Economics unit 1 notes from Sayeedh Ghouse

8/9/2019 Economics unit 1 notes from Sayeedh Ghouse

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Unit 1

COMPETITIVE MARKETS; HOW THEY WORK AND WHY THEY FAIL?

Positive n! No"#tive E$ono#i$s

Positive Stte#ents

A %ositive e$ono#i$ stte#ent is stte#ent t&t $n 'e %"ove! (it&

e#%&e"i$) *"e) (o")!+ evi!en$e, T&ese stte#ents "e o'-e$tive in nt."e

n! !o not $ontin n/ v).e -.!0#ents, T&e/ $n 'e teste! t".e o" )se

(it& $ts n! 20."es, E3#%)es45

1, T&e in6tion "te o UK "ose '/ 178 in 9::1,9, Une#%)o/#ent in S"i Ln is &i0&e" t&n t&t o In!i,


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Ent"e%"ene."s&i% 5 P"o2t

S$"$it/

T&is is t&e 'si$ e$ono#i$ %"o')e# en$o.nte"e! '/ eve"/ so$iet/ n!

&.#n 'ein0, It sttes t&t t&e "eso."$es vi)')e to stis/ &.#n (nts

n! nee!s "e )i#ite!, T&.s> eve"/ 0ove"n#ent &s to $o#e .% (it& n

nn.) %)n s to &o( to .se t&ese s$"$e "eso."$es to stis/ )) nee!s n!

(nts o $o.nt"/ to its #3i#.# %ossi'i)it/,

As "es.)t o s$"$it/> %eo%)e $nnot !o eve"/t&in0 t&e/ (nt, As "es.)t

t&e/ "e o"$e! to #e $&oi$e, W&en t&e/ #e $&oi$e> t&e/ !o t&is '/

s$"i2$in0 n! )te"ntive t&e/ (o.)! )ie to &ve, W&t t&e/ s$"i2$e is

no(n s t&e o%%o"t.nit/ $ost o (&t t&e/ &ve $&osen,

T&e"eo"e> o%%o"t.nit/ $n 'e !e2ne! s t&e ne3t 'est )te"ntive o"0one,

P"o!.$tion Possi'i)it/ C."ve *PPC+@ P"o!.$tion Possi'i)it/ o.n!"/ *PP+@

P"o!.$tion Possi'i)it/ F"ontie" *PPF+@ T"nso"#tion C."ve *TF+@ O%%o"t.nit/

Cost C."ve *OCC+

A P"o!.$tion Possi'i)it/ C."ve is 0"%& t&t s&o(s t&e #3i#.#

%ossi')e $o#'intion o 9 t/%es o 0oo!s t&t $n 'e %"o!.$e! '/ $o.nt"/ (&en )) "eso."$es "e .))/ .ti)iBe! 0iven t&e )eve) o

te$&no)o0/ is $onstnt


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T&e PPC n! E$ien$/

A Re%"esents sit.tion (&e"e $o.nt/=s %"o!.$in0@o%e"tin0 t %oint

insi!e t&e PPC, T&is #ens t&t so#e o t&e "eso."$es o t&e $o.nt"/ "e

.n.ti)iBe!, In ot&e" (o"!s> t&e .ne#%)o/e! "eso."$es "e%"esent ine$ien$/,

T&e"eo"e it is %ossi')e to #ove to("!s t&e PPC $."ve (it&o.t n

o%%o"t.nit/ $ost,

Re%"esents sit.tion (&e"e $o.nt"/=s o%e"tin0 on %oint on t&e

PPC, It "e%"esents #3i#.# e$ien$/ (&e"e t&e "eso."$es o $o.nt"/ "e

.))/ .ti)iBe!, In o"!e" o #ove "o# one %oint on t&e PPC to not&e" %oint

t&e"e (i)) 'e n o%%o"t.nit/ $ost sin$e "eso."$es "e $.""ent)/ .))/ .ti)iBe!>n! in o"!e" to %"o!.$e #o"e o one 0oo!> #o"e o not&e" 0oo (i)) &ve to

'e s$"i2$e!,

C Re%"esents %oint (&e"e $o.nt/=s o%e"tin0 o.tsi!e t&e PPC,

Ho(eve"> t&is is .nttin')e (it& t&e $.""ent "eso."$es, Fo" t&is to &%%en

t&e"e s&o.)! 'e "i0&t("! s&it o t&e PPC> #enin0 e$ono#i$ 0"o(t&,

S&its o t&e PPC


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A$$o"!in0 to t&e 'ove !i0"#> #ove#ent "o# A to AC in!i$tes t&t

t&e %"o!.$tive $%$it/ o %%)es in $o.nt"/ &s in$"ese! (&i)st o"n0es

&ve "e#ine! t&e s#e, T&is $o.)! 'e !.e to te$&no)o0i$) !vn$es>

&.#n $%it) invest#ent> i#%"ove#ents in t&e %"o!.$tivit/ o %%)es

in!.st"/ (&i)st eve"/t&in0 "e#ins t&e s#e in t&e o"n0e in!.st"/,

A$$o"!in0 to t&e !i0"# 'ove> t&e PPC &s s&ite! to t&e "i0&t "o# A to ,

T&is #ens t&t t&e %"o!.$tive $%$it/ o 'ot& 0oo!s &s in$"ese!, T&.s>

t&e $o.nt"/ (i)) 'e ')e to %"o!.$e #o"e o 'ot& t&ese 0oo!s, T&is o$$."s

(&en t&e"e is e$ono#i$ 0"o(t& n! it "e.i"es one o" #o"e o t&e o))o(in0;

Invest#ents

I#%"ove#ents in t&e %"o!.$tivit/ o )'o."

