IB Econ Case Studies (Real world examples)

Mehdi Atmani ‘23

Micro:
TAX & NeP & NeC

● Carbon Tax for NeP (Overproduction)

Overview
Canada has implemented a tax of $50 per ton of carbon dioxide emitted by facilities that emit more than 50,000 tons of
carbon.
Links
What Is Canada's National Carbon Tax and how does it affect us?
The benefits of a Carbon Tax
Points of Discussion
- The tax is estimated to reduce greenhouse gas emissions by 80 to 90 million tons
- The tax has faced backlash from the governments of Ontario, Alberta and Saskatchewan suggesting it may have
been politically motivated.
- As a carbon tax is an indirect tax it is regressive. However, their is a tax rebate (subsidy) for lower income
individuals

● Indirect Tax for NeC (Overconsumption)

Overview
Qatar implements a 100% tax on alcohol essentially doubling the price of alcohol
Links
Qatar 'sin tax' suddenly doubles the cost of alcohol
World Cup host nation Qatar puts 100% ‘sin tax’ on alcohol, making beer £82 a crate
Points of Discussion
- Could be religiously motivated as Qatar is a largely Muslim state and alcohol is prohibited under Islamic law
- Will be extremely effective as 88% of Qatar’s population is foreign
- Revenue is likely to be reinvested into education and healthcare

Gov.t regulation/legislation & NeC

● Government Legislation and Regulation for NeC (Overconsumption)

Overview
Hawaii raises the minimum smoking age from 18 to 21
Links
Hawaii Raises Legal Smoking Age to 21
Hawaii becomes first U.S. state to raise smoking age to 21
Points of Discussion
- Nationally 95% of adults who smoke began before the age of 21
- In Hawaii 86% of adults start smoking before 21
- According to the IOM the increase in minimum age for tobacco consumption would be successful rebate (subsidy)
for lower income individuals
- Reports indicate that tobacco kills roughly 1,400 people and costs $526 million annually.

Direct Gov.t Provision and PeP

 ● Direct Government Provision for PeC (Underconsumption)
Overview
Karnataka state government expanded and modernized the Bangalore airport at a cost of 1,500 crore rupees.
Links
Bangalore airport named after city founder Kempegowda
Points of Discussion
- Accessibility in the city has greatly increased promoting local businesses
- The rapid growth has led to Bangalore being deemed the silicon valley of India
- Revenue generated will be reinvested into the public sector

SUBSIDY and PeP

● Subsidy for PeP (Underproduction)

Overview
Spain has subsidized clean energy and will provide 181 million euros toward renewable electricity production
Links
Spain okays allocation of EUR 181m for renewables support
CLEAN RECOVERY: SPAIN OFFERS EUR 181 MILLION FOR RENEWABLE ENERGY PROJECTS
Points of Discussion
- The subsidy is estimated to reduce carbon emissions by 700,000 tons every year
- The method of clean energy production for which the subsidy is being provided ranges from biomass to
photovoltaic providing greater probability of success

Price floor:

● Price floor to protect producers.

Overview
Kerala has set a price floor on vegetables at 20% greater than their production cost
Links
Kerala becomes the first state to fix floor price for vegetables
Kerala becomes the first state to fix floor price for vegetables
Points of Discussion
- 16 variants of vegetables are being covered
- Registration can be done on an online portal but may seem to be a problem as farmers aren't as tech savvy

Price ceiling

● Price ceiling to protect consumers.

Price Ceiling
Overview
Government of Indonesia implemented a price ceiling on individually requested swab tests at Rp 900,000 from and original
Rp 2,500,000 + by hospitals and private retailers.
Links
Government to periodically evaluate COVID-19 swab test price cap
Points of Discussion
- The price ceiling is only for state owned laboratories
- Initial shortages are expected however the supply chain is expected to return to normal in long run
- The price ceiling comes in light of severe public backlash

SUBSIDY and PeC

 ● Subsidy for PeC (UnderConsumption)
Overview
Yes, a real-world example of a government intervening to fix an underconsumption is the U.S. government's Cash for
Clunkers program, which was implemented in 2009 during the Great Recession. The program was designed to stimulate
demand for new cars and reduce the number of older, less fuel-efficient vehicles on the road. Under the program, consumers
were offered a rebate of up to $4,500 when they traded in their old car for a new, more fuel-efficient one.
Points of Discussion
- The program was successful in increasing the demand for new cars and reducing the number of old, polluting
vehicles on the road. It also helped to support the U.S. automotive industry during a time of economic crisis.
- However, the program also faced criticism for its high cost to taxpayers and for its potential environmental impact,
as some of the older vehicles traded in under the program may have still had useful life left in them.

