Department of Industrial

Management
Faculty of Business
University of Moratuwa

Semester 01

IM 1641 – MICROECONOMICS

Group Assignment

Due Date of Submission

[31 / 06 / 2023]

Word Count
 Department of Industrial
Management

Faculty of Business

University of Moratuwa

Semester 01

IM 1641 –
Microeconomics
Group Formation Sheet

Group Leader’s Name: ……………………………………. Mobile:

……………………

Email: ………………………………..

NO INDEX NO NAME CONTRIBUTION

2 226115C A.S.J.R. Siriwardhana 20%

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3 226049C H.M.R.C Hennayaka 20%

4 226037M G.H.S.D Ganegoda 20%

5 226032T M.S.N.D Fernando 20%

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 content

1. Introduction

2. Modern Economy

3.Role the government

i. Provision of public and merit goods

ii. Maintaining macroeconomics stability

iii. Increasing economic growth

iv. Ensuring fairness

 Taxation
 Social programs
 Regulations

v. Equality in distribution of resources

vi. Taxation
vii. Distributive Justice

4.Market Failure
i. Insufficient allocation of resources
ii. Inequitable distribution of resources
iii. Macroeconomic instability

5. How Sri Lankan government rescue the economy during market failure.
6.Conclution

7.Refereneces

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(01) INTRODUCTION

In a modern economy, the government's legal framework is essential to ensure the smooth
functioning of markets and to protect the rights of individuals and businesses. For this it is
important to maintain a strong legal system. This framework includes laws governing areas
such as contracts, property, taxation and competition. These laws help create a level playing
field for businesses, promote innovation, and ensure that consumers are treated as deterrents
to unfair practices.

The government's legal framework is constantly evolving to respond to changes in the

economy and society. Government also plays a large role in enforcing the law and providing
legal services to individuals and businesses.

A strong legal framework is essential to sustain a modern economy. It must maintain a strong
legal framework to promote economic growth, protect the rights of individuals and
businesses, and attract foreign investment.
The government's legal framework is a complex and constantly evolving system. However,
this system of rules and regulations is essential for the smooth functioning of the modern
economic system. By providing a stable and predictable environment for business to operate,
law can promote economic growth, protect the rights of individuals and businesses through a
stable and secure market and social environment, and attract foreign investment.

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 (02) MODERN ECONOMY

The modern economy is a system of product, distribution, and consumption of goods and
services. It's characterized by the use of advanced technologies, the specialization of labor,
and the integration of requests. The ultramodern economy is also characterized by a high
degree of interdependence between countries. The Industrial Revolution was a period of
rapid-fire profitable growth and technological invention. It was driven by the development of
new machines and the use of fossil energies, similar as coal and oil painting. The Industrial
Revolution led to a dramatic increase in the product of goods and services, and it also led to a
abecedarian change in the way people lived and worked.

The ultramodern frugality has continued to grow and evolve since the Industrial Revolution.
The development of new technologies, similar as the internet and mobile phones, has led to
new ways of producing and distributing goods and services. The rise of globalization has also
led to a further integrated global frugality. The modern economy is a complex system with
numerous different factors. It's driven by a variety of factors, including technological
invention, mortal imagination, and the desire for profitable growth. The ultramodern
economy is also subject to a variety of challenges, similar as profitable inequality,
environmental declination, and political insecurity. Despite its challenges, the ultramodern
frugality has been a major force for good in the world. It has led to an increase in living
norms, a drop in poverty, and an enhancement in health and education.

The modern frugality has also made it possible for people to connect with each other from
each over the world. The ultramodern economy is a dynamic system that's constantly
changing. It's insolvable to predict what the future of the economy will hold. still, it's clear
that the ultramodern economy will continue to play a vital part in shaping the world in the
times to come. Then are some of the crucial characteristics of the ultramodern economy.

Specialization of labor
In the ultramodern economy, people specialize in the product of goods and services. This
allows for lesser effectiveness and productivity, as people can concentrate on what they do
stylish.