H.#n C%it) Invest#ent *HCI+

I#%"ove#ents in te$&no)o0/

Dis$ove"/ o nt.") "eso."$es


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T&e 'ove PPC is si! to 'e $onve3 to t&e o"i0in, T&is #ens t&t t&e

o%%o"t.nit/ $ost is !e$"esin0,

E$ono#i$ S/ste#s

T/%es o E$ono#i$ S/ste#s

1, T"!ition)@ S.'sisten$e E$ono#ies9, M"et E$ono#/ $ont"o) n! !is%ose o )n!>

#$&ine"/> '.i)!in0 et$, It is t&is et."e o #"et e$ono#ies t&t

$.ses t&e# to 'e !es$"i'e! s $%it)ist e$ono#ies,

F"ee!o# o $&oi$e


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In!ivi!.)s "e "ee to set .% in '.siness o" t&e#se)ves> 2"#s "e "ee

to !e$i!e (&t n! &o( t&e/ s&o.)! %"o!.$e> (o"e"s "e "ee to ente"

n! )eve o$$.%tions> $.sto#e"s "e "ee to s%en! t&ei" in$o#e s

t&e/ (is&,

Se) inte"estT&e s/ste# en$o."0es t&e# to !o (&t is 'est o" t&e#se)ves, Fi"#s

(i)) t"/ to #intin t&ei" %"o2ts> (o"e"s (i)) t"/ to #3i#iBe t&ei"

in$o#e n! $ons.#e"s (i)) #3i#iBe t&ei" stis$tion,

P"i$e #e$&nis# *$o#%etition+

In #"et e$ono#/> t&e %"i$es #e$&nis# $ts s si0n)in0 !evi$e

to 'ot& %"o!.$e"s n! $ons.#e"s, Risin0 %"i$es (i)) en$o."0e

%"o!.$es to s&it "eso."$es "o# one 0oo! to not&e" n! #o"e 2"#s

to ente" t&e in!.st"/, F))in0 %"i$es (i)) !is$o."0e %"o!.$tion> &o(eve"

en$o."0in0 $ons.#e"s to './ #o"e o t&is %"o!.$t,

A ve"/ )i#ite! "o)e o" t&e 0ove"n#ent

A #"et e$ono#/ is ve"/ oten !es$"i'e! s "ee ente"%"ise

e$ono#/ (&e"e t&e (o"! "eeG #ens "ee "o# 0ove"n#ent $ont"o),

&o( to %"o!.$e> (&o# to

%"o!.$e n! (&en to %"o!.$e, T&ese "e no(n s t&e .estions o

"eso."$e ))o$tion,

Fet."es o $o##n! e$ono#/

P.')i$ o(ne"s&i%

In t&is t/%e o e$ono#i$ s/ste# )) "eso."$es "e o(ne! '/ t&e

0ove"n#ent, T&e %"ivte se$to" o(ns on)/ t&e %e"son) %ossessions o

in!ivi!.)s,

P)nne! %"o!.$tion

In %)nne! e$ono#/> %"o!.$tion is $""ie! $$o"!in0 to ntion)

%)n, Reso."$es "e ))o$te! to t&e 0ove"n#ent se$to" 2"#s eve"/

/e" in !vn$e, In t&is t/%e o e$ono#i$ s/ste#s "eso."$es "e


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))o$te! to !ie"ent .se"s o t&e e$ono#/, Ho(eve"> in #"et

e$ono#/> "eso."$es ))o$tion is $""ie! o.t to t&e &i0&est 'i!!e",

P"i$es

In %)nne! e$ono#/> %"i$es $nnot $&n0e in "es%onse to $&n0e in

!e#n! n! s.%%)/, T&e/ "e 23e! '/ t&e 0ove"n#ent,

P"o2ts

T&e #in o'-e$tive o t&e %"ivte se$to" o"0niBtion is to #e

%"o2t, Ho(eve"> in $o##n! e$ono#/> 0oo!s n! se"vi$es "e

%"o!.$e! '/ t&e 0ove"n#ent in o"!e" to stis/ $ons.#e" nee!s, T&e

#in o'-e$tive o t&ese o"0niBtions is to %"ovi!e 0oo! se"vi$e even

t )oss,

, Mi3e! e$ono#/In t&e "e) (o")! t&e"e is neit&e" $o#%)ete)/ %)nne! e$ono#/ no"

$o#%)ete #"et e$ono#/, Inste!> #-o"it/ o t&e e$ono#ies o t&e

(o")! "e #i3e!,

In t&ese e$ono#i$ s/ste#s> t&e"e is 'ot& %.')i$ se$to" n! %"ivte

se$to", T&e"e is 'ot& 0ove"n#ent inte"vention n! "ee #"et o"$es,

T&e %.')i$ se$to" %"o!.$es 0oo!s n! se"vi$es t&t "e not %"ovi!e! '/

t&e %"ivte se$to", *P.')i$ 0oo!s n! #e"it 0oo!s@ 0oo!s t&ose "e not

%"o2t')e+

De#n! An! S.%%)/

De#n!

L( o !e#n!

T&is sttes t&t #o"e (i)) 'e !e#n!e! t )o(e" %"i$e t&n t &i0&e" %"i$e,

De2nition o !e#n!

T&is is t&e .ntit/ t&t $ons.#e"s "e (i))in0 to './ t 0iven %"i$e ove"

0iven %e"io! o ti#e,


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E3tensions n! $ont"$tions in !e#n!

