can lead to an improvement in
economic welfare.
Third degree price discrimination refers to where different groups of people get different prices for
the same product. This is used by firms to stimulate growth in the firm by receiving more revenue
from certain groups. The firm identifies two groups with different price elasticities of demand, which
means certain groups will be willing to pay more, and the firm can then exploit this by adapting the
price. Economic welfare refers to the standard of living and equality a community would prosper in.
Price discrimination can only be applied by firms who have market power, so they can vary the price;
difference in consumer segments as you should be able to distinguish between groups willingness to
pay; and for products with no ability to resell their product (“arbitrage”).
Price discrimination can lead to an improvement in economic welfare because they can increase
consumer surplus. This means minimising the gap between what consumers will be willing to pay
compared to what they actually pay. The diagram above shows us that in market 1 the specific group
of consumers paying the full price for the product. Market 2 shows the new price for the group of
consumers who are not being discriminated against paying a lower price due to their more elastic
demand for the product. The outcome of this is increase profit for the firms through additional
consumers added to the market who would not have joined prior to the price discrimination. By
doing so this can increase firms profits which means it is plausible that the firm could achieve
dynamic efficiency, where firms meet the changing needs and wants of consumers over time. The
additional profit can be used to reinvest into the company and expand giving an edge over other
firms who are competitors. This increase in productivity for the firm will cause more competitiveness
between the markets and cause prices to be lower, have a larger variety of products and betterquality
products which will be beneficial for social welfare. One example is student discounts on
public transportation such as buses. As students tend have lower disposable income and need these
discounts this will benefit their economic welfare as it allows for students to enter the market who
would not have been able to before due to price discrimination. The bus firms can use the additional
revenue to reinvest back into improving their services.
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One problem with price discrimination is that it leads to exploitation of certain groups who must pay
the full price leading to social inequity. For example, student discounts on things such as food,
transport and nights out. This discriminates against non-students as they don’t get these discounted
prices. This shows the unfairness in the pricing which leads to social inequity as non-students are
being discriminated against. This is shown in the diagram where firms gain more supernormal profit
(SNP) from market 1 as they pay a higher price. This is an example of negative social welfare.
Furthermore, this is an example of monopoly as market failure because instead of maximising social
welfare where AR=MC, they are using their price setting power to charge consumers higher prices
than a competitive firm would in both markets. The firm is using monopoly power to push up prices
above the allocative efficiency point. The diagram displays the firm is not producing where MC = AR.
Price discrimination can lead to an increase in economic welfare as they can increase producer
surplus. This is the difference between the price a producer is willing and able to supply at compared
to what it actually receives. Firms are able to be more productively efficient by using all available
capacity. For example, a happy hour before a prime time in a pub utilises spare capacity, such as the
jukebox and pinball machine, that might otherwise stand idle. Staff who were getting paid despite
there being no customers, are much busier in happy hour and increases their marginal revenue
product. Producer surplus is good for the economy as producers get the profits which can be
reinvested into research and development to produce better products for the consumers which
increases social welfare.
However, there are problems with this as it is very hard to find the correct price to set in market ‘B’.
If the firm discounts the price in market B too much, they might miss out on potential profits. If they
don't discount enough, they could miss out on potential consumers. For example, if the student
discount on public transport is still too expensive, the students will go to their next best option.
Similarly, students who previously could afford the higher prices now have the luxury of paying less
than they were willing and able to pay and therefore the firms’ profits will be reduced. Price
discrimination has its costs to implement and if done incorrectly can result in missed profits.
Price discrimination may look like it is contributing to social welfare, however it is in fact bad for
economic welfare as it can reduce equity and satisfaction within a community. Many firms use price
discrimination to exploit consumers into paying more money for a product; for example surge
pricing among taxi firms where prices may triple after midnight and leave many desperate
consumers who cannot afford a taxi. It also doesn't encourage equity within a community as people
in ‘market A’ pay more for the same product just because they don't fit a category. Therefore, it
doesn't necessarily allow for social and economic welfare to develop in communities.
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Essay_16: Zac Wilson
Evaluate the extent to which monopolistically competitive firms are more efficient than
oligopolistic firms.
There are four types of efficiencies: dynamic, productive, allocative and X- inefficiency. Allocative
efficiency is when the value that consumers place on a product equals the cost of the resources used
in production. Productive efficiency is when the firms is operating at the lowest point on its average
cost curve. Dynamic efficiency is when the firm successfully meets consumers changing needs and
wants over time. X- inefficiency is when a lack of competition may give a monopolist less incentive to
invest in innovation or consumer welfare. Monopolistic competition exits in an imperfect market
where there is some competition and differentiated products. Oligopoly is an imperfectly
competitive market with few strategically interdependent firms, high barriers to entry and
differentiated products.
Monopolistic firms, like Mo’s Kebabs, may be more efficient for many different reasons, but one is
that there will be less chance of X- inefficiency. This is because of no super normal profit (SNP) in the
long run. This is because of the way that the market Is structured. In a monopolistic market there are
many firms so there maybe profit in the short run, but in the long run the sharks (new firms) enter
the market to compete for the SNP. With no SNP available in the long run, there is no likely chance
of X- inefficiency. Monopolistic firms have to be more efficient with their spending to compete
against new entry firms. In contrast, oligopoly markets have high barriers to entry and therefore
firms face less competition and therefore can earn greater amount of SNP that don't get competed
away. An example of X-inefficiency in an oligopoly market would be British Airways. They overspent
on arts and other pieces for their offices and this is a lack of efficiency because the profit could have
been reinvested into product development. The diagram above shows a chance of dynamic
efficiency for the profit maximising firm in an oligopolistic market as it it earning supernormal profit.
However, when there is a lack of competition as there is for British Airways, then this can lead to X-
inefficiency in the long run. This can be seen in the diagram below with a higher average cost curve
caused by inefficient spending. The level of X – inefficiency highlights how monopolistic firms are
likely to be more efficient than oligopolistic firms.
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On the other hand, Oligopoly firms such as British Airways or Apple might be more dynamically
efficient. Dynamic efficiency occurs when firms reinvest SNP to reduce long-run costs by
implementing new innovative production processes or to invest in developing higher quality
products for consumers. With only a few number of firms in the oligopoly market firms can make
SNP to reinvest. In the case of monopolistic firms, this cannot happen in the long-run as barriers to
entry are low and new firms will compete the SNO away in the long run. Only normal profit is
achievable and therefore no dynamic efficiency. in a oligopoly market SNP is protected as there are
high barriers to entry and therefore there is still SNP in the long run. An example of this is Apple as
they are constantly investing in research and development so that they can stand out and sell more
mobile phones. Apple boosted R&D spending to an unprecedented 7.8% of revenues in 2023. This
principle can be seen in the diagram below, which compares a monopolistic bakery firm breaking
even in the long run with an oligopoly firm, Apple, making super normal profit.