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Integration of markets
The modern economy is characterized by the integration of requests. This means that goods
and services can be bought and vended freely across public borders

High degree of interdependence between countries

The modern economy is largely interdependent between countries. This means that the
profitable health of one country can have a significant impact on the profitable health of other
countries.
The modern economy has a number of benefits, including Increased living norms The
modern economy has led to an increase in living norms for people around the world. This is
due to the fact that the economy has produced more goods and services, which have made
people's lives easier and more comfortable. dropped poverty The ultramodern economy has
also led to a drop in poverty. This is due to the fact that the economy has created more jobs
and openings for people, which has allowed them to earn a living and ameliorate their
standard of living. enhancement in health and education the ultramodern economy has also
led to an enhancement in health and education. The ultramodern economy also has a number
of challenges, including profitable inequality the ultramodern economy has led to an increase
in profitable inequality. This is due to the fact that the frugality has created more openings for
some people, while others have been left before. Environmental declination the ultramodern
economy has also led to environmental declination. This is due to the fact that the economy
has produced more goods and services, which has put a strain on the terrain. Political
insecurity the modern economy can also lead to political insecurity. This is due to the fact
that the frugality can be a source of conflict, as different groups contend for coffers and
wealth.
The ultramodern economy is a complex system with both positive and negative aspects. It's
important to be apprehensive of the challenges and benefits of the modern economy in order
to
make informed opinions about the future of the economy.

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 (03) ROLE OF THE GOVERNMENT

Providing of Public and Merit goods

 Public goods

A public good is a non-excludable and non-rivalrous good. This means that once a public
good is produced, no one can avoid consuming it, and one person's consumption of that good
does not reduce the amount that others can consume. That is, the marginal cost of consuming
this good by an additional person is zero. National defense, public parks, lighthouses, and
street lighting are examples of public goods.

 Goods of merit

A good is a good that has positive externalities, that is, goods that benefit society as a whole
even if individuals do not consume them. Welfare goods are often subsidized by the
government to encourage their consumption. Examples of welfare goods include education,
health care, and public transportation.

Welfare goods are often subsidized by the government because they are considered essential
to the well-being of society. The government believes that everyone should have access to
these goods, regardless of ability to pay. Subsidizing welfare goods helps make them more
affordable and accessible to everyone. Their consumption has social benefits rather than
personal benefits.

Maintaining macroeconomic stability

Macroeconomic stability is a state of the economy in which major economic variables such as
inflation, unemployment, and economic growth are relatively stable. This means that there is
little volatility in these variables, which helps create an environment conducive to economic
growth and prosperity.
Fiscal policy is the policy used by the government to control taxes and expenditures to
influence the economy. Monetary policy is the policy used by the central bank to control the
use of interest rates and the money supply that affects the economy. Both fiscal and monetary
policies are used to achieve the government's economic objectives, such as economic growth,
low unemployment, and low inflation.

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 Increasing economic growth

Economic growth is the increase in the inflation-adjusted market value of goods and services
produced by an economy in a fiscal year. Statisticians traditionally measure such growth as
the percentage rate of increase in real GDP, or real GDP.

Economic growth is usually measured as the annual percentage change in real GDP. Real
GDP is adjusted for inflation, so it measures real growth in the economy.
Ensuring fairness

In a modern economy, government plays a significant role in ensuring fairness in the

distribution of resources. This can be done through various policies, namely:

 Taxation:

Government can use taxation to redistribute income from high income earners to low income
earners. This can be done through progressive taxation, which means that higher income
earners pay a higher percentage of their income in taxes. For example, serial taxes.

 Social Programs:
The government runs social programs like welfare, food stamps, and housing assistance to
help low-income families. These programs help ensure that everyone has access to basic
needs such as food and shelter.

 Regulation:
Government can regulate the economy to prevent monopolies and unfair business practices.
This helps ensure that everyone has a fair chance to compete in the market. This helps new
businesses enter the market.

Equity in distribution of resources

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That is, the distribution of the country's total income or resources among the entire population
in such a way that each person receives a level of income necessary for living. The role of
government in this regard is a complex and controversial issue. There is no single policy that
works perfectly and the best approach will vary according to the specific circumstances of
each country. However, the government has a responsibility to ensure that everyone has a fair
chance to succeed, and these policies help achieve that goal.

 Taxation

Government plays an important role in the modern economy through taxation. Taxes are used
to fund government programs and services such as education, health care, infrastructure, and
national security. Those taxes help raise government revenue, redistribute income, and reduce
economic inequality.

There are various types of taxes including income tax, sales tax, property tax, excise duty.
The amount of tax a person or business pays depends on their income, the goods and services
they buy, the value of their property, and the type of goods or services they sell.