Micro HL only:
Abuse of Market power:

● Legislation and Regulation

Overview
In 2019 Britain’s competition and markets authority blocked a merger between the second and third largest supermarket
firms Asda and Sainsbury respectively.
Links
Sainsbury's-Asda merger blocked by regulator
Points of Discussion
- If the merger was allowed the market share of the two firms would be 30.7% and they would be the largest
supermarket firm in the country
- The two firms claimed that costs would fall by 10%, however the opposing authority argued that their investigation
suggested that the merger would lead to increased prices, reduced quality and choice of products.
- The merger may have also been declined in light of an increasing concentration of firms in the domestic economy
with $2 trillion worth of mergers and acquisitions have occured in the past decade.

● Fines
Overview
In 2018 the European commission imposed a $5 Billion fine on Google for violating the EU’s competition rules by
requiring phone manufacturers to preinstall the google browsing app to access the google play store
Points of Discussion
- President Trump and Former President Obama argued that the fine towards American companies was unfair
- Google has shares of more than 90% in most European economic areas.
Links
Antitrust: Commission fines Google €4.34 billion for illegal practices regarding Android mobile devices to strengthen
dominance of Google's search engine

Macro:
Expansionary monetary policy:

● Change in Central Bank Lending Rate

Overview
In March 2020 The Taiwan Central Bank cut the minimum lending rate to 1.1125%
Links
Taiwan c.bank says economy not overheating, inflation stable
Points of Discussion
- Inflation due to the policy remains at a low and stable rate of 1.7%
- The economy was growing at its fastest rate in more than a decade by August
- Taiwan’s unemployment rate in march was at 3.72% but fell to 3.6% by the same time next year

● Quantitative Easing
Overview
Bank of England (BoE) bought £150 Billion of government bonds to help fight recession
Links
Bank of England to Buy £150 Billion More of U.K. Government Bonds to Help Fight Double-Dip Recession
Bank of England announces £150 billion extra cash stimulus
Points of Discussion
- At the time interest rate was at 0.1% so it would be impossible to adjust it to a lower rate through other measure
- Unemployment prior to the policy was at an all time high of 5.1%
- The overall spending of the Bank of England stands at £450 billion since the start of the pandemic in march which
could have financial implications
- The policy was also implemented in light of a possible shrink in the economy by 11%

Contractionary monetary policy:

● Change in central bank lending rate

Overview
The US federal reserve announced that it will be raising its interest rate by 0.5% in May 2022
Links
US Fed raises interest rates to tackle inflation
US Fed raises interest rates by 0.5%, what it means for crypto markets
Points of Discussion
- The policy has been implemented in an attempt to counter the rising inflation which currently stands at around 8%
- The rising inflation comes in light of external factors such as Russia’s invasion Ukraine and is being dealt by other
countries in a similar manner. Negative Supply shock. Cost push inflation.
- The policy is being implemented after a similar policy proved successful in 1994

Expansionary fiscal policy:

● Government Spending
Overview
Direct payment of up to $1,400 to US Citizens around January of 2021 as part of the Biden administrations CARES Act to
boost spending. The Biden administration launched a 1.9 trillion Fiscal package.
Links
The macroeconomic implications of Biden’s $1.9 trillion fiscal package
Points of Discussion
- A total of $600 billion were provided to fund the scheme
- Initial analysis suggests that the policy will lead to an increase in GDP Growth by 4%
- Unemployment rate is predicted to dip to below 3.2% which is greater than 1 percentage point below the estimated
natural rate of inflation suggesting that it could lead to inflationary pressure

