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Essay Plans for June 2024 AQA A-Level Economics Paper 1

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(In Progress)

Government Intervention for Under-Provided Merit Goods

  • Introduce the market failure as: positive externality in consumption or a positive externality in production (if you explain it well)
  • Maximum price (rent controls)
    • draw the diagram
    • explain that price goes down from p1 to p2
    • but, quantity falls from q1 to q2 (excess demand at the lower price)
    • evaluate further: demand is inelastic (necessity) and supply is inelastic (time taken to build a house, time taken to train a dentist, regulations, no other use of a spare home)
    • draw diagram again considering elasticities
  • Subsidies
    • a payment given to shift supply to the right
    • q1 up to q2 and p1 down to p2
    • opportunity cost and burden
    • elasticities
    • over-reliance and gov. failure (excessive costs and unintended consequences)
    • the opportunity cost e.g. for bikes can be funded by indirect tax on a demerit good e.g. cars
  • Provision of information
    • draw the externalities diagram
    • supply or demand now shifts to the right due to the new information
    • evaluation: opportunity cost, can get ignored
  • State provision
    • state provision means that everyone can access the good or service
    • markets only allocate to those who are willing and able
    • opportunity cost
    • excess demand leads to low quality or high wait times
    • counter evaluation: private schools/ private healthcare can be an option too with state provision
    • state provision is best reserved for when there is a missing market
  • Leave to free market
    • market mechanism allocates resources when there is excess demand due to the rationing function.
    • market mechanism also signals and incentivises innovation e.g. ebooks

Pros and cons of Oligopoly

  • Collusive oligopoly
    • prisoners dilemma means that people know that working together leads to better outcomes
    • so therefore firms collude
    • this leads to monopoly outcomes
  • Competitive oligopoly
    • kinked demand curve (interdependent)
    • they can't raise their prices because they'd lose customers
    • they can't lower their prices because other firms would reduce theirs as well
    • prices are rigid
    • non-price competition is the determining factor; taste/ quality/ customer service
    • customers get to benefit from this
    • evaluation: local monopolies e.g. burger king in an airport
  • Judegement: depends on what type of oligopoly it is

Pros and cons of monopoly power

  • dynamic efficiency
    • supernormal profit in the long run, reinvested
  • benefit from economies of scale
    • lower average costs due to higher output
  • no productive efficiency
    • AC is not minimised
  • no allocative efficiency
    • MC does not equal AR

Pros and cons of Inequality

  • Inequality is bad because it leads to negative externalities
    • stress
    • crime
    • burden on taxpayer (they pay less tax and they use state provided services more e.g. libraries)
    • labour markets only care about those who are "willing and able" to do something. we need to redistribute money in the form of child benefits or disability benefits
  • Inequality is good because it may be earned
    • wage differentials show why heart surgeons earn more than customer service staff
    • the supply of heart surgeons is very low due to high training and skills needed
    • the demand for heart surgeons is high due to their productivity

Policies to reduce inequality or pay gaps

  • Minimum wage
    • it causes unemployment (government failure)
  • Trade unions or minimum wage in a monopsony market
    • it doesn't cause unemployment
    • but monopsony is the government so that leads to conflicting objectives e.g. a higher minimum wage leads to higher costs and this impacts nhs/ schools budget
  • Education and training
    • this shifts productivity up and therefore increases demand for labour
    • so wage goes up and quantity of labour goes up
  • Progressive taxes and benefits system
    • they should exist because otherwise people would struggle due to factors such as disabilities, homelessness
    • they should exist because inequality causes more inequality especially wealth inequality (inheritance taxes). wealth inequality leads to less people accessing quality health and education which leads to lower incomes
    • they should not be too high, because then highly skilled people like heart surgeons would leave the country (usa/ australia) or retire early and we would lose valuable skills
    • they should not exist because wage differentials are deserved due to skills, value and mrp, and making taxes more progressive reduces incentives to be helpful or creative or hardworking.