Monopolistic firms like Mo’s Kebabs may be more allocative efficiency than an oligopoly firm like
Coca-Cola. Monopolistic competition Is closer to allocative efficiency than oligopoly as they have less
price setting power as a result of higher levels of competition. Allocative inefficiency occurs when
competitive markets fail to allocate resources to their optimal use in the economy, which in turn
results in market failure. Market failure occurs when too much or too little of the good or service is
produced or consumed from the point of view of what is socially most desirable. An example of this
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is Apple that is profit maximising. Perfect competition is the only market which can reach allocative
efficient but monopolistic is closer to the point of allocative efficiency.
However Oligopoly firms may be more productively efficient than monopolistic firms due to
economies of scale. Greater economies of scale occur for oligopoly firms and can lead to lower
prices for consumers. Economies of scale are average costs falling in the long-run as output rises.
The greater the level of economies of scale, the more likely the firm can produce at a point of
productive efficiency. Walmart's business strategy is built around the concept of economies of scale.
The company leverages its size to offer customers discounted prices by purchasing goods in bulk
from suppliers, negotiating lower prices than smaller competitors can offer, and spreading labour
costs across multiple stores. The economies of scale diagram below shows the lowering costs of
production as outpu increases. On the other hand, a monopolistic firm like a local baker does not get
as great economies of scale as the baker is unlikely have SNO to invest in increasing its scale due to
the constant competition.
Monopolistically firms, such as Mo’s Kebabs or a local bakery are more allocatively efficient and less
x- inefficient whereas oligopolistic firms such as Coca Cola, British Airways or Walmart are more
productive and dynamically efficient. Therefore the extent to which monopolistically competitive
firms are more efficient than oligopolistic firms depends on the market structure and the type of
efficiency in view.
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Essay_17: Ewan Pratt
With reference to BASF or another firm of your choice, evaluate the benefits of
economies of scale.
Economies of scale for a firm such as BASF are the falling long run average costs after an increase in
production levels. The benefits of the economies depend on the size of the firm as well as the
markets they operate in AC.
Economies of scale enables reduced unit costs to potentially be passed onto consumers and reduce
prices. One benefit of economies of scale is the purchasing benefits that allow firms to reduce their
average costs by buying resources in bulk or by being a monopsony. For example, due to BASF size
and market share they are able to increase their buying to bulk in products such as chemicals
therefore reducing the unit cost of production. Because of BASF’s 39% market share in the
European chemical industry bulk buying is achievable. With an increased fixed price individual unit
costs will reduce due to larger amounts of resources being brought into the business at one time. As
well as increasing their profits as a result of the reduced average costs and unit costs BASF can afford
to reduce prices for consumers and still increase their Profits and dividends. BASF may want to
reduce prices for customers to increase their sales and further increase their market share by
making them more competitive against other firms as a result of lowering prices, this is a benefit to
the firm and the consumer.
However, the benefits achieved as a result of economies of scale might not be passed onto the
consumer. This might happen if BASF shareholders choose to use additional profit gained from
economies of scale to either increase re-investment or to pay higher dividends. In addition, BASF is a
monopoly and may be prone to x-inefficiency, which occurs when firms incur inefficient costs due to
a lack of competition. Profits may be spent on additional items such as advertising, office
decorations and other things that may not benefit the business productivity. Consumers within the
European chemical market will pay higher prices due to lack of alternatives to BASF.
BASF: Limit Pricing
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A benefit of economies of scale for the firm is the ability for firms like BASF to increase their market
share. Economies of scale act as a barrier to entry as costs are so low due to economies such as
buying in a bulk. New competitors to the industrial paint market cannot match the low costs of BASF
and cannot enter the market as a result. BASF can use methods such as limit pricing to shut
challenger firms out of the market. The diagram above shows BASF operating at the profit
maximising equilibrium point where MR=MC. It then shows BASF has dropped its price from p1 to
p2, where p2 is lower than the AC of the challenging firm. In this instance the costs of the new
competitor would be higher than those of BASF due to their lack of economies of scale. The result of
this is that the challenger firm decides not to enter the market for industrial paint because it is no
longer profitable at a price of p2. For limit pricing to work BASF has to sacrifice short-term profits but
there is reduced competition and increased market share for BASF in the long run.
However, the firm using limit pricing may lose out on profit where the callenger firm may be able to
sustain being undercut, which leads to reduced market share and reduced profits for BASF. Limit
pricing can also negatively affect the income of a firm over the course of operating limit pricing due
to losing out on maximum profit. For example, BASF could pursue a policy of limit pricing on DSM by
lowering prices below their costs which can force them out the market and maintain BASF market
share. However, if unsuccessful BASF will only have reduced their short-term profits, lowering
potential investment which could create a knock-on effect by reducing market share by missing out
on innovation as a result.
Overall, I think that economies of scale will benefit consumers and producers, but only up to a
certain point. Once the firm gains too much monopoly power, the benefits might start to be limited.
However, while a firm like BASF is likely to receive economies of scale, other firms may be different,
and some firms may also experience the effects of diseconomies of scale – rising long run average
costs as output increases – due to cost incurred by problems of communication, coordination and
cooperation. Therefore, the benefit of economies of scale on the producers and consumers depends
on their individual situation and to what extent the economies affect the consumer or the producer.
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Essay_18: Oliver Renwick
Evaluate the extent to which the UK bookseller market can be described as perfectly
competitive or monopolistic.
The UK bookseller marker could be considered as perfectly competitive for many booksellers. One
characteristic of perfect competition is that firms are price takers. Highstreet booksellers tend to sell
at the same price for each product, this suggests the market is highly competitive. As can be seen on
the diagram below, the perfectly competitive firm is a price taker. This is because there are many
small firms in the market, none of which is large enough to have price setting power. The price is
therefore set by the market forces of supply and demand. Secondly, due to companies like ‘Which?’,
it is easier to compare prices, suggesting a market close to perfect knowledge for consumers and
firms, which is another characteristic of perfect competition. It is also notiable that there is little to
no product differentiation in the books that are being sold, which is a third characteristic of perfect
competition. Overall, there are reasons to categorised as a perfectly competitive market.
However, the UK high street bookseller market may be monopolistic. Perfect competition is a
theoretical construct that does not exist in a pure form in the real world. Waterstones is the market
leader in high street booksellers and could be described as a monopolistic firm due to some brand
differentiation existing. Monopolistic firms can have little product differentiation and brand loyalty.
Waterstones has a loyalty card scheme and therefore a degree of brand loyalty (even if the books
are homogenous). There is still no product differentiation in this market due to books being identical
goods. There are too many firms in the high street bookseller market for it to be oligopolistic.
Therefore, it is most likely a monopolistic market with two dominant firms (Waterstones and WH
Smiths) among 1,072 booksellers in the UK, suggesting that the firms have some price setting power
and downward sloping revenue curves as in the diagram below.
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Another reason why the UK bookseller market may be considered perfect competition is that there
are low barriers to entry and exit. There is a low need for expertise, and this makes it easier for firms
to join the market. There are also no patents stopping the sale of books, making it closer to perfect
competition. Barriers to entry include the sunk costs needed to enter a new market and in the
bookselling market start-up costs are low as many booksellers are online nowadays. This makes the
market more like perfect competition because new firms can enter and exit the market easily. With
the possibility of many firms this results in the loss of price setting power and no long run
supernormal profits. UK booksellers have low barriers to entry making it closer to perfect
competition.