● Tax cuts
Overview
In March of 2022 Iowa cut income tax to a flat rate of 3.9% from a progressive taxation system to regressive.
Links
Iowa Enacts Sweeping Tax Reform
Reynolds signs major tax cuts into law
Points of Discussion
- Unemployment was at 3.3% at the time the tax cut was introduced
- The tax cut was implemented in order to encourage businesses and consumers spending
- The tax rate of 3.9% will be gradually implemented and is expected to be fully in use by 2027
- Their will be a loss of approximately $1.65 billion per year in government revenue
- The reform was heavily criticized by the opposing political party, the democrats
- As it is a constant tax rate for each income bracket it is a regressive tax

Contractionary fiscal policy:

● Reduced Government Spending

Overview
The United States government reduced spending on the defense sector by $255 billion in 1990
Links
Contractionary Fiscal Policy and Its Purpose With Examples
Economic policy of the Bill Clinton administration
Points of Discussion
- The policy was implemented namely to reduce the budget deficit that had been left by the preceding president
- The policy may have been politically motivated as all republicans voted against it and it took vice president Al
Gore’s tie-breaking vote for the bill to be passed
- In the years following the policy the budget deficit was eventually turned into a budget surplus

● Increased Taxes & Austerity

Overview
One real-world example of a contractionary fiscal policy where a government decided to increase taxation is the United
Kingdom's (UK) austerity measures in response to the global financial crisis of 2008.
After the financial crisis, the UK government increased taxes and reduced government spending to reduce the budget deficit
and stabilize the economy. The government raised the value-added tax (VAT) from 17.5% to 20% in 2011, which increased
the cost of goods and services for consumers. Additionally, the government implemented cuts to public services, such as
education, health care, and social welfare programs, resulting in reduced government spending.
Points of Discussion
- The goal of these austerity measures was to reduce the government's budget deficit and debt levels. However, the
measures were also criticized for their potential negative impact on economic growth, as increased taxes and
reduced spending can reduce consumer and business spending, leading to lower economic activity.
Multiplier effet + Austerity :
Since any increase or decrease in lending has a multiplied effect on real GDP, it is important for policy-makers to know the
size of the multiplier. Ex The ·troika" of lenders to Greece(the IMF, European Central Bank and European Commission)
underestimated the size of the multiplier in Greece, with the result that when austerity measures were imposed(decreases in
government spending and increases in taxes), the resulting decrease in Greece's real GDP was much greater than expected,
leading to a recession that was much more serious than anticipated.

Supply Side Policies

● Encouraging competition
Overview
In the midst of an economic crisis in 1991 India began privatizing different sectors of the economy in a bid to encourage
competition and induce growth
Links
Disinvestment of Public Sector Units in India
Points of Discussion
- From 1992-92 to 2000-2001 India’s GDP grew at an average rate of 6.1% and inflation at a rate of 7.1%
- Political differences and priorities complicated the privatization as governments often sought to keep older policies
- As the policy was gradually implemented it ensured that adequate support was created for privatized firms.

● Research & Development

Overview
South Korea invested almost $83 billion in research and development in 2019
Links
S. Korea's R&D spending 5th largest among OECD members in 2019
Points of Discussion
- The spending is up 3.9% and translates to approximately 4.64% of South Korea’s Real GDP
- The spending has played a major role in economic growth which has been rapidly increasing in the past decade

● Labour Market Reforms

Overview
In December 2015 the state of Kentucky lowered its minimum wage from $10.10 to $7.25 in order to reduce unemployment
Links
Disinvestment of Public Sector Units in India
Points of Discussion
- Worker productivity since 1979 has increased 62% but wages have only increased 18%
- Kentucky has experienced an average real GDP growth of 0.9% in the proceeding period from 2016 to 2019 before
the pandemic
- Unemployment rate also dropped to 5.1% in that same year

● Provision of Infrastructure
Overview
Indian government expenditure on public healthcare in 2021-22 increased to ₹4.72 lakh crores
Links
Economic Survey: Govt spending on public healthcare rose 73% last year
Points of Discussion
- The spending has increased from ₹2.73 lakh crores to ₹4.72 lakh crores representing a 73% increase in budget
allocation
- The increased spending also comes in response to the worsening impacts of the covid-19 pandemic
- The policy has been effective in inducing long term economic growth