Taxes can have a significant impact on the economy. They can affect the amount of money
people spend, the amount of investments businesses make, and the overall level of economic
activity. Taxes affect income distribution because some people pay more taxes
The role of government in ensuring fairness in the distribution of resources is essential for the
well-being of society. By taking steps to promote economic opportunity and equality,
governments can help create a more just and equitable world.

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 Distributive justice

Equality in the distribution of resources is the idea that everyone, regardless of their
background, should have access to the resources they need to live a good life. There are many
ways to ensure equity in the distribution of resources, such as considering people's needs,
providing equal access to resources, and ensuring efficient use of resources.
Ensuring equity in the distribution of resources is an important goal for any society. Working
together, we can create a fair and just world for everyone.

Rules and regulations

It is the primary responsibility of the government to provide the legal basis and other basic
services which are the prerequisites for the efficient functioning of a market economy.
Confirming the legal status of business organizations,
Defining Personal Rights and Enforcing Contracts

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These matters require a strong legal basis and it is the government's responsibility to fulfill
that requirement. It also handles economic relationships between business entities, owners of
production resources and consumers
The following laws should be prepared by the government. Once the legal basis is
established, the economic relations mentioned above will be well established.
The government will be able to monitor how they are done, detect violations and punish
violators accordingly

(04)Market failure

Market failure refers to the situation when a market economy, despite its advantages in terms
of efficiency and resource distribution, exhibits flaws and weaknesses. Even in a market
economy, there can be failures in its functioning. One such failure is the inefficient allocation
of resources due to price manipulation, which leads to market volatility. Overall, there are
three main criticisms against the market economic system:

(i) Inefficient allocation of resources,

(ii) Inequitable distribution of resources,
(iii) macroeconomic instability.

(i) Inefficient allocation of resources

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The concept of perfect competition refers to a market structure in which no market, producer,
or consumer is powerful enough to influence the market price. The 'invisible hand' principle
will also apply when there is full competition in all markets of the economy. It allows the
economy to stay on the production possibility curve, and when full competition is in place in
all markets, it is possible to produce the combination of goods desired by consumers, under
the most efficient production techniques, with the least amount of inputs sacrificed. But many
markets in the real world are admittedly far from perfectly competitive for various reasons.
Market failures arise because of this situation. Thus, there are several important reasons that
have affected the markets away from full competition. They can be described as follows.

(i) Availability of public goods

(ii) Finding common property resources
(iii) Finding collective goods or quasi-public goods
(iv) Externalities arising from production and consumption activities
(v) Finding merit goods and demerit goods
(vi) Concentration of economic power
(vii) Inadequate provision of information relevant to market
(viii)Missing Market
(ix)Factor immobility

❖ Public Goods

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Public goods are goods or services that are non-excludable and non-rivalrous in nature,
meaning they are available for everyone to use or benefit from and one person's use does not
diminish their availability for others. Public goods are typically provided or facilitated by the
government or public sector because they are not efficiently provided by the private market
due to their characteristics.

There are two key features that define public goods:

◆ Non-excludability: It is difficult or impractical to exclude individuals from using or

benefiting from a public good once it is provided. This means that individuals cannot
be easily prevented from enjoying the benefits of the good, regardless of whether they
contribute to its provision or not.

◆ Non-rivalry: The consumption or use of a public good by one individual does not
reduce its availability or utility for others. In other words, the consumption of a public
good is not diminished by others using it simultaneously.

Examples of public goods include:

Street lighting

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 ● Once street lights are installed, it is challenging to exclude anyone from benefiting
from them, and the use of street lighting by one person does not prevent others from
using it as well.

National defense
● The protection and defense of a country benefit all its citizens collectively. It is
difficult to exclude individuals from the defense system, and the protection provided
to one person does not reduce the protection available to others.

Public parks
● Parks and recreational areas that are open to the public are non-excludable and non-
rivalrous. Once a park is created, anyone can enter and enjoy its facilities without
reducing its availability for others.
Clean air and water
● Environmental goods, such as clean air and water, are examples of public goods. It is
challenging to exclude individuals from enjoying clean air or water, and the
consumption of these goods by one person does not reduce their availability for
others.