However, our analysis depends on how we define the bookseller market. Up to this point we have
focused the discussion on high street bookseller, but today an increasing number of books are
bought and sold online. Online booksellers like Amazon now account for 70-80% of all book sales in
the UK. Therefore, it could be argued that the market for book sales is neither perfect nor
monopolistic competition, as Amazon have a monopoly in the market. Amazon have monopoly
power as they may be able to sell their books at a cheaper price then their competitors having the
ability to buy in bulk unlike small high street booksellers. This means that they can exploit economies
of scale and build barriers to entry. More people are subscribing to Amazon Prime making it is easier
for consumers to purchase books on Amazon and they may find a better deal included in their
Amazon Prime subscription. This suggests that bookselling in the UK is no longer a competitive or
monopolistic market.
In judgement, it is important to clearly define the market that we are describing. High street
booksellers in the UK may be described as having some characteristics of perfect competition and
some characteristics of monopolistic competition and should be placed somewhere between the
two on the market structure spectrum. However, when including online sales of books in the UK,
there is a clear market leader with monopoly power in Amazon and this shows that market
structures are an ever changing phenomenon.
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Essay_19: Eddie Davey
Discuss the extent to which price fixing behaviour is inevitable in highly concentrated
markets such as the European truck market.
Price fixing behaviour includes illegal collusion among competitors to maintain and set prices they
agree on. Concentrated markets refer to the extent to which market share is taken by a small
number of firms. Oligopoly markets are highly concentrated as they are defined as markets with a
few large firms.
Collusion is likely to be more common in highly concentrated markets. The European truck market
stands as a perfect example of such high concentration with the leading 5 firms controlling over 755
of the market. In fact, recent investigations have revealed proof of collusion among major truck
manufacturers, including Scania, where they engaged in price-fixing schemes. The increased
likelihood of collusion in concentrated markets is explained by game theory.
The two-firm, two-outcome matrix diagram above initially identifies each firms’ options, including
whether to engage in price fixing or carry on with competitive pricing strategies. The game theory
matrix suggest that if firms do not collude, both lower their price to avoid risking losing profit. This is
called Nash equilibrium. This is shown in the diagram by the lower/lower box with each firm earning
£10m profit. If the firms choose to collude, they both raise their prices and can increase their profits
from £10 to £40 (the top left box). This extra profit is made at the expense of higher prices for
consumers and therefore such collusion is illegal in most countries. However, the model also shows
that there is a temptation to break the collusion, as £60 is possible in that case. Game theory offers
insights into how firms, like Scania and its rivals, may engage in strategic interactions, modelling
their pricing decisions and their impacts on each other's profitability, In a highly concentrated
market characterized by a small number of powerful firms, like the European truck industry, there
exists a heightened likelihood of collusion due to their strategic interdependence.
However, price fixing is not inevitable because it is illegal in ost countries and firms may refrain from
engaging in it to avoid legal repercussions. As clearly shown by the European truck market example,
where the European Court ruled against the truck manufacturer for participating in a price-fixing
cartel. Efforts by regulatory bodies like the CMA aim to curb information sharing in markets like the
truck industry. The Scania example illustrates the ongoing battle against collusive behaviour,
emphasising the importance of continually refining regulation strategies approaches to ensure
market integrity and fair competition.
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Another form of price fixing in highly concentrated markets is limit pricing, which plays a significant
role in shaping market dynamics and influencing the behaviour of dominating oligopoly firms like
Scania. Limit pricing involves strategically setting prices below potential competitive levels, typically
aimed at deterring entry or expansion by smaller competitors. This strategy allows established firms
to maintain their market dominance by discouraging potential entrants from entering the market so
dominant firms can keep maximising profit. For example, in the case of the European truck market
limit pricing could involve existing firms setting prices at a level that makes it economically
unfeasible for new competitors to enter or expand their firm. By doing so, the truck firms effectively
create barriers to entry, allowing for them to keep their market share and preventing potential
threats from emerging competitors. This strategic pricing tactic not only protects European truck
firm position but also reinforces its dominance in the market.
However, limit pricing strategies may result losses of profit for European truck firms. By setting
prices below potential competitive levels, these firms sacrifice immediate profitability in exchange
for long-term market share. This short-term sacrifice may raise concerns among shareholders about
the feasibility of this limit pricing and if it will benefit them or have negative impacts on supernormal
profits (SNP). While these barriers to entry may deter entry and expansion by smaller competitors in
the short-run there is no guarantee that it will effectively prevent competition in the long-run. New
entrants may find ways to go around the barriers posed by limit pricing, for example through pricing
strategies or differentiation. This uncertainty raises questions about the long-term benefits of limit
pricing as a sustainable competitive strategy.
In judgement, while price fixing behaviour is possible in highly concentrated markets this does not
mean it is inevitable. The work of regulatory bodies like the CMA act as a deterrent to price fixing
behaviour, as does the risk of losing profits from limit pricing. However, the temptation to collude
will inevitably still exist.
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Essay_20: Noah Sennhauser
Evaluate the effectiveness of policies that can be used to resolve the market failure
caused by private water companies polluting rivers.
Market failure refers to the misallocation of resources in a market compared to the social optimum.
Thames Water is a prime example of a market failure and will be used to represent and evaluate the
effectiveness of policies that can be used to resolve this disparity. The external costs of these water
companies polluting rivers is that society include the inability to enjoy water bodies as they are full
of sewage.
One way in which the government could prevent this market failure is to fine the private water
companies which pollute. This was done in the UK to Thames Water after they dumped millions of
litres of raw sewage into rivers near Gatwick, which pushed the regulator to hand them a £3.33m
fine. This fine is useful in preventing market failure, as it acts as a deterrent for Thames Water to
pollute because it will result in unnecessary additions to their costs. This would therefore push their
profit margins down - something they actively wish to avoid. The effect of this is that companies like
Thames Water will pollute less to avoid these fines, rivers will be cleaner, and consumers will be
better off as Thames Water and Co. are now focused on avoiding these fines and ensuring market
failure doesn’t occur at such a scale. The aforementioned negative externalities are lessened or
removed.
Thames Water Polluted Water
This principle can be see on the diagam above. There is free market equilibrium at Pm Qm, which is
where the market is currently producing at. The social optimum however is higher than this, at Popt
Qopt. At Qm, MSC>MPC so external costs are present. The external cost must be added to Thames
Water to bring them up to social optimum. This is market failure, as resources are not being
appointed to the social optimum.