Policies to reduce income inequality:

● Cash Transfer
Overview
In 2003 Brazil enacted the Bolsa Familia scheme which provided cash transfers of 35$ per month to families living below
the poverty line
Links
Bolsa Família in Brazil
Points of Discussion
- The primary objectives were to reduce poverty, inequality and break the poverty cycle
- Roughly 11% of the population lived below the international poverty line at the time
- Its Gini Coefficient prior to the policy stood at 0.595 which has fallen to 0.489 in 2020
- The scheme has reportedly reached over 46 million people and has been lauded as one of the most successful
conditional cash transfer scheme

● Progressive Tax
Overview
Denmark has one of the most progressive income tax systems in the world with the highest tax bracket paying up to 55% of
income
Links
Why Danes Happily Pay High Rates of Taxes
Points of Discussion
- The model has led to a fall in Denmark’s gini coefficient for the last five years from 0.282 to 0.277
- In addition to a fall in gini coefficient the tax revenue is readily reinvested through provision of free education,
healthcare and extremely generous paternity leave amongst others

Global Econ:
Trade Protection

● Tariff
Overview
France imposed a tariff of 3% on digital companies that earn a revenue greater than €750 million of which €25 million is in
France.
Links
US threatens 100% tariffs on French cheese and champagne
US threatens tax on champagne and French cheese
Points of Discussion
- The tariff is expected to generate around €400 million per year for France
- About 30 companies are expected to pay the tariff most of which are from the United States
- The Trump Administration is planning to introduce tariffs of their own off 100% on imported french wine and
champagne

● Quota
Overview
China has set an quota of 40,203 tonnes on wool imports from Australia
Links
China raises import quota for Australian wool in 2022 despite the ‘economic coercion’ claim
Points of Discussion
- The import quota was increased from a year earlier when it was set at 38,288 tonnes
- It contradicts reports from Australian authorities accusing China of engaging in a trade war
- Australian wool accounts for approximately 80% of Chinese wool imports
● Production Subsidy
Overview
The United States has provided over $2 Billion in subsidies for the construction of Electric Vehicle plants at the end of 2021
Links
US states lavish subsidies on carmakers for edge in EV race
Points of Discussion
- The subsidy will be extremely successful in increasing production with companies such as Ford setting a goal to
create 600,000 cars by the end of 2023 per year
- Most USA state governments are also implementing their own subsidies alongside the federal government's subsidy
- The subsidy is greater than those provided in the previous four years combined

● Export Subsidy
Overview
The Indian government has provided an export subsidy for sugar producers on its transport worth ₹1,375 crores in 2018
Points of Discussion
- 5 Million tonnes of sugar are expected to be exported between October of 2018 to September of 2019
- Their are state elections coming up in mid-2019 suggesting their could be a political agenda to the policy
Links
Cabinet okays Rs 5,500-crore package to sugar industry

Trading blocks:

● Free Trade Area

Overview
54 of the 55 African countries partake in the African Continental Trade Agreement founded in March of 2018
Links
6 reasons why Africa's new free trade area is a global game changer
The African Continental Free Trade Area
Points of Discussion
- Access to larger market of 1.27 billion people
- It will reportedly increase regional income by 7% and lift 30 million people out of extreme poverty by 2035
- Exports in African nations are expected to increase by $560 billion

● Monetary Union
Overview
The European Union (EU) is a political and economic union consisting of 27 member states which are primarily located in
Europe. It was founded in 1993 and has a total population of approximately 47 million people
Links
Countries using the euro
Convergence criteria for joining
Points of Discussion
- There is a common central bank named the European Central Bank (ECB) and it’s solely responsible for the
monetary policy of 19 out of 27 nations.
- When Greece underwent a deep recession in 2009 inflexibility of the ECB was a primary cause, however, it was the
EU which bailed them out by providing €100 billion in debt relief
- EU countries must meet a “convergence criteria” to adopt the euro as their currency. 8 of the 27 countries don’t
meet the criteria suggesting that the Euro is a stable currency in the foreign exchange market

Exchange rates:

