What is market failure
when the price mechanism takes into account private benefits and costs of production to consumers and producers, but fails to take into account indirect costs such as damage to the environment. The market reaches a sub optimal position for society
What are the five reasons that governments intervene
The provision of goods and services, market failure in income distribution, market failure in externalities, market failure in the abuse of market power and market instability, the business cycle
What is a public good
A good that has the attributes of non excludable (can't exclude people), and non rival (one person's consumption does not impair another). An example is ABC radio.
What is a free rider
Groups or individuals who benefit from a ood or service without contributing to the cost of supplying the good or service. As a consequence, the good or service is likely to be under-supplied in relation to the total demand.
What is a merit good
goods that are not produced in sufficient quantity by the private sector because private individuals do not place sufficient value on those goods, ie they involve positive externalities that are not fully enjoyed by the individual consumer. Merit goods include education and health care.
What is relative poverty
refers to those whose standards of living is substantially lower than the average for the economy as a whole, and is often defined as a level of income below 30% of average earnings
How does a free market impact income distribution
Free markets tend to produce substantial inequality in the distribution of income.
What is the concept of the welfare state
Following world war 2, most industrialised economies including Australia established an overall framework of welfare benefits for aged, unemployed, housing and transportation
What is an externality
external costs and benefits that private agents in a market do not consider in their decision making process. For example, an airlines and passengers do not consider aircraft noise when negotiating airfares.
Provide examples of negative externalities
pollution, degradation of land, water pollution
Provide four ways that firms can abuse market power
"Monopolisation (one dominant firm forces out others with price cutting to eliminate competitors).
Price discrimination (different prices in different markets without a legitimate business reason)
Exclusive dealing (suppliers impose conditions on customers not to purchase other items)
Collusion and market sharing (agreeing pricing with competitors)"
What law addresses market abuse in Australia
Competition and Consumer Act 2010
What regulator administers the competition laws in Australia
ACCC - Australian Competition and Consumer Commission
What penalty did Visy Group have to pay when found guilty of price fixing
Why does the government care about market abuse
Market abuse generally results in higher prices for consumers, and a lower level of overall economic activity, and less internationally competitive
What is the business cycle
Refers to fluctuations in the level of economic growth due to either domestic or international factors
What are the parts of the business cycle
What is a recession
Two consecutive quarters of negative GDP growth
What are macroeconomic policies
Policies that affect all of the economy, and include monetary policy, and fiscal policy
What is monetary policy
Domestic Market Operations by the RBA to achieve a target cash rate with the objective of keeping inflation between the agreed band of 2-3%
What is fiscal policy
Fiscal policy is the decisions of the government on taxes and spending in the annual budget process.
What are microeconomic policies
Policies designed to affect a particular industry, for example changing the level of tariff on cars or textiles
What are the three levels of government in Australia
Commonwealth, State and Local
Which arm of government is responsible for defence, income taxes and corporations
Which level of government is responsible for garbage collection and local roads
Which level of government is responsible for health, education and industrial relations
What document list the powers of the Commonwealth
The Constitution Act 1901
What has the trend been in Commonwealth power
Since federation it has generally increased, with the evolution of a single national economy - however this is generally done as a process of negotiation and judicial interpretation of the Constitution
What is the public sector
refers to the parts of the economy that are owned or controlled by the government. It includes all tiers of the government as well as government business enterprises
What has the trend in the size of the public sector been?
Spending has gone up from 20% of GDP (1950) - 38% of GDP (2011). Employment in the public sector has declined from 24% (1970) to 16% (2010).
How does the government reallocate resources?
By influencing the way business and consumers behave in the market through taxation or spending measures. Secondly, by producing goods and services itself - or by prohibiting the sale of certain goods.
What is a direct tax
A tax paid by the individual or firm on who they are levied - ie income taxes are paid by the individuals
What is an indirect tax
A tax levied on individuals or firms, but then passed on to someone else. For example, GST is an indirect tax. It is levied on the seller (ie they are responsible to pay it) but they pass it on to purchasers as part of the price
What are different types of spending the government can use to change resource allocation
Funding (ie paying for things), Grants (to start ups), Subsidies (to encourage production or usage of some items ie solar panels), Cash Payments (for example to private search firms to find jobs for unemployed people).