However, in the grand scheme of things, the fine may not be sizeable enough to be effective and
have the intended effect. It may even be cheaper for Thames Water to just tank the fine and not
change anything, which means that the market failure stays present. Tanking the fine may just be
the better outcome for the firm if getting rid of their waste ethically costs more. Therefore, these
fines would have little effect on companies like Thames Water, as pollution is still better than the
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alternative. Alternatively, the cost of fines may be passed onto consumers, seeing as Thames Water
is a natural monopoly. This is a prime example of regulatory failure, which is when regulation
intended to overcome market failure, or essentially protect the public, fails to achieve these goals. In
this case Thames Water can take advantage of this, as going against the law can result in increased
profits. This regulatory capture was further exemplified when the chairs of the water regulator,
Ofwat, met with the Environment Agency in September 2023 to discuss how to quell the public’s
anger over bill rises and sewage spills. They are supposed to hold water companies accountable but
are instead dealing with the issue in another way.
Another way in which the government could prevent market failure is to nationalise (the swapping
of a privately earned firm in the ownership of the government) the water companies. According to
The Guardian, if the government acquires the private water companies, it will pay itself off in 6
years. This goes to show that it is viable for the government to nationalise, as it is financially
possible. The benefit of nationalisation is that the government aims not to make profits and please
shareholders, but act in the best interests of society. This is much better, as before, shareholders of
water companies were paid incredible amounts (£7.2bn paid to shareholders since privatisation),
when that money could have been used to improve the service and is an opportunity cost for other
projects. A nationalised industry can aim to be allocatively efficient (when resources are distributed
to maximise societal welfare at a quantity where P=MC) and socially efficient. This means that the
government can act in a way that benefits society the best, which includes not polluting, as it
damages the society in which it is based and is the cause of market failure. This applies to water
companies as they are prone to pollution to save on costs.
However, it may be financially unviable to acquire these companies, as the 6 year payback period is
simply an approximation. Therefore, if something were to happen, such as rising costs when
replacing the Victorian sewer systems with more modern ones, and the government is unable to
sustain the water companies on their own financially, the service may receive cutbacks and get
worse than it used to be. This leads to further market failure on top of what they were trying to
solve. It could also be an example of government failure (specifically excessive administration costs,
which is defined as when the cost of government intervention is greater than the correction of
market failure it leads to a net welfare loss), and another further problem is that the government
faces no competition, so may relapse into lower efficiency and innovation, which is not in the
consumers’ best interests.
All in all, I believe that action needs to be taken to resolve this market failure, and the best way to do
this is through nationalisation. The 6-year payback is essential to my argument, as it is a (relatively)
short time frame, and would likely result in a better product, as society is being damaged by the
sewage spillage into the rivers and lakes. However, this conclusion depends on whether or not this 6
year payback is accurate.
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Essay_21: Ben Watkins
With reference to an industry of your choice, evaluate policies that might be used to
improve competitiveness.
Competition is a driving force of innovation, quality, and low prices, and therefore within a
government’s best interest to create policy that improves competitiveness. ‘Competition Policy’,
existing to promote competition, contributing towards improved efficiency in individual markets. I
will evaluate policies that could improve competitiveness in the farming industry.
One method of intervention a government could use is the granting of subsidies in order to boost
the competitiveness of small and medium sized enterprises (SMEs). A subsidy is a form of financial
government support that reduces costs for firms. Through subsidising production and reducing
costs, the profits of a firm can increase, allowing them to reinvest, lower prices, improve quantity
and become more competitive. Such policy could be applied to an industry such as the farming
market reducing marginal costs and allowing greater dynamic efficiencies. An example of such
economic policy occurred in Europe in 1957 as a part of the ‘Treaty of Rome’, which subsidised
farmland with the intention of ensuring domestic and international competition.
The effect such policy is demonstrated on the diagram above, representing the European farming
industry. The diagram begins prior to the subsidy at a price level of P1 and quantity of Q1, operating
with subnormal profits shown by profit box ABCD. Following the introduction of a subsidy, the costs
to the firm are greatly reduced, shown by the downward shift of the MC curve from MC1 to MC2,
and the AC curve from AC1 to AC2. These shifts create a new profit maximising equilibrium at point
C, at a reduced price of P2, and an increased output of Q2. The subsidy has both lowered the price,
whilst increasing output, allowing the creation of supernormal profits demonstrated by the shaded
box EFGH. The subsidy enhances competitiveness as the once struggling farming firm is now able to
match rivals and compete for market share. This practice will further promote efficiency savings
within other firms, forcing rivals to cut costs creating price competition as firms compete for market
share, all of which benefits consumers.
However, the viability of such policy is contentious as such methods are expensive, and therefore
incur an opportunity cost where the money could instead be spent on the healthcare industry, for
example, rather than farming. In the diagram below, the shaded box demonstrates the cost to the
government, with the vertical distance between the two AC curves, multiplied by the new quantity
showing the level of government spending. In the context of UK farming, this could be of an issue
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with public firms such as the NHS lacking finance. Furthermore, if SME farms where to gain interest
from larger firms, they could be bought out, which would reduce competition.
An alternate method governments could employ to increase competition is that of deregulation.
Deregulation is the act of governments reducing the restrictions placed on firms within an industry,
otherwise known as the taking down of ‘red tape’. Such policy would help increase competition
through lowering barriers to entry and increasing the easy of entry for rival firms. This can be
referred to as contestability, in which barriers to entry are low enough to encourage new firms to
easily enter the market. Contestable markets increase consumer choice through greater competition
amongst firms and incentivises firms to operate closer to allocative efficiency at the point AR=MC.
An example of deregulation took place in the mail industry in 2006, when the Tony Blair government
opened up the market to new firms. The monopoly Royal Mail had over the market meant high
prices and relatively poor wait times. The Tory Lib Dem coalition of 2010 furthered the deregulation
of the mail industry in 2013 by privatising Royal Mail. This proved to be effective, greatly reducing
the market share of Royal Mail and encouraging the entry of new firms such as DPD, UPS and
Hermes whom offer competitive prices, quality service and tracking options in order to compete
with one another. Deregulation could therefore be said to increase competition through its lowering
of barriers to entry and opening up of the market.
However, in evaluation it must be stated that the use of deregulation can incur some negative
effects. One example of this would be the reduction in consumer protection as government
oversight is reduced. An example of this of this occurred in 2000 during the ‘California energy crisis’.
In a bid to increase competition and lower prices, the State of California deregulated their electricity
industry by removing the price caps. This resulted in extortionate pricing, harming the consumer as
they could not afford the rising costs of electricity. Deregulation can also cause negative
externalities, For example, via Brexit, the UK left the EU’s ‘social climate fund’, which regulates the
carbon emissions of a wide range of EU firms. The UK has not created an equivalent, potentially
incurring the negative externality of widescale pollution.
In judgment, I would argue the effectiveness of either competition policy depends on other factors.
For instance, in a time of high government debt governments would struggle to implement the use
of subsidies, instead depending on deregulation as its less costly. On the other hand, if the
government is in a position in which it is able to afford subsidies, I would argue it to be more
effective than deregulation. Yet despite this, if deregulation can be implemented in a way in which
workers rights, the environment and the consumer are not harmed, its effectiveness could be
greater than that of subsidies at a massively reduced cost.
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Essay_22: Noah Taylor
To what extent has privatisation of the UK rail industry been a success?