Scientific research and knowledge

● Scientific discoveries, research, and knowledge are often considered public goods
because they can be shared and benefit society as a whole. Once a scientific finding is
made, it can be disseminated and utilized by anyone without reducing its usefulness
for others.
The provision of public goods is often considered a responsibility of the government because
their non-excludable and non-rivalrous nature makes it difficult for the private market to
provide them efficiently. Governments use taxation and other mechanisms to collect funds
from the public and allocate resources towards the production or maintenance of public
goods.

❖ Common Property Resources

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Common resources, such as marine resources, forests, wetlands, and the atmosphere, have
certain characteristics. They cannot be easily limited in population and consumption, leading
to overexploitation and degradation. For instance, the open access nature of fish resources
allows individual fishers to deplete them, affecting others' ability to fish. Similarly,
unrestricted grazing on common grasslands can quickly degrade them. The market fails to
efficiently manage these public resources due to the absence of well-defined property rights.
This inefficient management has resulted in severe environmental degradation in many
countries. The concept of the "tragedy of the commons" illustrates the negative impact of
unregulated access to common resources, leading to reduced productivity and social welfare.

❖ goods or quasi-public goods

Semi-public goods or collective public goods are characterized by limited

competition in consumption until capacity is reached, and the ability to
restrict access. Examples include highways, parks, beaches, movie theaters,
art galleries, and museums. These goods can be consumed collectively up to
a certain limit without depriving others of the opportunity to consume. The
term "club goods" is sometimes used for such goods, as seen in sports clubs

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 where consumption is non-competitive until capacity is reached. However,
market failures can occur due to the lack of competition in consumption.
Charging prices for these goods can lead to inefficient consumption below
the socially optimal level. Market mechanisms may result in exclusion of
individuals willing to pay different prices, causing an inefficient allocation of
resources. These characteristics highlight the ineffectiveness of market
mechanisms for public and collective goods.

❖ Externalities

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 Externalities refer to the effects or consequences of an economic activity that
extend beyond the parties directly involved in the transaction. They are the
unintended costs or benefits imposed on third parties who are not part of the
decision-making process. In other words, externalities are the spillover
effects that arise when the actions of one party impact others, either
positively or negatively, without compensation or consent.

Externalities can be classified into two types:

1. positive externalities
2. negative externalities

● Positive externalities occur when a third party receives benefits from an

economic activity without directly participating in it. For example, when a
person installs solar panels on their home, it reduces their reliance on
traditional energy sources and contributes to a cleaner environment, benefiting
the community as a whole.

● Negative externalities, on the other hand, arise when the actions of one party
impose costs on others who are not involved in the transaction. For instance,
pollution from a factory can cause health problems for nearby residents or
harm ecosystems, resulting in costs borne by the affected individuals or the
society at large.

Externalities can lead to market failures, as the prices of goods and services
may not reflect their true social costs or benefits. In some cases, government
intervention, such as taxes, subsidies, or regulations, may be necessary to
internalize externalities and align private and social costs or benefits. The

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 goal is to incentivize economic actors to consider the broader impacts of
their actions and ensure a more efficient allocation of resources.

◆ Negative externalities from production

Where the marginal social cost of production is higher than the marginal
private cost
Example: Air, land, river and noise pollution which results from factory
emissions

 Positive externalities from consumption

Where the marginal social benefit of consumption is higher than the

marginal private benefit.
Examples: Community-access defibrillators; External benefits from museum

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  Positive externalities from production

Where,
MSB>MPB

Example: Lower transport costs for local firms following construction of

new roads

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 Where,
MSC<MPC

 Negative externalities from consumption

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Where,
MPB>MSB
The impact on family life / social cohesion of problem gambling or drug
addiction

❖ Finding merit goods and demerit goods

Merit goods and demerit goods are concepts used in economics to classify
goods based on their social benefits or costs. Merit goods are considered to
have positive externalities and are underprovided by the market, while
demerit goods have negative externalities and are overproduced by the
market.

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 1. Merit Goods:
Merit goods are goods or services that are considered to be beneficial for
society and individuals, even if they are not fully appreciated or demanded
by individuals in the market. These goods have positive externalities,
meaning that their consumption or provision generates spillover benefits for
society as a whole. Some examples of merit goods include:

- Education: Investing in education has long-term benefits for individuals

and society by
improving human capital, increasing productivity, and reducing social
inequalities.
- Healthcare: Access to healthcare services improves the overall health and
well-being of individuals, leading to higher productivity and a healthier
population.
- Public parks and recreational facilities: These amenities provide spaces for
leisure, exercise, and community interaction, contributing to physical and
mental well-being.