W&en t&e %"i$e o 0oo! it is 'e)ieve! t&t t&e .ntit/ !e#n!e! (i))

in$"ese, T&is is no(n s #ove#ent )on0 t&e s#e !e#n! $."ve*e3tension in !e#n!+,

W&en t&e %"i$e o 0oo! "ises> t&e .ntit/ !e#n! (i)) )) t&.s $.ses

#ove#ent )on0 t&e s#e !e#n! $."ve *$ont"$tion in !e#n!+,

S&its o t&e !e#n! $."ve

W&en t&e"e "e $&n0es in t&e %"i$e> t&e"e (i)) 'e eit&e" n e3tension o"

$ont"$tion in !e#n!, Ho(eve"> (&en n/ ot&e" $to" %"t "o# %"i$e>

e$tin0 t&e !e#n! o" 0oo! $&n0es> t&e"e (i)) 'e s&it o !e#n!

$."ve to t&e )et *!e$"ese+ o" to t&e "i0&t *in$"ese+,

Ot&e" $to"s e$tin0 !e#n!4 5


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1, In$o#es o $ons.#e"I t&e in$o#e o t&e $ons.#e"s in$"eses> t&e !e#n! o" t&e %"o!.$t

in $on$e"n (i)) )so in$"ese> "es.)tin0 in "i0&t s&it o t&e !e#n!

$."ve,

W&en t&e in$o#es o $ons.#e"s ))> t&e !e#n! o" t&e %"o!.$t in$on$e"n (o.)! )so ))> $.sin0 t&e !e#n! $."ve to s&it to t&e )et,

9, P"i$es o s.'stit.te 0oo!sW&en t&e %"i$e o s.'stit.te 0oo! in$"eses> t&e !e#n! o" t&e

%"o!.$t in $on$e"n (i)) in$"ese $.sin0 t&e !e#n! $."ve to s&it to

t&e "i0&t> (&e"es t&e !e#n! $."ve (o.)! s&it to t&e )et (&en t&e

%"i$e o s.'stit.te 0oo! !e$"eses s t&e !e#n! o" t&e %"o!.$t in

$on$e"n (o.)! )so !e$"eses,

t&e !e#n! o" t&e %"o!.$t (i))

in$"ese n! i t&e"e is %oo" !ve"tisin0> t&e !e#n! o" t&e %"o!.$t

(i)) !e$"ese,7, Tste n! s&ion

A %ositive $&n0e in tste n! s&ion to("!s t&e %"o!.$t (o.)!$.se !e#n! to in$"ese (&e"es ne0tive $&n0e (o.)! $.se

!e#n! to !e$"ese,

S.%%)/

L( o s.%%)/

T&is sttes t&t #o"e (i)) 'e s.%%)ie! t &i0&e" %"i$es t&n t )o(e" %"i$es,

De2nition o s.%%)/

T&is is t&e .ntit/ t&t %"o!.$e"s "e (i))in0 to se)) t 0iven %"i$e ove"

0iven %e"io! o ti#e,


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E3tensions n! $ont"$tions in s.%%)/

W&en t&e %"i$e o 0oo! in$"eses it is 'e)ieve! t&t t&e .ntit/ s.%%)ie!

(i)) in$"ese (&i$& is no(n s n e3tension in s.%%)/, A $ont"$tion ins.%%)/ o$$."s (&en t&e .ntit/ s.%%)ie! !e$"eses !.e to )) in t&e %"i$e

o 0oo!,

Ot&e" $to"s e$tin0 s.%%)/

1, Cost o %"o!.$tion

I t&e $ost o %"o!.$tion in$"eses> )ess (i)) 'e s.%%)ie! n! t&.s t&es.%%)/ $."ve (o.)! s&it to t&e )et n! vi$e ve"s,

9, Wet&e" $on!itionsE3$e))ent (&et&e" (i)) in$"ese t&e 0"i$.)t.") 0oo!s s.%%)ie! t&.s

$.sin0 t&e s.%%)/ $."ve to s&it to t&e "i0&t n! vise ve"s,


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ove"n#ents in$"esin0 t3es on 2"#s (o.)! !e$"ese t&e #o.nt

s.%%)ie! to t&e #"et> (&i$& (o.)! "es.)t in t&e s.%%)/ $."ve s&itin0

to t&e )et,


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No"#) 0oo!s n! Ine"io" 0oo!s

No"#) 0oo!s

T&ese "e 0oo!s (&i$& &ve %ositive "e)tions&i% (it& in$o#e n! !e#n!,

In ot&e" (o"!s> (&en in$o#e in$"eses> t&e !e#n! (o.)! in$"ese n! vise

ve"s,


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Ine"io" 0oo!s

T&ese "e 0oo!s (&i$& &ve n inve"se "e)tions&i% 'et(een in$o#e n!

!e#n!, I In$o#e in$"eses> t&e !e#n! (o.)! !e$"ese n! vise ve"s,

T&e/="e $onsi!e"e! to 'e )o( .)it/ 0oo!s n! "e !e#n!e! '/ t&e )o(

in$o#e 0"o.%s in so$iet/, W&en in$o#e in$"eses it is si! t&t t&e !e#n!o" t&ese 0oo!s (i)) )) s %eo%)e ten! to 'e 'ette" o n! $n o"! to './

).3."/ 0oo!s *'ette" .)it/ 0oo!s+,

Co#%)i#ents n! S.'stit.tes

Co#%)i#ents

T&ese "e 0oo!s t&t "e !e#n! to0et&e", In ot&e" (o"!s> t&e .s0e o one

0oo! "e.i"es t&e .s0e o not&e",

E3#%)e4 5 C" J Pet"o),

W&en t&e %"i$e o one 0oo! in$"eses> t&e !e#n! o" t&e ot&e" 0oo! (i))

)),


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S.'stit.tes

T&e"e "e 0oo!s t&t "e .se! to stis/ t&e s#e nee! inste! o not&e"

0oo! .se! stis/ t&e s#e nee!,

E3#%)e4 5 .tte" n! #"0"ine

W&en t&e %"i$e o one 0oo! in$"eses> t&e !e#n! o" t&e ot&e" 0oo! (i))

)so in$"ese,

T/%es o De#n!