Privatisation is the transfer of ownership from the government to private sector firms. This occurred
in the case of the UK rail industry in 1993 by the Conservative government and this split the railway
industry into two parts. The national rail infrastructure such as the tracks and stations remained
owned by the public sector, while the train operating companies became privatised. The success of
this move is up in the air due to the railways seeing much growth, but potentially not having
benefited from privatisation as much as should.
One argument in favour of the railway industry being privatised is the fact that the service has been
improved for consumers due to the private firms being more dynamically efficient (when the firm
successfully meets consumers changing needs and wants over time) and avoiding x-inefficiency
(when a lack of real competition causes average prices to be higher than in a market with
competition). In the case of the railway industry dynamic efficiency would be seen through
improvements to customer service and improvements in the reliability and safety of the trains, as
well as the frequency of services offered. This would be the case as the private firms would be able
to focus more on how the passengers are feeling about the services and would be able to be more in
touch than the government. This is because a rail company focuses directly on running the business
compared to a government who may have other priorities, such as the healthcare system. This
would mean that the private firms could adjust prices with greater responsiveness leading to greater
consumer satisfaction. These benefits have led to a doubling in the number of journeys being made
on the railways compared to when it was nationalised. As a result, consumer spending increased and
total revenue increased by almost £5 billion in 2016/17 compared to 2000/01. This has the knock-on
effect of allowing the private sector firms to spend more on maintenance, technological innovation
or simply buying new or more trains.
However, some may disagree as they may feel that the benefits are not a result of privatisation but
of government intervention. One such example could be the introduction of Oyster cards in London -
cards that are used solely for public transport. These cards have been very successful as they now
are used for around 80% of all journeys on public transport in London with over 43 million cards
having been distributed by 2012. These cards are just one example of the investment that the
government consistently makes into the rail industry despite it being privatised spending around
£4.2 billion annually in subsidies on the railways, even bailing out private firms which fail to run
profitably. In 2009 the East Coast line defaulted on its payments, was renationalised and later
became the most efficient line in the hands of the public sector. Overall, these points present the
possibility that the railways were destined to grow to the extent that they did and that this may have
even been hindered by privatisation of the train operators as government subsidy and support has
been crucial to private success.
Another reason that many believe that the UK railways’ privatisation has been a success is that the
railway being privately owned allows for greater competition, which is more important than who
owns the lines. This is because an increase in competition leads to a decrease in prices in most
markets. The railways operate in an oligopoly with the top four firms in the market generating 58%,
market share. This shows the n-firm concentration ratio in action and suggests that the market is an
oligopoly where the top 5 firms have at least 60% of the total market revenue. These leading firms
would be in constant competition and more firms would be able to enter the market and attempt to
gain market share which in turn has the potential to drive down prices as they all compete for the
53
customers who would benefit from the lower prices. In addition, the private railway operators have
the ability to regulate their prices with greater efficiency compared to the public sector operators.
This greater efficiency comes because of the public sector operators being further removed from the
industry. Eventually, this would lead to the prices being levelled out across the market so as not to
allow one firm to charge less than others unless the other firms had been priced out.
However, rail prices have risen by up to 120% since privatisation and there is little space for increase
competition due to the railways being at full capacity. This shows that while private firms have the
potential to keep prices lower for consumers, this hasn’t stopped them from increasing prices
exponentially. This increase in prices is evidence of a lack of competition on the newly formed
oligopoly, which runs contrary to one of the main aims of the privatisation of the railways.
Additionally, the private firms would be unable to increase the competition much further than it
already is as the railways are near full capacity. There is very little scope for Open Access Operators
(OAOs) to enter the market. This means that without further intervention from the government to
increase the number of lines or the efficiency of the already existing infrastructure then the cap for
the private sector firms is approaching. Juxtaposed to this is the fact that the public sector operators
would have greater scope to grow due to the government owning the limiting factors that the
private sector firms face and would have greater control over them when the opportunity for growth
presents itself.
Overall, I find that the privatisation of the railway industry in the UK has been a success albeit with
some shortcomings. The greater point is that nationalised railways suffer from a lack of competition
since profit is not the main objective of a public service. A privatised service with the power to
regulate prices allows the private firms to maintain price levels to provide a better service for more
people.
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Essay_23: Johannes Meiswinkel
Discuss the extent to which the NHS's role as a dominant employer is always
disadvantageous to healthcare workers.
The NHS is one of the biggest employers in the world which makes it a significant contributor to the
UK economy. The NHS’s aim is to provide universal health care to every resident of the UK regardless
of their ability to pay as well driving innovation and research for the medical sector. A monopsony
employer is an employer which can influence wage rate due to its market share in the labour market
for a specific profession.
The NHS can exploit its employees through its dominant position in the health care labour market. It
can be said the NHS is a monopsony because it is the dominant employer in the labour market
without any significant competition. With over 1.3 million employees it is one of the largest
employers worldwide. Its only competition being the private health care sector that has no
significant impact on the market due to its size. As a monopsony the NHS has wage setting power. To
attract new employees, it has to offer higher wages. These wages however are most likely not
reflective of the marginal revenue product of the employees because the NHS as a monopsony is a
profit maximiser. Employees have no choice but to accept the market wage rate because there are
so few alternatives. In a competitive market nurses would refuse to work for a wage of W3 because
they could get W1 elsewhere. However, the NHS has no significant competition and can get away
with paying W3. Therefore, it can be said that workers in the NHS are being exploited and underpaid
and only because of the monopsony power.
However, there are trade unions. A trade union is an organisation formed by workers of similar fields
that works in the interest of its members. Far more than half a million employees in the NHS are
being represented by a trade union one of them being Unison with almost half a million members.
They are there to call for better working conditions but more often bargain for higher wages. The
union effectively becomes a monopoly seller of labour. Therefore, it can oppose the monopsony
power of the NHS and gains its bargaining power from that. The wage they are bargaining for will
always be higher than the one the NHS is paying. In the diagram below, the market starts in
equilibrium. The union then bargains for a certain wage, effectively creating a minimum wage that
workers won’t work for less and the NHS must pay. As a result, a horizontal supply curve is created
until it intersects the original demand curve because workers would accept any wage above their
minimum wage. Therefore, no labour can be hired by the NHS below that wage rate. As a result, the
wage rate and quantity of labour employed are greater than without a union. Reducing the extent to
which the NHS’s role as a dominant employer is disadvantageous for health care workers.
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As a monopsony the NHS can exploit employees through longer hours and bad working conditions.
In the past years doctors in the UK have been striking more frequently. Especially junior doctors have
been striking. The main cause for that is not a low wage but rather because of the long working
hours under bad conditions. Many doctors left the NHS during the pandemic leaving the remaining
ones with more work to do as a result of the labour shortage. In addition to this have there been
cuts in funding because of austerity measures making working conditions even worse. The NHS is the
dominant employer for doctors in the UK. Therefore, doctors have no bargaining power. If they do
not agree with the working conditions and hours and want to change to a new employer is there are
few alternatives. Furthermore, there is no incentive for the NHS to better their working conditions as
the competition is too little. This means that the NHS knows doctors will stay with them no matter
what because there is no alternative other than retraining for a new job.