2. Demerit Goods:
Demerit goods, on the other hand, are goods or services that are considered
to have negative impacts on individuals and society, even if they are heavily
consumed or demanded in the market. These goods have negative
externalities, meaning that their consumption or provision imposes costs on
society. Some examples of demerit goods include:

- Tobacco and alcohol: These products have adverse health effects and can
lead to addiction and other social problems such as drunk driving and
domestic violence.
- Fast food and sugary drinks: Overconsumption of these products
contributes to obesity, diabetes, and other health issues.
- Fossil fuels: The use of fossil fuels for energy generation contributes to air
pollution, climate change, and environmental degradation.

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 It's important to note that the classification of goods as merit goods or
demerit goods can be subjective and may vary based on societal values and
perspectives.

❖ Market power

If production organizations have the ability to influence the market, the

allocation of resources by the market will be inefficient.
If there is perfect competition in the market, no firm can influence the
market. If the demand curve faced by the firm is fully flexible or parallel to
the horizontal axis, it is shown that the firm does not have market power. If a
firm has a downward-sloping demand curve, it has the potential to influence
the market. The price charged for the good in equilibrium exchange when the
market demand curve is downward sloping. It will fail to represent the
marginal cost of producing the product. When the market price exceeds
marginal cost and there is a mismatch between the cost of producing an
additional unit and the benefit from consuming an additional unit, the
condition that price and marginal cost must be equal (P=MC) required for
allocative efficiency is violated. is When imperfectly competitive markets
operate, the economy may not be allowed to operate on its production
possibilities curve. As output falls below optimum
Economic efficiency collapses. Economic inefficiencies arise not only in
commodity markets but also in factor markets due to market power. For
example, when trade unions operate in the labor market, balanced exchange
does not take place on a competitive basis.

❖ Missing Market

An important condition required to ensure the efficiency of the distribution

of resources in an economy is to have its own market for the exchange of all

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 goods and services. When such markets exist, the exchange efficiency can be
determined at the point where each good and service equals its marginal
benefit and marginal cost. Not only for public goods and public resources,
markets have not emerged for many other areas. Examples include
externalities in the form of environmental pollution. A factory producing
chemicals discharges waste into an adjacent river. If, the fish deaths in the
river adversely affect the people and the remaining local residents who use
the river water, the factory owner has no incentive to take those adverse
consequences into account in making production decisions. Even if the
people living in the river valley can demand some payment to the factory
owner to prevent pollution, it will be difficult to procure the relevant amount
due to the problem of free consumption.

(ii) Inequitable distribution of resources

Even in an economy that achieves an optimal balance between public goods

and private goods, operates efficiently within the production possibilities
cycle, and overcomes hindrances such as externalities, imperfect
competition, factor immobility, and imperfect information, there is still a
higher likelihood of market failures. This is primarily due to issues
concerning the fairness of resource distribution and potential market
manipulation. The market system itself does not guarantee equitable income

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 distribution, leading to disparities that may be deemed socially unacceptable.
Various factors influence personal income in a market economy, including
labor input, education level, inherited property, factor prices, and even luck.
Consequently, resulting household income levels may not necessarily align
with notions of fairness. Moreover, resource allocation within the economy
often mirrors income distribution patterns. Resources tend to be directed
towards meeting the demands of higher-income individuals rather than
addressing the needs of those with lower incomes. This can result in
situations where a wealthy household can consume luxuries equivalent to the
amount of milk needed to sustain a poor child's health. Although such
outcomes may not indicate inefficiencies in market resource allocation, they
are deemed politically and morally unacceptable. When a small segment of
society disproportionately owns a significant portion of the goods produced
in the economy, it is generally considered morally impermissible.

(iii) macroeconomic instability.

In an economic system driven by market manipulation, macroeconomic instabilities can arise

regularly. Periodic booms and busts in the economy have been identified as an inherent
characteristic of a market economy. These periodic fluctuations in the economy are called
business cycles. In many cases, fluctuations in aggregate demand cause short-term instability
in the economy. This is mainly affected by changes in private investment demand. The
inflation rate and unemployment rate of the economy are the main indicators that reflect the
economic instability.