1, Co#%osite !e#n!T&is "ee"s to t&e !e#n! t&t &s #n/ .ses,

9, oint !e#n!De#n! o" $o#%)i#ent"/ 0oo!s,E3#%)e4 5 T/"es n! t.'es


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E3#%)e4 5 L'o." is si! to &ve !e"ive! !e#n!, T&is is 'e$.se

t&e !e#n! o" )'o." "ises "o# t&e !e#n! o" t&e %"o!.$t o

)'o.",

T&e Ee$t o T3es ! S.'si!ies

Ee$t o t3es *'."!en+

T&e i##e!ite ee$t o t3 is s&it o t&e s.%%)/ $."ve to t&e )et, T&is is

'e$.se (&en t3 is i#%ose!> t&e $ost o %"o!.$tion in$"eses n!

s.%%)ie"s "e !is$o."0e! to s.%%)/,

W&en !e#n! is %e"e$t)/ ine)sti$ $ons.#e"s 'e"s t&e enti"e t3,

W&en t&e !e#n! is %e"e$t)/ e)sti$ 5 %"o!.$e" 'e"s t&e enti"e t3,


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Ee$t o s.'si!/

T&e i##e!ite ee$t o s.'si!/ is s&it o t&e s.%%)/ $."ve to t&e "i0&t,

T&is is 'e$.se (&en s.'si!/ is 0iven> $ost o %"o!.$tion !e$"eses n!

s.%%)ie"s "e en$o."0e! to s.%%)/,


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W&en t&e 0ove"n#ent i#%oses !i"e$t t3> it e$ts t&e !e#n!

$."ve,T&e"eo"e> )) t&e !i0"# !"(n 'ove *e3$).!in0 t&e ee$t o

s.'si!ies+ "e 'se! on INDIRECT TAES,

T/%es o t3es *in!i"e$t t3es+

1, S%e$i2$ t3 *.nit t3+9, A! v)o"e# t3 *%e"$ent0e t3 on %"i$e+

1, S%e$i2$ t3 *.nit t3+T&is is 23e! "te o t3 (&e"e t&e #o.nt o t3 is t&e s#e o"

eve"/ .nit %"o!.$e!, T&e"eo"e> t&e s.%%)/ $."ve (i)) s&it to t&e )et s %"))e) )ine,

9, A! v)o"e# t3 *%e"$ent0e t3 on %"i$e+T&is is %e"$ent0e o t3 $&n0e! on t&e %"i$e o t&e %"o!.$t, T&.s>

t&e s.%%)/ $."ve (i)) s&it to t&e )et '/ &i0& %"o%o"tion t &i0&e"

%"i$e n! )o(e" %"o%o"tion t )o(e" %"i$e,


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P"o!.$e" n! Cons.#e" S."%).s

P"o!.$e" S."%).s

T&is "ee"s to t&e 'ene2t %"o!.$e" 0ets s "es.)t o 'ein0 ')e to se))

%"o!.$t t &i0&e" t&n )o(e" %"i$e &e (s (i))in0 s.%%)/,

T&is !e%en!s on t&e e)e$t"i$it/ to t&e s.%%)/ $."ve

S.%%)/ e)sti$ P"o!.$e" s."%).s "e!.$esS.%%)/ ine)sti$ P"o!.$e" s."%).s in$"eses

Cons.#e" s."%).s

T&is "ee"s to t&e 'ene2t $ons.#e" 0ets s "es.)t 'ein0 ')e to './

%"o!.$t t )o(e" %"i$e t&n &i0&e" %"i$e &e (s (i))in0 to %/,


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T&is !e%en!s on t&e e)sti$it/ o t&e !e#n! $."ve

De#n! e)sti$ Cons.#e" s."%).s "e!.$esDe#n! ine)sti$ Cons.#e" s."%).s in$"eses

A0"i$.)t.") M"ets

C&"$te"isti$s

1, Ine)sti$ De#n!T&e !e#n! o" 0"i$.)t.") 0oo!s is so)! to 'e "e)tive)/ ine)sti$ to

t&e "es%onse to $&n0es in %"i$es, T&e"eo"e> n in$"ese o %"i$es (i))

)e! to )) in t&e .ntit/ !e#n!e! '.t t&e %"o%o"tion o t&is ))

(o.)! 'e "e)tive)/ s#))e" $o#%"e! to t&e $&n0e in %"i$e n! vise

ve"s,

T&is is #in)/ 'e$.se 0"i$.)t.") %"o!.$ts #in)/ "e%"esent oo!ite#s s.$& s "i$e n! $&n0es in %"i$es o t&ese 0oo!s (i)) &ve )itt)e

ee$t on $ons.#e"s !e#n!, Fo" e3#%)e> "ise in t&e %"i$es o "i$e

(o.)! #en t&t $ons.#e"s (o.)! sti)) $ontin.e to %."$&se sin$e "i$e

is $onsi!e"e! s 'si$ oo! $o##o!it/,

On t&e ot&e" &n!> ))in0 %"i$es (i)) en$o."0e $ons.#e"s to %."$&se

#o"e "i$e '.t it (i)) 'e )i#ite! !.e to t&e $t t&t oo! ite#s "e

$ons.#e! to $e"tin )i#it,

9, Ine)sti$ s.%%)/T&e s.%%)/ o t&ese %"i#"/ $o##o!ities is si! to 'e ine)sti$ (it&

"e0"! to $&n0es in t&e %"i$es, In$"esin0 %"i$es (i)) en$o."0e

%"o!.$e"s to se)) #o"e to t&e #"et> '.t t&is in$"ese in s.%%)/

!e%en!s on n.#'e" o ot&e" $to"s s.$& s (et&e" n! 0oo!