However, poor working conditions are likely to be only short term. The NHS is a state-owned firm
and therefore run by the government. As so many people work for the NHS they are an important
part of voters which is an incentive for the government to ensure they have good working conditions
to not lose votes. In addition, there are new governments in regular intervals, which means that the
people in charge of the NHS change as well. The Labour Party would like to primarily fund the NHS
more through taxation than the Conservatives do. Both want to fund the NHS more. The
Conservatives want to increase inject 20.5 billion pounds and increase nurse recruitment, training
and retention. Whereas the Labour Party wants to add 26 billion pounds and annual increases of
4.3% for the budget. This would be funded by increased taxes. As they are trying to win votes, they
will try to increase working standards and therefore bad working conditions will only be a short-run
problem. The NHS is so important to the UK society that in the long-run they will have to ensure
working conditions are better to retain the staff. Otherwise, the NHS would collapse completely
which would result in devastating consequences for millions of people.
Having one dominant firm in a market is never in the best interest of employees and consumers and
it is the same with the NHS. Its monopsony position enables it to exploit workers by paying low
wages or letting them work under bad conditions. Although there are trade unions and it is
government run, recent strikes by the employees show that more competition would certainly be in
the best interests of employees to have alternatives and pressurise the NHS to keep wages higher.
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Theme 4
A Global Perspective
57
Essay_24: Ben Staddon
Evaluate the impact of globalisation on developing economies. Refer to a developing
economy (or economies) of your choice in your answer.
Economic globalisation refers to the increasing interdependence of world economies because of the
growing scale of cross-border trade of commodities and services, flow of international capital and
wide and rapid spread of technologies. Benefits of globalisation can be broken down to benefits to
workers and benefits to firms.
Benefits of globalisation to workers in a developing country like Nigeria would include more jobs
being created and higher wages. These benefits may come through the creation of wealth through
foreign direct investment (FDI). One characteristic of globalisation is the increase growth and
influence of multinational firms (MNCs). MNC investment into the Nigerian economy provides much
needed foreign currency into the financial account of the balance of payments and creates new jobs
for the Nigerian labour force. This could result in economic growth via higher levels of consumption
as a result of more people working and receiving wages. This is depicted in the AS/AD diagram
below, which shows AD1 shifting to AS2 as consumption, one of the components of AD, increases.
One outcome of this is an increase in Real GDP (Q1 to Q2). This is due to the boost in consumption
which results in growth in employment and job opportunities boosting the Nigerian economy. Since
output is increasing due to the increased consumption, so the derived demand for Nigerian labour
also increases.
On the other hand, globalisation may harm workers in Nigeria due to the exploitation of labour by
MNCs. An example of this would be the exploitation of Shell workers in Nigeria because they were
being paid US$137 to US$257 a month or even not being paid at all. They are also working 12-hour
shifts which is overworking their staff meaning they are working like elephants and eating like ants.
Exploitation causes poor working conditions and poor pay and this will mean workers are struggling
to feed their families and could lead to poor physical and mental health. This is an example of the
race to the bottom as Nigeria allows MNCs to exploit workers as they are desperate to secure FDI to
bolster the foreign currency reserves. In the same way, developing economies may compromise
climate change policies in a bid to secure investment. This would be harmful to workers and society
in the future.
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Benefits of globalisation to Nigerian firms would include the opportunity to increase profits via
access to global markets and trade liberalisation. Globalisation is characterised by trade
liberalisation, which means the removal of tariff and non-tariff barriers in trade. A tariff is a tax that
has to be paid on a good that is either imported or exported from one country to another. Nigerian
exporters can access larger global markets and increase their export revenues. In Nigeria there are
two main exports which are crude petroleum and petroleum gas. Exports of crude petroleum are
vital to Nigeria’s export economy and account for 70.8% of all its exports. The most popular export
destinations for Nigerian crude petroleum were India $5.22 billion, Spain $3.67 billion, and South
Africa $2.14 billion. Having fewer barriers to trade reduces the cost of goods sold in importing
countries. There are many benefits to specialisations because there will be a larger quantity of goods
and services that can be produced, improved productivity and quality and could also lead to firms
having a comparative advantage over other firms.
The diagram above could represent the Indian market for oil. It can be seen that if there are tariffs in
the market, then the quantity of imports is only Q4-Q3. However, if tariffs are removed then the
price for oil in India falls to P1. The quantity of imports is now Q2-Q1. Since India is importing
significantly more oil, Nigerian oil firms can benefit through increased export revenues.
However, trade liberalisation can benefit stronger economies but put weaker ones at a greater
disadvantage. The existence of tariffs can be used to protect domestic businesses who are given a
degree of market share of domestic markets by the tariffs. If the diagram above represented the
Nigerian car market, then Nigerian manufacturers can be protected from foreign competition
through the imposition of tariffs. In this case a tariff raises the price of cars and increases domestic
demand from Q1 to Q3. Trade liberalisation may bring benefits to exporters but may also bring harm
to domestic firms that are not ready to compete with foreign imports. The infant-industry theory
states that new industries in developing countries need protection against competitive pressures
until they mature.
Overall, I believe that globalisation is good for Nigeria because while globalisation will increase trade
and likely benefit Nigerian consumers and workers, there is scope for the government to protect
domestic firms through selective tariffs in the short run until international competitiveness can be
secured.
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Essay_25: Jamie Macleod
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.
Economic growth is an increase in a nation's actual and potential output over time. Economic
development is improvement in the economic well-being and quality of life for a community. This is
often seen with incremental improvements to an economy. The most common reasons for economic
growth are increases in land, labour, or capital. Other reasons can be improvements in technology,
increase in population and/or immigration, and investment. These increase economic growth as it
can increase productivity.
A constraint on the economic growth and development of a country may be down to poor
governance and corruption. Corruption is most present in the newly emerging economies and
developing countries. Nigeria scored 24 on a scale from 0 ("highly corrupt") to 100 ("very clean") in
the Transparency Index 2019. When ranked by score, Nigeria ranked 150th among the 180 countries
in the Index, where the country ranked last is perceived to have the most corrupt public sector. This
is a useful measure in determining a government's corruption level; however, it is not always 100%
accurate as corruption is hard to determine. This is often seen in Nigeria as government funds and
foreign aid is not always invested into development and instead into government pockets. This has
an extremely negative impact on the Nigeria economy as 100 million Nigerians are still in poverty.
Not only this but of all Nigerian citizens surveyed who had at least one contact with a public official
in the 12 months prior to the 2019 survey, 30.2 per cent paid a bribe to, or were asked to pay a bribe
by a public official. This greatly increases the inequality gap in Nigeria. This makes their 10-year
agenda to reduce poverty drastically slower. Poverty puts an additional strain on families, which can
lead to parental mental health and relationship problems, financial problems and substance misuse.
This can have a negative impact on parenting behaviours which impact children's outcomes. This
makes growth and development far slower than it should and can be.
However, one way this can be addressed is to enhance international cooperation and partnerships.
