Market-Based & Interventionist Policies (DP IB Economics): Revision Note

Strategy

Explanation

 Advantages

Disadvantages 

Trade liberalisation

• Removing the barriers to international trade such as tariffs, quotas etc.

• More trade increases output, employment & incomes

• Lowers costs of production for firms

• May result in lower prices for consumers

• More efficient global allocation of resources

• Global competition intensifies and some firms may fail

• There may be an element of structural unemployment as inefficient industries die out

Privatisation

• Government firms are usually so big that private enterprise refrains from trying to compete with them. Privatisation encourages new firms to enter the market & compete, thus increasing the total supply in the economy

• May increase competition leading to an increase in output, employment & incomes

• Private firms may be more efficient than government firms

• Competition may result in cheaper prices for consumers

• The money from the sale of assets can be used to provide more merit and public goods

• Government assets are often sold off cheaply at prices below fair market value

• The quality of services may deteriorate as private firms focus on profit maximisation

• Unemployment may increase as private firms seek to cut their wages in order to maximise profits

• Prices may actually rise as firms provide a monopoly service e.g. rail travel

Deregulation

• This is the process of removing government controls/laws from markets in order to increase competition

• Any regulation increases costs of production for firms and deregulation decreases costs which may result in greater supply

• Less regulation may result in innovation and more enterprise in an economy

• Deregulation may create an environment of corruption leading to inefficiency

• Deregulation may increase the quantity of negative externalities

• Deregulation may allow foreign firms to monopolise industry within the nation, leading to higher prices and less output

Strategy

Explanation

 Advantages

Disadvantages 

Tax policies

• A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality

• Redistribution often starts with the provision of free education & healthcare paid for from tax revenue

• Tax revenue provides the means of supporting poorer households and the unemployed

• Sometimes, the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes

• If the tax burden is too high it may become a disincentive to work

Transfer payments

• Transfer payments are usually given to the poorest & most vulnerable people in society and include unemployment & disability payments, pension payments, heating discounts, public transport subsidies etc.

• The poorest households are supported

• Money received from transfer payments generates consumption in the economy and increases aggregate demand

• Poorer countries have less money available to support the poor

• There is an opportunity cost for the government associated with each transfer payment

• Supporting the poor makes good economic sense but is sometimes politically unpopular

Minimum wages

• Minimum wages are set above the free market rate and firms are not allowed to pay anyone less than the legal rate

• Workers receive higher wages and have more disposable income

• Consumption increases leading to increased aggregate demand

• Standard of living increases with higher income

• Costs of production for firms increase, possibly leading to less international competitiveness

• With higher costs of production, output may fall leading to increased unemployment