&"vest,


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ine)sti$ s.%%)/

n! YED 1+

Di0"##ti$ n)/sis o ine)sti$ !e#n! n! ine)sti$ s.%%)/ (it&

"e0"! to 0"i$.)t.") 0oo!s,

1+ Ine)sti$ !e#n! i)).st"tions

9+ Ine)sti$ s.%%)/ i)).st"tion


25/50

PED on !o(n("! s)o%in0 !e#n! $."ve

PED (&en %"i$e $&n0es "o# 1: to

PED (&en %"i$e $&n0es "o# to


26/50

PED (&en %"i$e $&n0es "o# to 9

On $o##on !e#n! $."ve s)o%in0 "o# )et to "i0&t> its 'e"in0

(o.)! $&n0e "o# 'ein0 e)sti$ *PED 1+ to .nit"/ e)sti$ * PED Q 1+

to n ine)sti$ v).e *PED 1+

M"et Fi)."e

T&is o$$."s (&en t&e %"i$e #e$&nis# $.ses n ine$ient ))o$tion o

"eso."$es o" (&en t&e #"et o"$es o !e#n! n! s.%%)/ $nnot '"in0 n!

e$ient ))o$tion o "eso."$es,

So#eti#es #"et i)."e is )so "ee""e! to s sit.tion (&en "eso."$es

"e not ))o$te! to t&ei" 'est o" o%ti#.# .se )e!in0 to net (e)"e )oss in

t&e so$iet/,

T&e"e "e v"io.s t/%es o #"et i)."e (&i$& $n 'e $)ssi2e! into;

1, E3te"n)ities9, P.')i$ 0oo!s n! #e"it 0oo!s *#issin0 #"ets+


27/50

E3te"n)ities

T&is is !e2ne! s ee$ts*$ost@'ene2t+ on t&i"! %"t/ (&o is neit&e" t&e

%"o!.$e" no" t&e $ons.#e" t&t is i0no"e! '/ t&e %"i$e #e$&nis#, T&is is

)so no(n s in!i"e$t $osts n! 'ene2ts> s s%i))ove"s *s%i))ove" ee$t+ "o#

%"o!.$tion o" $ons.#%tion o 0oo! o" se"vi$e> E3te"n) $osts "e $o##on)/no(n s ne0tive e3te"n)ities@ne0tive s%i))ove" ee$ts n! e3te"n)

'ene2ts s %ositive e3te"n)ities@%ositive s%i))ove" ee$ts,

E3te"n) $osts *Ne0tive e3te"n)ities+

T&is "ises !.e to !ive"0en$e 'et(een so$i) $osts n! %"ivte $osts, It is

(&e"e t&e #"0in) so$i) $osts e3$ee! t&e #"0in) %"ivte $ost,

E3te"n) $osts $n $#e 'o.t in 'ot& %"o!.$tion n! $ons.#%tion, Ane3#%)e o" one in %"o!.$tion $n 'e %o)).tion '/ 2"#s n! one t&"o.0&

$ons.#%tion $n 'e %ssive s#oin0,

P"ivte $osts

T&is "ee"s to t&ose $osts in$.""e! '/ 2"# o" n in!ivi!.) in o"!e" to

%"o!.$e o" $ons.#e 0oo! o" se"vi$e, In "ee #"et> %"o!.$e"s "e on)/

$on$e"ne! (it& t&e %"ivte $osts o %"o!.$tion, T&ese "e $osts inte"n) o"

2"#> o" (&i$& it !i"e$t)/ %/s o", T&e/ in$).!e (0es> "ent> %/#ent> o"

"( #te"i)s> e)e$t"i$it/ et$, On t&e ot&e" &n!> %"ivte $osts o" n

in!ivi!.) (i)) 'e t&e #"et %"i$e t&t $ons.#e" %/s o" 0oo! o"

se"vi$e,

So$i) $osts

/ !!in0 %"ivte $osts to e3te"n) $osts> (e o'tin so$i) $os, T&is #ens

t&t e3te"n) $osts "e t&e !ie"en$e %"ivte $osts n! so$i) $osts, T&e#"0in) %"ivte $ost n! so$i) $ost $."ves oten !ive"0e in!i$tin0 t&t

e3te"n) $osts in$"ese !is%"o%o"tionte)/ (it& o.t%.t, iven 'e)o( is

!i0"# in!i$tin0 t&e "e)tions&i% 'et(een %"ivte $ost> so$i) $ost n!

e3te"n) $ost


28/50

E3te"n) 'ene2ts

T&is #/ o$$." in t&e %"o!.$tion n! $ons.#%tion o 0oo! o" se"vi$e, An

e3#%)e o n e3te"n) 'ene2t in %"o!.$tion is t&e "e$/$)in0 o (ste

#te"i)s,

An e3te"n) 'ene2t in $ons.#%tion is t&e v$$intion o n in!ivi!.) 0inst

v"io.s !iseses,

P"ivte ene2ts

In "ee #"et> $ons.#e"s "e on)/ inte"este! (it& t&ei" %"ivte 'ene2ts,

P"ivte 'ene2ts $n "ise "o# t&e %"o!.$tion n! $ons.#%tion o 0oo!s n!

se"vi$es, T&e %"ivte 'ene2ts on %"o!.$tion $n 'e t&e "even.e o'tine! '/

2"# n! t&e %"ivte 'ene2t o $ons.#%tion $n 'e t&e stis$tion o

s#oin0,

So$i) 'ene2ts

/ !!in0 %"ivte 'ene2ts to e3te"n) 'ene2ts> (e o'tin so$i) 'ene2ts,

T&is #ens t&t e3te"n) 'ene2ts "e t&e 'ene2ts 'et(een %"ivte 'ene2ts

n! so$i) 'ene2ts, T&e #"0in) %"ivte 'ene2t n! t&e #"0in) so$i)