(05) How Government can rescue the economy during market failure.

 Formal government debt management.

Sri Lanka's main issue is having too much debt, with $50 billion in external debt and
domestic debt both denominated in Sri Lankan rupees (LKR). External debt is due by
the government and must be paid back over time, whereas internal debt is owed by the

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government, enterprises, and consumers. Our institutions cannot print dollars as the US
financial system can, therefore we are forced to repay it with the dollars we earn. The
most crucial information is that any foreign institution borrowing LKR must return it to
Sri Lanka.

As an agency of the Government of Sri Lanka (GOSL), the Central Bank of Sri Lanka
(CBSL) is in charge of managing the public debt. It is the goal of debt management to

1. Reduce long-term direct and indirect costs of public debt.

2. Prevent variability in the cost of debt service and provide a fair allocation.
3. Avoid focusing too much on redemption payments.
4. Reduce the risk of refinancing.
5. Encourage the domestic government securities market to operate effectively.
6.Repay government debt accurately on time.

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 ❖ International relationship
Modern economies are highly complex and dynamic, making it difficult for a country to
be unaffected by shocks such as technological disruptions, geopolitical tensions, global
pandemics, and the climate crisis. Additionally, the political system in Sri Lanka is
designed to incentivize the government to please its citizens in the short term while
incentivizing elected officials to distort the market in the long term. This is particularly
detrimental to Sri Lanka due to the way the political system is designed, which
incentivizes the government to please its citizens in the short term while incentivizing
elected officials to distort the market in the long term.

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In the past few years, The Sri Lankan government has been made friendly relationships
with so many countries.

Ex-: U.S.-SRI LANKA RELATIONS

Over the course of the COVID-19 pandemic, the United States donated over 3.4 million doses of
COVID-19 vaccines and provided over $17.9 million to Sri Lanka’s COVID-19 response and
recovery. 

China -Sri Lanka relationship

between 2004 and 2014 China provided $7 billion in loans and investment
including loans for the construction of a port in Hambantota.

❖ Attracting foreign investment to Sri Lanka

Investment Policy of Sri Lanka and its Recent Developments

Sri Lanka abandoned its communist leanings and began to accept foreign
investment in 1978. Sri Lanka may bring in about US$ 16.5 billion in
foreign direct investment between 1978 and 2018 for a variety of
industries, including manufacturing, infrastructure, development, tourism,
IT/BPO, etc.

Sri Lanka managed to attract the historically largest recorded FDI influx to the
country in 2017, which amounted to US$ 1.7 Billion. Nevertheless, the country's FDI
inflow remains significantly low in contrast to its regional neighbors. In order to
reach its goal of US$ 2.5 billion by the end of 2018, Sri Lanka could draw in US$ 1.4
billion in foreign direct investment during the first half of 2018

Meanwhile Sri Lanka is experiencing the economic crisis that started in 2019.It’s the
countries’ worst economic crisis since 1978.To survive from this situation Sri Lanka needs to
attract many of foreign investments.

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 We have identified that in some sectors such as textile and clothing, IT and
manufacturing Sri Lankan firms have been expanding their footprint and have
been able to become very competitive globally and move up the value chain to more
sophisticated products and markets. Here you are showing your potential so I think
the discussion we need to have is clear.

Faris Hadad- Zervos

World Bank Country Director for Sri Lanka, Nepal, and Maldives

Foreign Direct Investment in Sri Lanka increased by 307 USD Million (0.307 B USD) in
the fourth quarter of 2022. The maximum growth was 961 USD Million and the minimum
was 20 USD Million.

Importance of foreign investments to a country

1. Grow the Economy by Inspiring

By contributing capital to the economy, foreign investment can boost economic growth.
This money can be used to fund new projects, provide the current ones, or update
infrastructure, all of which can increase productivity and generate jobs

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 2.International market access
Access to overseas markets may assist local companies in growing their customer base
and producing more goods. Small and medium-sized businesses especially may benefit
from this since they might not have the experience or resources to join international
markets on their own.

3. Technology and skill exchanges

Foreign investment has the potential to boost home economies' productivity and
competitiveness by introducing new technologies, knowledge, and skills. This can be
especially helpful for developing nations that do not have the resources or experience to
create new technology or goods.