This can be done through trade and aid. The role that trade and aid can play is crucial. Not only can it
improve a country's technology, infrastructure, and security, it can strengthen relationships with
other governments. One reason the UK gives so much aid to Afghanistan is to try build security and
transparency. If corruption is present, aid could be withheld, and trade could be diverted if the
corruption wasn’t cracked down upon. Outside governance prevents the country of origin from
corruption. Resources are then allocated more efficiently. This therefore means that there is no
longer a restriction of corruption on a developing country's economic growth. This depends on how
much involvement a country has in the others government. If each country is transparent in what
they are using their money for, this will work. If they do not crack down on corruption and are not
transparent, it will not work.
A savings gap is another common constraint on economic growth and development. A savings gap is
generally defined as the difference between “capital formation” and the “savings” of an economic
sector over a given period and it measures the need of external funds of that sector and can be
explained by the Harrod-Domar model below. If a country such as Nigeria has a low level of savings,
then there will be a lack of funds for borrowing to invest. With low levels of investment, the quality
of Nigeria’s factors of production (human, physical and natural capital) is likely to remain low. This
means that productivity will remain relatively low and incomes on Nigeria will also be low.
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The savings gap in some developing counties has widened in recent years due to rising capital flight.
Capital flight occurs when firms move their operations abroad. This can exacerbate the savings gap
as banks have fewer loanable for investment and cannot inject money into the circular flow or
create jobs.
One way to overcome the savings gap is through government intervention. Government
intervention can halt one of the stages of the poverty cycle. The Harrod-Domar model suggests that
an injection of finance into the circular flow can result in increased savings. Where the Nigerian
economy receives an injection of FDI, foreign aid or borrowing, the knock-on effects are that there is
increased income leading to increased savings and the potential for increased investment. This in
turn can improve the capital stock, increasing outputs and generating more income for Nigeria's
citizens. The effectiveness of this depends on the success of businesses and firms as if investment
into new firms fails, money is instead wasted and an LDC could very easily fall back into the poverty
cycle. Thus, in evaluation, the extent to which a savings gap acts as a constraint on growth will
depend on the success of governments halting the poverty cycle by securing FDI, loans or aid.
Overall, there are many constraints on economic growth for low-income developing countries. Other
common constraints include a lack of education or a lack of FDI to boost struggling economies. There
are, however, clear ways in which these constraints can be removed despite many of these proving
elusive to many LDCs. If these things go right, then growth/development can be slowed by
corruption, which is a harder problem to solve.
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Essay_26: Richard Wang
Evaluate the factors that might have caused an increase in the international
competitiveness of the UK’s goods and services.
International competitiveness is the ability of a nation to compete successfully overseas and to
sustain improvement of living standards and output.
One factor that could increase the
international competitiveness of the UK’s
goods and services is deregulation, which is
the removal of regulations. In 2016, after
the Brexit vote, the UK was expected to get
rid of some regulations because it no longer
needed to follow the EU rules. Therefore,
the UK would be less regulated compared to
other EU countries. This could be in the
form of workers maximum working hours,
working conditions and so on. With longer
maximum working hours allowed, output is
likely to increase, this would lead to a
decrease in unit cost which is calculated
total costs divided by output. Therefore,
firms would be able to increase their
profitability, which would shift the SRAS curve outwards from SRAS1 to SRAS2, as shown on the
diagram above. This then would make prices drop from P1 to P2 and national output to increase
from Y1 to Y2. Consequently, the UK could attract more foreign investment which would shift the
LRAS curve outwards from LRAS1 to LRAS2. This would increase the UK’s international
competitiveness both in the short run and the long run, because it would be more successfully
competing overseas and sustained improvements of outputs.
However, deregulation in certain areas could cause negative effects. An example of this would be
deregulation in the labour market. In 2017, the EU has followed a policy of liberalisation and
deregulation of markets in order to open them up to competition. The reason for this is to be more
international competitive. But this also alarms trade unions and employers to be wary that this could
have a negative impact on the labour standards, wages and working conditions. This could further
lead to demotivation of labour or even strikes. The consequence of this would be a distinct decrease
of productivity, which further could add costs to the firms. This could further influence international
competitiveness negatively.
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Another factor that could increase the UK’s international competitiveness could be wage costs. Data
suggests that in 2016, the UK had a lower
minimum wage (US$ 10.2), than France (US$
12.6) and Germany, (US$ 11.8 ). With lower
wage costs, the UK could attract more FDI and
therefore increase its international
competitiveness. Therefore, as the graph
shows, we have our original long run aggerate
supply curve LRAS1. Because factors of
production are likely to increase with FDI , we
would have a shift in the long run aggerate
supply from LRAS1 to LRAS2. Then we would
have an increase in potential GDP from Yp1 to
Yp2. This means that the capacity of production, which is the maximum output a country can
produce using all its available resources, would have increased in the UK. This could come in the
form of an improvement in capital goods, an increase in population and so on. Those factors could
make us more efficient and productive and more internationally competitive.
However, Brexit could increase the
wage costs in the UK. Post Brexit,
earnings have increased by around
4% annually across the UK. This is
because Brexit caused a lot of
European workers to leave the UK
denying the UK access to cheap
labour. As the diagram shows, the UK
labour market would shrink which
would cause an inwards shift on the
labour supply curve. We can see in
the diagram that with the same
amount of employment, the wage
rate has increased from W1 to W2.
This means that the UK has no longer got the advantage of low labour cost. This could cause the
firms that invested in the UK because of the low labour cost to leave to find other countries that
have lower wages. Therefore, the UK has become less internationally competitive.
In judgement, there are so many factors that could have caused the UK rank in global
competitiveness to increase. It may be that the UK has not changed at all, but rather the reason that
we have gone from the 10th to the 8th could be that two other countries have declined. Without
further data, it is impossible to categorically state the reasons for the change.
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Essay_27: Aaron Coleman
Discuss the economic implications of the UK leaving the European Union.
The EU started as a common market with free movement of people and goods and developed into a
monetary union, a common market with a shared currency. The UK was only ever a part of the
common market having opted out of joining the Euro Zone. The EU has four key freedoms: Free
trade of goods, free mobility of labour, free movement of capital, and free trade in services. The UK
left the EU in 2020 and will therefore not benefit from these freedoms. Brexit has been criticized by
many for its economic implications.
One economic impact of the UK leaving the EU is the reduction of labour mobility. Labour mobility
refers to how workers are able to move from one job to another. Being in the EU gave the UK high
labour mobility. This is due to one of the four key freedoms, free mobility of labour. Since we were in
the EU, we were able to move to and from different counties to find new employment without
having to pay or apply for a visa. This also meant that we could easily have foreign workers from
other countries inside the EU to fill job vacancies in the UK. A great example of this was lorry drivers.
Many lorry drivers in the UK came from other countries inside the EU, mainly eastern European
countries, and this was because of the EU’s labour mobility. We greatly benefited from this. Lorry
driving is not a highly sought after job for people living in the UK. This is because of its long hours
and monotony. According to the diagram above, labelled excess demand for lorry drivers, we see
how being in the EU solved this issue. The original demand for lorry drivers was fulfilled by the UK
supply, shown at Slab1 intersecting with Dlab1 causing the quantity of lorry driver to be at the point
Q1. But with the growth of the UK the demand for lorry driver for the same price shifted to Dlab2.