'ene2t $."ves oten !ive"0e> in!i$tin0 t&t 'ene2ts in$"ese!is%"o%o"tionte)/ (it& o.t%.t $ons.#e!, T&is is s&o(n in t&e !i0"#

'e)o(,


29/50

T&e #"et e.i)i'"i.#

T&e s.%%)/ $."ve o" 2"# is t&e M"0in) P"ivte Cost $."ve *MPC+, T&e

!!ition o )) t&e MPC $."ves o 2"#s in #"et o" %"ti$.)" 0oo! o"

se"vi$e (i)) o"# t&e #"et s.%%)/ $."ve,

T&e !e#n! $."ve o" $ons.#e"s is t&e M"0in) P"ivte ene2t $."ve *MP+,

E$ono#ists ss.#e t&t it is %ossi')e to #es."e t&e 'ene2t o'tine! '/

$ons.#e" 0oo! o" se"vi$e '/ t&e %"i$e t&e/="e (i))in0 to %/, As n in!ivi!.)$ons.#es #o"e .nits o 0oo!> t&e #"0in) 'ene2t *#"0in) .ti)it/+ (i))

)), T&is is (&/ t&e !e#n! $."ve s)o%es !o(n("!s "o# )et to "i0&t, T&e

!!ition o )) t&e $ons.#e"s MP $."ves "o# %"ti$.)" 0oo! o" se"vi$e

(i)) o"# t&e #"et $."ve, M"et e.i)i'"i.# o$$."s (&en MP Q MPC

T&e So$i) O%ti#.# E.i)i'"i.#

T&e So$i) o%ti#.# e.i)i'"i.# )eve) o o.t%.t o" %"i$e o" 0oo! o" se"vi$e

o$$."s (&e"e M"0in) So$i) Cost *MSC+ e.)s M"0in) So$i) ene2t*MS+ (&en t&e so$i) o%ti#.# is "e$&e! in #"et (e)"e is #3i#iBe!,

E3te"n) $osts n! t&e t"in0)e o (e)"e )oss

T&e "ee #"et i0no"es ne0tive e3te"n)ities, Ho(eve"> !!in0 e3te"n)

$ost on to t&e %"o!.$tion o 0oo! o" se"vi$e $.ses its $osts to 0o .% t&.s

s&itin0 t&e s.%%)/ $."ve to t&e )et n! 'e$o#in0 t&e M"0in) So$i) Cost

$."ve *MSC+,


30/50

In n .n"e0.)te! #"et> 2"#s (i)) on)/ te into $$o.nt o its %"ivte $osts

n! %"ivte 'ene2ts, T&e"eo"e> it (i)) %"o!.$e (&e"e MPQMPC, Fi"#s i0no"et&e e3te"n) $ost it $"etes, T&e"eo"e> t&e $ost o %"o!.$tion (i)) 'e )o(e"

t&n i t&e e3te"n) $osts (e"e $onsi!e"e!, T&e "es.)t is t&t o.t%.t (i)) 'e

0"ete" t&n t&e so$i))/ o%ti#.# )eve), T&is )e!s to ove"%"o!.$tion n!

.n!e" %"i$in0, D.e to ove"%"o!.$tion o o.t%.t> t&e"e is )oss o so$i)

(e)"e *!e%i$te! '/ t&e s&!e! t"in0)e+, T&e i)."e to te into $$o.nt

t&e ne0tive e3te"n)it/ ee$ts is #"et i)."e, T&e #"et &s i)e!

'e$.se e3te"n) $osts "e i0no"e!,

E3te"n) 'ene2ts n! t&e t"in0)e o (e)"e 0in

T&e "ee #"et i0no"es %ositive e3te"n)ities, Ho(eve"> !!in0 e3te"n)

'ene2ts onto t&e $ons.#%tion o 0oo! o" se"vi$e s.$& s t&e $ons.#%tion

o v$$intion $.ses t&e !e#n! $."ve to s&it to t&e "i0&t n! 'e$o#e t&e

#"0in) so$i) 'ene2t $."ve,

Ass.#in0 t&e"e "e no e3te"n) $osts in t&e $ons.#%tion o v$$intions in

"ee #"et> t&e so$i) o%ti#.# %"i$e is OP9 n! .ntit/ O9, W&en

e3te"n) 'ene2ts "e i0no"e!> t&e"e is .n!e" %"i$in0 n! .n!e" %"o!.$tion,

T&e"e is n e3$ess o so$i) 'ene2ts ove" so$i) $osts o" t&e #"0in) o.t%.t"o# O to O9> (e)"e $o.)! 'e in$"ese!,

T&e e3$ess o so$i) 'ene2ts ove" so$i) $osts is s&o(n '/ t&e t"in0)e MT,

T&is is t&e "e o (e)"e 0in to so$iet/, T&e #"et &s i)e! sin$e

%ositive e3te"n)ities &ve 'een i0no"e!,


31/50

P.')i$ oo!s

T&e $se o" ins.$ient .ntities o %.')i$ 0oo!s n! #e"it 0oo!s 'ein0

oe"e! '/ t&e %"ivte se$to" is ve"/ oten no(n s #issin0 #"etsG,

T&ese 0oo!s invo)ve )"0e $ons.#%tion s.$& s ntion) !eense> 6oo!

