6)

a) the existence of external costs and external benefits, abuse of monopoly power and false
advertising.
b) resources in the public sector are allocated by government directives. Some products are
produced by state owned enterprises and are allocated to overcome market failure. Resources
in the private sector are allocated by the price mechanism. Profit provides an incentive for firms
to produce what consumers demand.
c) Inflation may reduce the purchase power of the poor will decrease and prices of basic
necessities will increase and this will increase absolute poverty. Inflation may reduce the value
of any savings they have reducing their ability to access health care, education, housing, job
opportunities, etc.
d) Government spending will increase total aggregate demand and this may encourage firms to
produce more goods and services and economic growth may increase, deflation may be avoided
and unemployment may fall. The poor may gain jobs, making income more evenly distributed.
Government spending on healthcare may raise living standards and life expectancy. However,
Higher government spending may cause inflation if total supply does not rise in line with total
demand. Some of the higher income created may be spent on imports, this may increase a
current account deficit. An increase in government spending on unemployment benefits may
increase voluntary unemployment.