● Depreciation
Overview
In August of 2015 the People’s Bank of China (PBOC) devalued its currency by 3%
Links
The Impact of China Devaluing the Yuan in 2015
Points of Discussion
- Since 2005, China’s currency has appreciated 33% against U.S. dollar The PBOC claimed that the devaluation was
part of its reform to move towards market based policy

● Appreciation
Overview
China’s currency rapidly appreciated from 1981 till 1996 from 1.92 yuan for a dollar to 8.28 yuan for a dollar
Points of Discussion
- American companies could manufacture goods for cheap in China driving them into the country
- However, in 2005, the Yuan reversed course and appreciated by 33%
Links
Currency Appreciation

Economic Growth or Economic Development Strategies:

● Export Promotion
Overview
South Korea’s Real GDP per capita grew from $158 to $13,403 between 1960-1996 which has been largely credited to the
use of export substitution
Links
The Development of the Four Asian Tigers
The Story Behind the Four Asian Tigers
Points of Discussion
- South Korea implemented a free market economy led by exports
- Absolute poverty fell from 40.9% in 1965 to 4.6% in 1984
- The share of exports in GDP has tripled in 25 years

● Economic integration
Please refer to the section titled “Trading Blocs” on this doc.

● Supply Side Policies

Please refer to the section titled “Supply Side Policies” on this doc.

Policies to current current account deficit:

● Expenditure Switching
Overview
During the 2008-09 financial crisis, Latvia, amongst other things, reallocated 3% of its food expenditure from imported
goods to domestic goods
Links
Income-induced expenditure switching: Supermarket scanner data evidence from the 2008-09 Crisis in Latvia
Points of Discussion
- On Average domestic goods were 30% cheaper
- Within 2 years 20% of trade deficit was reduced and GDP growth resumed suggesting the policy was successful

Additionals:
Anti-monopoly regulation and Disney
Governments actively regulate mergers to ensure markets stay competitive. Firms merge to create a new company that will
have a competitive edge, either through scale, unique products or assets it did not have before. Disney gained access to a
large catalog of films and television shows when it bought 21st Century Fox in 2019. The US government permitted this
merger to occur because it actually increased competition as it gives Disney enough content to compete with Netflix and
Amazon Prime.

Interventionist supply side policy: China infrastructure and technology investment.

https://www.globaltimes.cn/page/202204/1259774.shtml

Interventionist supply side policy: US decreases investment in education.

https://www.usnews.com/news/national-news/articles/2017-09-18/while-rest-of-the-world-invests-more-in-education-the-
us-spends-less

Interventionist supply side policy: Cressida Cowell renews call for £100m investment in primary school libraries.
https://www.theguardian.com/books/2022/jun/08/cressida-cowell-renews-call-for-100m-investment-in-primary-
school-libraries

Market-Based-SSP: Reduction in unemployment benefits without success: https://www.cnbc.com/2021/07/22/cuts-to-

unemployment-benefits-didnt-get-people-back-to-work-study-finds.html

Market-Based-SSP: Cut in Business Tax Ethiopia.

https://newbusinessethiopia.com/nbe-blog/electric-car-tax-cut-game-changer-for-ethiopias-automotive-industry/

Market-Based-SSP: Improving the quality of health care in Indonesia:

https://www.thejakartapost.com/opinion/2022/09/18/toward-the-digitization-of-the-health-systems-in-indonesia.html

Greece vs China Investment in Infrastructure:

A fiscal stimulus through investment in infrastructure is not always successful. It depends on what type of infrastructure is
built. In China, increased infrastructure in roads, rail and telecommunications has led to unprecedented increases in
productivity, innovation and future growth. However, the experience has been very different for Greece. Increased
infrastructure in sporting facilities used in a one-off 10-day event has not led to sustainable economic growth.

Market-Based-SSP:
Less regulations on foreign investment. For example, Kenya removed regulations restricting foreign investment to enable a
railroad project funded by the state-owned China Road and Bridge Corporation. The railway between Mombasa and the
capital of Kenya, Nairobi, has reduced travel time between the cities from 36 hours to 8 hours and reduced transportation
costs by 60%. This is an extremely important project that brought huge supply-side benefits to Kenya, which is a growing
and still developing country. Allowing private firms to make infrastructure investments has increased the economic capacity
of Kenya