!eense s/ste#> $"i#in) -.sti$e s/ste# et$,

P.')i$ 0oo!s "e $o##on)/ no(n o" t(o i#%o"tnt $&"$te"isti$s;

1, Non 5 E3$).!'i)it/T&is #ens t&t on$e 0oo! &s 'een %"o!.$e! o" t&e 'ene2t o one

%e"son> it is i#%ossi')e to sto% ot&e"s "o# .sin0 it, T&is is $o##on)/

no(n s t&e F"ee Ri!e" P"o')e#,9, Non 5 "iv)"/@ Non !i#inis&'i)it/

T&is #ens t&t s #o"e %eo%)e $ons.#e 0oo!> n! en-o/ its

'ene2ts> it !oes not "e!.$e t&e #o.nt vi)')e o" ot&e"s,

E3#%)e4 5 St"eet )i0&ts

On$e %.')i$ 0oo! &s 'een %"ovi!e! t&e $ost o s.%%)/in0 it to n e3t"

$ons.#e" is Be"o, F."t&e"> e3#%)es )i0&t&o.ses> 2"e(o" !is%)/s> %.')i$

'e$&es> %.')i$ %"s> st"eet )i0&tin0 et$,

T&e .n!e" %"ovision o %.')i$ 0oo!s

P.')i$ 0oo!s "e .n!e" %"ovi!e! o" 9 'si$ "esons;

1, T&e "ee "i!e" %"o')e#On$e %.')i$ 0oo! &s 'een %"ovi!e! o" one in!ivi!.)> it is

.to#ti$))/ %"ovi!e! o" )), T&e #"et i)s 'e$.se it is not

%ossi')e o" 2"#s to (it&&o)! t&e 0oo! "o# t&ose $ons.#e"s (&o

"e.se to %/ o" it,

9, T&e v).tion %"o')e#It is !i$.)t to #es."e t&e v).e o'tine! '/ $ons.#e"s o

est')is&e! #"et %"i$e o" t&e#, It is t&e inte"est o $ons.#e"s to

.n!e" v).e t&e 'ene2t 0ine! "o# %.')i$ 0oo! !o t&t t&e/ %/

)ess o" it, .t it=s in t&e inte"est o t&e %"o!.$e"s to ove" v).e t&e

'ene2t 0ine! '/ %.')i$ 0oo! in o"!e" to $&"0e &i0&e" %"i$e, T&e

.n$e"tint/ ove" v).tion #/ !ete" *%"event+ 2"#s "o# %"ovi!in0

%.')i$ 0oo!s,


32/50

.si %.')i$ 0oo!s *Se#i %.')i$ 0oo!s+

In %"$ti$e> t&e"e "e oten (/s in (&i$& %"ovi!e"s o %.')i$ 0oo!s $n

e3$).!e $ons.#e"s "o# 'ene2tin0,

E3#%)e4 5

1+ A #oto"ist $n 'e $&"0e! t3 o" .sin0 t&e "o!,9+ Ent"n$e ees o" t&e ntion) #.se.# * (&i$& is $onsi!e"e! s

%.')i$ 0oo!+

Me"it 0oo!s

T&ese "e 0oo!s t&t "e %"ovi!e! '/ t&e "ee #"et '.t (o.)! 'e .n!e"

%"ovi!e!, T/%i$) e3#%)es "e e!.$tion n! &e)t&$"e (&e"e t&e 'ene2t

$n 'e seen to t&e enti"e e$ono#/, I )et to t&e #"et> it (o.)! 'e .n!e"

%"ovi!e! n! on)/ t&ose (&o $n o"! it (i)) $ons.#e it,

De #e"it 0oo!s

T&e $ons.#%tion o t&ese 0oo!s is $onsi!e"e! .n&e)t&/ o" so$i))/

.n!esi"')e !.e to %e"$eive! ne0tive ee$ts on t&e $ons.#e"s t&e#se)ves,

It is ove" $ons.#e n! ove" %"o!.$e! o )et to t&e "ee #"et o"$es,

E3#%)e4 5 )$o&o)> to'$$o> 0#')in0> -.n oo! et$

e$.se o t&e nt."e o t&ese 0oo!s t&e 0ove"n#ent i#%oses t3es on

t&ese 0oo!s n! in so#e $ses 'n in $ons.#%tion o" !ve"tise#ent o

t&ese 0oo!s,

P"ivte 0oo!s

P"ivte 0oo!s "e t&e o%%osite o %.')i$ 0oo!s, T&e/ !is%)/ $&"$te"isti$s

o "iv)"/ n! e3$).!'i)it/ in $ons.#%tion, An e3#%)e o %"ivte 0oo! is

$"e#/ .)) o $&o$o)te !o.0&n.t> t&e $ons.#%tion o (&i$& !i"e$t)/

e3$).!es ot&e"s "o# $ons.#in0 t&t %"ti$.)" !o.0&n.t, T&e o(ne"s o

%"ivte 0oo!s "e ')e to .se %"ivte %"o%e"t/ "i0&ts (&i$& %"event ot&e"s

"o# $ons.#in0 t&e#,


33/50

ove"n#ent %"ovision o %.')i$ 0oo!s

In #i3e! e$ono#/> t&e 0ove"n#ent ten!s to %"ovi!e %.')i$ 0oo!s in o"!e"

to $o""e$t #"et i)."e, It "ises .n!s "o# 0ene") t3tion to %/ o" t&ei"

%"ovision, Wit&o.t 0ove"n#ent inte"vention> %.')i$ 0oo!s #/ 'e .n!e"

%"ovi!e! o" not %"ovi!e! t )), T&e $t.) #o.nt %"o!.$e! (i)) 'e )ess t&nt&e .ntit/ "e.i"e! o" $&ievin0 t&e so$i))/ o%ti#.# )eve),

I#%e"e$t #"et no()e!0e

S/##et"i$ ino"#tion

In t&e st.!/ o $o#%etitive #"ets> it is oten ss.#e! t&t $ons.#e"s n!

t&e %"o!.$e"s &ve %e"e$t #"et no()e!0e .%on (&i$& to #e t&ei"

e$ono#i$ !e$isions, T&is is no(n s s/##et"i$ ino"#tion (&e"e

$ons.#e"s n! %"o!.$e"s &ve %e"e$t n! e.) #"et ino"#tion o

0oo! o" se"vi$e, Ass.#in0 t&t $ons.#e"s n! %"o!.$e"s $t in "tion)

