Government Intervention and Inequality: Economics 9708 (Cambridge International AS & A Level)

Economists use the Gini coefficient as one way of measuring how evenly income or wealth is shared out across a population. Its value always lies between 0 and 1 (it can also be expressed as a percentage between 0% and 100%).

Which of the following statements about the Gini coefficient is correct?

A national health agency is concerned that a popular brand of sugary fizzy drink is over-consumed, since consumers do not fully take into account the long-term health costs of high sugar intake. The table below shows, at each price, the quantity of the drink that consumers demand each week, the quantity that producers originally supplied each week, and the quantity producers would supply each week after a specific (per-unit) tax is imposed on them.

(a) Using the "quantity supplied before tax" column, state the original equilibrium price and quantity of the drink. [2]

(b) A specific tax of $0.60 per bottle is imposed on producers of the drink. Using the "quantity supplied after tax" column, state the new equilibrium price paid by consumers and the new equilibrium quantity. [2]

(c) Calculate the price received by producers once the tax has been paid, and hence calculate how much of the $0.60 tax is borne by consumers and how much is borne by producers. [4]

(d) Explain, using the figures in the table, why the burden of the tax is not shared equally between consumers and producers. [2]

A small country's economy relies heavily on farmers who shear sheep and sell raw wool to textile mills. Wool prices have historically been volatile, and the government is concerned that low prices in some years leave farmers unable to plan their incomes. The table below shows the quantity of raw wool demanded and supplied each month, at different prices, in the free market.

(a) Using the table, state the free-market equilibrium price and quantity of raw wool. [2]

(b) The government sets a minimum price of $5.00 per kg for raw wool, above the free-market equilibrium, to guarantee farmers a higher and steadier income. Using the table, calculate the size of the resulting surplus of raw wool, and explain why a minimum price set above equilibrium creates a surplus rather than a shortage. [4]

(c) A buffer stock agency is set up to buy the entire surplus at the minimum price, so that the market price does not fall below $5.00 per kg. Calculate the total amount the buffer stock agency must spend each month buying this surplus (1 tonne = 1000 kg). [3]

(d) Assess whether a buffer stock scheme of this kind is likely to be a successful way of supporting raw wool farmers' incomes in the long run. [3]

Newspaper reports in a country often compare two different economic measures: how much people earn each month, and how much people own in total. Economists distinguish between these as income and wealth.

(a) Distinguish between income and wealth, giving one example of each. [2]

(b) Explain two economic reasons why the distribution of income and wealth might be unequal within a country. [4]

(c) Discuss the extent to which introducing (or raising) a national minimum wage is likely to be an effective policy for reducing income inequality. [6]

A government believes that locally grown vegetables are a merit good that is currently under-consumed, since many consumers underestimate the long-term health benefits of eating them and instead choose cheaper, less healthy processed food. The table below shows, at each price, the quantity of vegetables (measured in boxes) that consumers demand each week, the quantity that producers originally supplied each week, and the quantity producers would supply each week after receiving a subsidy.

(a) Using the "quantity supplied before subsidy" column, state the original equilibrium price and quantity of vegetables. [2]

(b) The government pays producers a subsidy of $1.00 per box to encourage consumption of this merit good. Using the "quantity supplied after subsidy" column, state the new equilibrium price paid by consumers and the new equilibrium quantity. [2]

(c) Calculate the price received by producers once the subsidy has been added, and hence calculate how much of the $1.00 subsidy benefits consumers (through a lower price) and how much benefits producers (through a higher price received). [4]

(d) Explain why, in this case, the benefit of the subsidy is shared equally between consumers and producers. [2]

A government believes that renting a home has become unaffordable for many low-income households, so it sets a legal maximum price for monthly rent that is below the current free-market equilibrium rent.

Which of the following best describes the most likely effect of this policy on the rental housing market?

A city government is concerned that rents for one-bedroom apartments have risen sharply, making them unaffordable for many workers. The table below shows the quantity of one-bedroom apartments demanded and supplied each week, at different weekly rents, in the free market.

(a) Using the table, state the free-market equilibrium rent and quantity of apartments. [2]

(b) The government imposes a maximum rent of $250 per week. Using the table, calculate the size of the resulting shortage of apartments, and explain why a maximum price set below equilibrium creates a shortage rather than a surplus. [4]

(c) Suggest and explain one non-price method that might be used to allocate the limited number of apartments among tenants at the $250 maximum rent. [2]

(d) Discuss whether an illegal black market is likely to emerge as a result of this maximum rent, and explain how it would affect the government's aim of making housing more affordable. [2]

A country currently relies on privately owned clinics to provide primary healthcare, and most patients pay a market price for a consultation. The government is concerned that many low-income households are consuming too little primary healthcare, a merit good, and is considering two alternative policies: (i) directly providing primary healthcare itself, free at the point of use and funded through taxation, or (ii) leaving clinics privately owned but paying them a subsidy for every patient they treat.

(a) Explain what is meant by "direct provision" of a good or service by the government, giving one example other than healthcare. [2]

(b) Explain two reasons why direct provision might increase consumption of primary healthcare among low-income households more than a subsidy paid to private clinics would. [4]

(c) Discuss the extent to which government direct provision of primary healthcare, funded through taxation, is likely to be a more effective policy than subsidising private clinics for increasing the consumption of primary healthcare among low-income households. [6]

A government uses the following simplified income tax system to help redistribute income: the first $10,000 of a person's annual income is tax free; income from $10,000 up to $30,000 is taxed at $20\%$; and any income above $30,000 is taxed at $30\%$.

Amara earns $20,000 per year and Boas earns $50,000 per year.

(a) Calculate the total tax paid by Amara and by Boas under this system, showing your working for each. [4]

(b) Calculate each person's average rate of tax (the tax they pay as a percentage of their total income). [2]

(c) Using your answers to (a) and (b), state and explain whether this income tax system is progressive, proportional or regressive. [2]

(d) Explain what is meant by a "transfer payment", giving one example, and explain one difference between a transfer payment and the income tax system above in how each affects the distribution of income. [2]

Governments can redistribute income partly through transfer payments, which differ from payments made in exchange for producing a good or service.

Which of the following is an example of a transfer payment?