What is corporatisation
occurs when the government changes the rules around how government owned businesses are operated so they behave more like private sector businesses, independent from the government
What is privatisation
Privatisation occurs when the government sells public businesses to the private sector - for example CBA and Telstra
How does the government achieve a redistribution of income
By higher taxes on higher incomes and redistributing those funds to those on lower incomes
What is the tax base
The items that are taxes
What is an average rate of tax
The amount of tax paid divided by income
What is the marginal rate of tax
The amount of tax paid on an extra dollar, ie the dollar of income 67,453 - the marginal rate is the percentage of the last dollar that is paid in tax
What is a progressive tax
A tax where the average rate of tax increases as income increases. An example is personal income taxes
What is a regressive tax
A tax where the average rate of tax decreases as income increases. An example is GST
What is a proportional tax
A tax where the average rate of tax does not change as income increases. An example is company tax
What are the two settings of monetary policy
Tightening (an increase in the target cash rate) and loosening (a decrease in the target cash rate)
What is a government business enterprise
businesses owned and managed by the Commonwealth or State governments
What are remaining government business enterprises
Australia Post, Medibank Private, state rail and electricity, CSIRO, universities
What is competition policy
Policy of the government in relation to market and competition practices of businesses
What is workable competition
A desire to have a level of competition that is compatible with the market structure and specific conditions of an industry
What is the ACCC
Australian Competition and Consumer Commission is Australia's competition watchdog, which ensures that businesses do not engage in anti competitive behaviour
What is environmental sustainability policy
Policies designed to manage the use of renewable and non renewable resources. Examples include the carbon tax, and also the Murray Darling basin water management plan
What is fiscal policy
a macroeconomic policy that can influence resource allocation, redistribution of income and reduce the fluctuations of the business cycle. Its instruments include government spending and taxation and the budget outcome
What is the budget
a tool of the government for the implementation of fiscal policy. It shows the governments planned expenditure and revenue for the next financial year
What are the major sources of Commonwealth revenue
Personal income taxes (43%), company tax (21%)
What are the major government expenditures
Social security and welfare (33%), Health (16%), Education (8%)
What rate is company tax
30% of profit. Same percentage whether $1 of profit, or $1m of profit. It is a proportional tax.
What rate is GST
10% on the price of good, although basic food is exempt from the GST because of the regressive nature of the GST.
What is excise duty
A tax based on the quantity of a product - these provide 7.5% of government revenue as excises on tobacco, cigarettes and alcohol
What is customs duty
A tax on imported goods - only 2% of government revenue
Identify four areas the government spends money on
Social security and welfare, infrastructure, industry assistance and development and protecting the environment
What are the three possible outcomes of a budget
Deficit, Surplus, Balanced. These are calculated based on the revenue and expenditure of ONE year.
What are the three possible budget stances
Contractionary, Expansionary and neutral. These are RELATIVE to the previous year. So a budget, or a surplus, can be contractionary - it depends on what the budget in the PRIOR YEAR was.
What is an automatic stabiliser
instruments inherent in the government's budget that counterbalance economic activity. In a boom period, they decrease economic activity, and in a recession, they increase economic activity. The most common examples are transfer payments and a progressive tax system. Metaphor to remember: the winged keel of Australia II.
What are six influences on government policy
"Parliament and political parties
Interest groups (ie no aircraft noise lobby)
International (ie GFC, Eurozone, PIIGS)"
What is the current budget outcome for 2012/13
A slim surplus of 0.1% of GDP
What is the current budget stance
What was the stance of the last budget
What are the three phases we refer to recent history in Australia
"Mining boom mark 1 (growth, inflationary, increase interest rates, contractionary surpluses)
GFC (decline, decrease interest rates, expansionary deficit (then C)
Mining boom mark 2 (growth, inflationary, increase interest rates, contractionary) - nb then Eurozone slowdown and return to surplus sees looser monetary policy)"
Graph of budget outcomes