However, lorry drivers coming in from the EU is shown by the shift of Slab1 to Slab2, fulfilling the
need for more lorry drivers at the same wage and removing the excess demand. Now we have left
the EU, we have returned to this excess demand and without enough lorry drivers there could be
mass delays and many firms would be affected. There have indeed been lorry driver shortages,
which has negatively impacted the economy. This demonstrates one of the negative impacts leaving
the EU has had on the UK and shows the UK has struggled to find solution to its new problems.
However, one benefit to the removal of the free movement of labour is the reduction of
occupational immobility of labour in the UK. This is due to the UK new immigration policy. Following
Australia, the UK will now implement a points-based immigration policy based on how much the
British government believes the county will benefit from allowing someone to gain residency there.
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The UK will now be able to look at each person on an individual basis and decide if they want them
in the county or not. This means that the UK can be selective in who they want based on what the
country needs. This will reduce the negative effect of occupation immobility of labour. Occupational
immobility of labour exists when barriers stop workers from moving from one job to another. By
reviewing people coming into the country, we can grant access to people who will fill employment
gaps caused by occupation immobility of labour, thus reducing unemployment.
Another implication of the UK leaving the EU is that there will now be an increase in cost for trading
with counties inside the EU. This is because the UK will be leaving the EU customs union which
allows for trading without tariffs. The diagram below shows how the price of goods from inside the
EU will know cost more with the example of ships, something's the UK commonly imports from the
EU. The diagram shows the price of ships while the UK was still in the EU, this is shown at p1 where
the EU supply meets domestic supply and demand. Being in the EU causes the price of ships to go
down from the original domestic (p) price. However, since we have left the EU now, we will have
tariffs on the ships we import. This tariff will push the prices of ships from P1 to P2.
However, this is only one side of the new trade deals the UK will have post Brexit. Since we have left
the EU we can now make our own trade deals with non-member state countries. This will free up
trade for the UK and countries like the USA or Canada. Where before we did not import goods like
beef from the US due to the high 300% tariffs, we will now be able to make our own deals. The UK
are likely to pursue bilateral free trade deals which we were not able to before due to the
constraints of EU membership. This also means that we can trade with emerging economies. This
will likely increase our GDP, since it will shift our aggerate demand curve, which is affected by out
net trade (X-M). The UK now has the potential to increase its revenue by trading with newly
emerging economies like India and China. These countries will have increase demand for imports,
since their population is growing and with their growth in national incomes they will soon have more
need for financial services, somethings the UK specialises in. On top of this, the UK will be able to
reduce their spending. The UK had to pay £19 billion a year to be a member state of the EU. This
money will know be able to be invested back into the UK economy.
The implications of the UK leaving the EU are famously hard to predict. The conclusion of the cost/
benefit analysis will only be shown in the coming years depending on if the UK is able to make
beneficial trade agreement with non-EU states. If the UK is able to secure these deals it is likely that
there will be a noticeable boost in UK exports leading to significant increases in UK GDP. Finally,
Brexit should also be assessed for its non-economic impacts.
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Essay_28: Gordon Fitzgerald
Evaluate the arguments that economies might put forward to justify the use of
protectionist measures.
Protectionism occurs when the government enacts policies such as quotas, tariffs, and subsidies in
order to protect domestic industries/firms from foreign competition. This essay will assess whether
protectionist measures are good or bad for an economy.
A government may use protectionist measures, such as tariffs, to raise government revenue. By
doing this, the government can get a surplus in the government budget. For example, in 2019, the
US government gained “100 billion dollars” as a result of imposing tariffs on imported Chinese
goods.
US STEEL MARKET
The diagram above demonstrates how the government uses tariffs to artificially raise market prices
to collect revenue. As tariffs are imposed, the price of the good, for example imported steel in the
US, will rise and the quantity of imports will fall from QD1-QS1 to QD2-QS2. Although the quantity
has fallen, this new quantity is taxed and raises revenue for the government of the amount QD2-QS2
x the value of the tariff. This is show in the diagram by the “Gov Rev” box. This revenue can be used
to fund public goods/services, such as improved education in state schools. The improvement in
education, funded in part by tariffs, can lead to an outward shift in AS (in the long term) because
workers become more skilled.
However, the tariffs can be problematic because the country that has been slapped with tariffs can
retaliate. In this example, China retaliated by introducing tariffs on US goods. This then causes US
firms to suffer, which will lead to potential macroeconomic side effects. For example, when US firms
can’t export their goods to China, they could go under, which will lead to increased unemployment.
Additionally, Chinese retaliation to US tariffs can result in imports of US goods becoming more
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expensive for Chinese firms. This means that tariffs may not result in an improvement in the welfare
of the US economy, as US exporters may lose revenue. The decrease in welfare in the US, can be
considered an example of government failure (this is when government intervention causes a loss in
net welfare), and the tariffs can be an example of government failure because the actions of the
government led to unintended consequences which lead to a loss in national welfare.
Nonetheless, if tariffs are imposed on chosen imports, domestic corporations can thrive because
there is less competition in the local market. This can cause firms to expand and grow, because
markets become less contestable as a result of the weakening position of foreign firms. Less
saturated markets can allow “infant industries”, such as the Rwandan textile industry to grow. If the
Rwandan government imposes tariffs on foreign textile goods that flood the market, infant
industries will gain more profit and can, as a consequence, use this money to grow and scale their
businesses. As a result of expanding their operations and taking advantage of economies of scale will
allow the firms to lower their LRAC, which will be beneficial for such textile firms s it allows them to
become more competitive, and for domestic consumer as they can take advantage of the lower
costs via lower prices. So, tariffs can be used as a short-term measure to grow infant industries.
However, the introduction of tariffs can lead to a rise in prices and go against consumer interests.
This is because when the market becomes less competitive due to the tariffs, inefficient domestic
firms are being supported. In addition, firms do not feel the need to act competitively, discouraging
innovation and investment. Furthermore, domestic firms with price setting power may keep prices
higher because there is less competition. The lack of competition may also result in less consumer
choice. In our example, the local Rwandan textile firms would be the only remaining firms in the
market as most foreign firms would have left. The loss of foreign firms from the Rwandan textile
market can cause a loss in global efficiency because international competitiveness decreases. In
other words, the Rwandan textile firms will dominate the domestic market after the tariff has been
introduced even though they are less efficient and cannot compete at lower prices, unlike
international firms. The loss of foreign firms means that the Rwandan textile market will instead be
supplied by productively inefficient Rwandan firms.
In judgement, the effectiveness of tariffs depends almost entirely on the size/magnitude of the
tariffs, and how the economies involved react. The tariffs shouldn’t be so high as to cause negative
effects such as inflationary pressures or retaliation from trading partners. It is difficult to justify
tariffs as a means to collect government revenue, but tariffs can be useful, in the short-term, if the
goal is to grow infant industries.
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