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Preliminary Economics Topic Six –

Government and the Economy
Government intervention in the economy

Limitations of the operation of the free market:

Market failure can occur in five areas of economic
activity: provision of goods and services, inequality in the
distribution of income, negative environmental
externalities, monopoly power, and fluctuations in
economic activity
Provision of goods and services – market failure can arise
from the inadequate provision of some collective goods
and services (demanded by the community), and public
goods (non excludable and non rival goods) and merit
goods (goods that the government believes are beneficial
to society that are not produced in adequate quantities
because the market is too small and there is little
incentive for producers)
Unequal distribution of income – can cause absolute
poverty (below poverty line) and relative poverty (do not
have enough income to have the average standard of
living enjoyed by the majority); groups prone to poverty
include: single people (57%), sole parents (20%),
childless couples. women, young people, unemployed,
migrants, Aborigines, the elderly, sick and disabled
Externalities are the social costs of private production

higher rates of inflation in booms. The role of government 2. interest on loans.1 Size of the public sector: pg254 .  Monopoly power – natural monopolies may form (from PTEs and Public Utilities) if they supply the entire market demand with an efficient scale of plant. subjecting PTES to taxes. etc. Problems caused by fluctuations include: higher rates of unemployment in recessions. principles of competitive neutrality. and deregulation – removing restrictions Fluctuations in economic activity – business cycle: boom downswing recession upswing.1 Functions of the three levels of government and constitutional powers: 3. commericialisation – PTEs guaranteeing a rate of return. government reforms in this area to make PTEs more efficient include: privatisation – the sale of part or all of a PTE to the private sector. corporatisation – structuring PTEs like private sector enterprises by making them financially independent.

cannot be passed on to others Indirect taxes (sales tax. the provision of goods and services through public trading enterprises (PTEs) and the use of other economic policies such as competition and environmental policies Reallocation of resources is done through changing the level and composition of taxation and expenditure (spending on collective goods.4. customs duties) are imposed on one group but are usually passed on fully or partially to the final consumer of the good or service Taxation criteria: equity (vertical – higher incomes paying a higher rate. efficiency (leaves allocation of resources unchanged and doesn’t affect economy otherwise). redistribution of income. GST. excise. horizontal – equal tax for same income). governments may use selective assistance or incentives to industries) Taxation revenue = tax base x tax rate (percentage of tax base paid in tax) Direct taxes (income & company) are paid by those individuals and firms upon whom they are levied. simplicity (minimising tax avoidance and evasion) Tax impact = initial point levied. taxation alters relative prices. tax incidence = who ultimately pays . stabilisation of economic activity.1 Economic functions of the Australian Government:        The economic functions of the Australian government are reallocation of resources.

          5. laws and regulations. fines. growth.4) Influences on government policies in Australia:   Political parties Businesses – Business council of Australia (BCA). (Pg 271 – Figure 13.1 Government redistributes income to reduce equality by progressive taxes and social welfare payments ART = (tax paid)/income.1 Government attempts to stabilise the economy through macroeconomic policies: fiscal and monetary policy Monetary contractionary – rise in the cash rate Monetary expansionary – reduce interest rates (stimulating spending. are some major business lobby groups that attempt to influence government policy to favour business activity . larger surplus Pg 262 – budget. contractionary smaller deficit. smaller surplus. MRT = (change in tax paid)/change in income Two main components of budget: structural component (explicit changes in G or T) and cyclical component (changes in G or T caused by changing economic activity) Surplus budget T>G Deficit budget G>T Balanced budget G=T Expansionary larger deficit. permits. subsidies Federal budget:       6. Confederation of Australian Industry (CAI). employment) Fiscal contractionary – surplus budget (G<T) Fiscal expansionary . Australian Chamber of Commerce and Industry (ACCI). quotas. etc.deficit budget (G>T) PTEs – The PTE sector is an important provider of social and economic infrastructure in Australia and contributes revenue to government (dividends) The Australian government uses competition policy enforced by the ACCC to achieve effective competition in markets The Australian and state governments control negative environmental externalities through: taxes. licenses.

Greenpeace Welfare agencies – Australian Council of Social Services (ACOSS). Aboriginal groups.      Unions – ACTU (Australian Council of Trade Unions) campaigns for higher wages and better working conditions Environmental groups/organisations – Australian Conservation Foundation. etc. Salvation army. lobby on social policies The media – influence public opinion Other interest groups – National Farmers Federation (NFF). Women’s Electoral Lobby (WEL) International – foreign policies of allied governments and treaty obligations .