4.The diversification
Companies can diversify their activities and reduce the risk they face to market risks by
making investments in international markets. Companies can spread their risks and
decrease the effects of any economic or political crisis in one country by investing in a
variety of markets.

❖ Fair taxation

Below tax changes are occurred according to annual report of central bank
(2022).

1. Beginning on January 1, 2022, the VAT rate on financial services offered

by financial institutions was increased from 15% to 18%.
2. The rate of VAT on the supply of goods and services was raised from 8% to
12% percent.
3. The Telecommunication Levy was raised from 11.25 to 15 percent.
4. To give legal substance to the rise in VAT rate, broaden the tax base, and eliminate VAT
exemptions, the Value Added Tax (Amendment) Act, No. 44 of 2022 was passed.
5. The excise taxes on cigarettes, gasoline, and diesel were changed.
6. Alcoholic beverage excise tax was changed.

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7. A bill to amend the Betting and Gaming Levy Act, No. 40 of 1988 was submitted to the
Parliament.

❖ Actions taken to reduce income distribution disparities.

Due to the economy's forecast downturn, in 2022, poverty is predicted to increase. Due to
food inflation, job losses, lack of fertilizers and reduced remittances, the poorest households
suffer the most. While income support is helpful in some ways, it is insufficient in the face of
significant declines in real incomes.

The following measures have been taken to increase the income of the low-income lab.

Government has provided Samurdhi Recipients 120998 million.

Charging income tax from higher income people

Personal income tax (Years of assessment up to and including 2021/22)

Income Personal income rate%

First three million 6
Next three million 12
Over 6 million 18
 Above incomes given by Sri Lankan rupees.

Giving subsidies to a farmer as an encouragement

Government gave 56 810 million of fertilizer Subsidy for farmers to encourage them.

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 (06)CONCLUSION

In conclusion, the modern economy is a complex and interconnected system that

encompasses the production, distribution, and consumption of goods and services. It has been
shaped by advanced technologies, labor specialization, and international integration. The
Industrial Revolution marked a transformative period in history, driving rapid economic
growth and technological advancements that altered the way people lived and worked. The
modern economy has had a positive impact on the world, contributing to improved living
standards, reduced poverty rates, and advancements in health and education. However, it also
presents challenges, including economic inequality and environmental degradation. As we
navigate the complexities of the modern economy, it is important to address these challenges
while harnessing its benefits for the betterment of societies worldwide.

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 (07)References

1.Prof Danny Atapattu (January 1, 2018) Introduction to Economics 02- Revised Edition for
New Syllabus
2. https://www.cbsl.gov.lk/en/public-debt-management
News Explainer: The Economic Crisis in Sri Lanka - Visual Capitalist.
https://www.visualcapitalist.com/explained-the-economic-crisis-in-sri-lanka/.
(2) Sri Lankan Economic Crisis 2021- Present | Economic Crisis ....
https://byjus.com/current-affairs/sri-lankan-economic-crisis/.
(3) Sri Lanka: Why is the country in an economic crisis? - BBC. https:
//www.bbc.com/news/world-61028138.
(4) Sri Lanka Economy Has ‘Hit Rock Bottom,’ Putting Pressure on President ....
https://www.nytimes.com/2022/03/25/world/asia/sri-lanka-economic-crisis.html.
(5) Sri Lanka's economic crisis, explained | CNN. https://www.cnn.com/2022/04/05/asia/sri-
lanka-economic-crisis-explainer-intl-hnk/index.html.
(6) Sri Lanka's political and economic situation, visualized | World ....
https://www.weforum.org/agenda/2022/07/economic-politics-debt-protest-crisis-sri-
lanka/.https://www.erd.gov.lk/index.php?
option=com_content&view=article&id=102&Itemid=308&lang=en (Department of
external resources)
(7) https://www.worldbank.org/en/news/feature/2021/06/10/foreign-investment-can-help-
sri-lanka-build-back-better
(8)Central bank 2022-Annual report (https://www.cbsl.gov.lk/en/publications/economic-
and-financial-reports/annual-reports/annual-report-2021)
(9) Mr. Samia Rekhi (Role of Government in a Modern Economy)
(https://www.economicsdiscussion.net/economy/role-of-government-in-a-
modern-economy/20795)

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