BOOKLET Economics Essay Project 2024

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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


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.


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


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.


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


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



Theme 1

Introduction to Markets

and Market Failure


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


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.


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.


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


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.


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.


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.


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.


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


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.


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


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


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.


Theme 2

The UK Economy:

Performance and



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.


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.


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



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


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


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.


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.


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


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.


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.


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


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.


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


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.


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


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.


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


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


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.


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.


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.


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.


Theme 3

Business Behaviour and

the Labour Market


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


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.


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.


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.


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.


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


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.


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


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.


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.


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


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.


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.


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.


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


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


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.


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


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.


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


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



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.


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.


Theme 4

A Global Perspective


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.


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



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.


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.


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.


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.


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.


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.


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



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


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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