(/> it (i)) )e! to n e$ient ))o$tion o "eso."$es,

As/##et"i$ Ino"#tion

In "e)it/> $ons.#e"s n! %"o!.$e"s &ve i#%e"e$t n! .ne.) #"et

no()e!0e .%on (&i$& to #e t&ei" e$ono#i$ !e$isions n! t&is $o.)! )e!

to #is))o$tion o "eso."$es, T&is is no(n s s/##et"i$ ino"#tion,

Oten %"o!.$e"s #/ no( #o"e t&n $ons.#e"s 'o.t 0oo! o" se"vi$e, A

se$on! &n! $" s)es#n o" e3#%)e> #/ &ve 0"ete" no()e!0e o t&e

&isto"/ o t&e ve&i$)es o" s)e s (e)) s #o"e te$&ni$) no()e!0e t&n

$ons.#e"s, T&is (o.)! )e! to $ons.#e" %/in0 too #.$& o" )o( .)it/

%"o!.$t,

So#eti#es $ons.#e"s &ve #o"e #"et no()e!0e t&n %"o!.$e"s, Fo"

e3#%)e> $ons.#e" #/ %."$&se n ins."n$e %o)i$/ $on$e)in0

ino"#tion 'o.t &i# o" si#%)/ no( #o"e 'o.t &is inten!e! .t."e

$tions, T&is #i0&t in$).!e "is/ )iest/)e,


34/50

W&en t&e"e is i#%e"e$t #"et ino"#tion> #"ets "e )ie)/ to i), T&is

$n 'e seen in t&e .n!e" $ons.#%tion o &e)t&$"e> e!.$tion n! %ensions

*#e"it 0oo!s+ o" t&e ove" $ons.#%tion o to'$$o> )$o&o) n! 0#')in0

*so#eti#es no(n s !e #e"it 0oo!s+,

Lo'o." i##o'i)it/

T&e #o'i)it/ o )'o." "ee"s to t&e 'i)it/ o )'o." to $&n0e o"# one -o' to

not&e" 0eo0"%&i$))/> o$$.%tion))/ n! in!.st"i))/,

Une#%)o/#ent (&i)e %eo%)e se"$& o" -o' n! 2)) t&e# is no(n !

"i$tion) .ne#%)o/#ent, Ho(eve"> #o"e se"io.s t/%e o .ne#%)o/#ent is

!.e to #is#t$& o si)) n! )o$tion 'et(een -o' seee"s n! -o' %"ovi!e"s,

T&e 0ives "ise to i##o'i)it/ o )'o." n! st".$t.") .ne#%)o/#ent,

eo0"%&i$) i##o'i)it/ "ee"s to t&e o'st$)es t&t %"event )'o." "o#

#ovin0 "o# one "e to not&e" to 2n! (o", T&e"e "e seve") $.ses s.$&

s #i)/ n! so$i) ties t&e 2nn$i) $osts invo)ve! (it& #ovin0 &o#es>

i#%e"e$t #"et no()e!0e *s/##et"i$ ino"#tion+ on vi)')e (o">

"e0ion) v"ition in &o.se %"i$es n! t&e $ost o )ivin0, T&e 'i00est %"o')e#

ten!s to 'e t&e )$ o o"!')e &o.sin0 in #n/ %"ts o t&e UK,

O$$.%tion) i##o'i)it/ "ee"s to t&e o'st$)es (&i$& %"event )'o." "o#

$&n0in0 t&ei" t/%e o o$$.%tion to 2n! (o", T&e"e "e seve") $.ses>

in$).!in0 ins.$ient e!.$tion> t"inin0> si))s n! (o" e3%e"ien$e,

ove"n#ent #es."es to in$"ese 0eo0"%&i$) #o'i)it/ o )'o."

T&e"e "e v"io.s #es."es t&t=s 0ove"n#ent #i0&t .n!e" te to in$"ese

t&e 0eo0"%&i$) #o'i)it/ o )'o." n! t&is in$).!es;

Re)3tion o %)nnin0 )(s (&i$& en')e $onst".$tion 2"#s to '.i)!

&o.sin0> es%e$i))/ in 0"een 'e)t "es n! t&e so.t& est o En0)n!,

In$"ese in t&e $onst".$tion o so$i) &o.sin0 s.$& s $o.n$i)%"o%e"ties n! $&"ities (&e"e "ent) $osts ten! to 'e #o"e o"!')e

t&n #o"t00es, Oe"in0 &o.sin0 s.'si!ies to $e"tin 0"o.%s o (o"e"s (&e"e $.te

s&o"t0es e3ist> s.$& s te$&e"s> n."ses n! 2"e 20&te", I#%"ovin0 t&e o%e"tion o -o' $ent"es> so t&t #o"e ino"#tion is

vi)')e on -o' v$n$ies in n "e,


35/50

T&e #es."es 0ove"n#ent #i0&t .se to in$"eses o$$.%tion) #o'i)it/ o

)'o.";

In$"esin0 t&e %"ovision o t"inin0 s$&e#es es%e$i))/ o" t&e.ne#%)o/e!, T&is #i0&t in$).!e s.'si!ies to %"ivte se$to" $o#%nies

to oe" t"inin0 se"vi$es, In$"esin0 t&e %"ovision o ."t&e" e!.$tion> es%e$i))/ in t&e %ost

1 *te" 1+ se$to", In$"esin0 t&e %"ovision o &i0&e" e!.$tion, T&e"e &s 'een "%i!

in$"ese in t&e n.#'e" o st.!ents in t&is se$to" ove" "e$ent /e"s,

In$"esin0 $$ess to st.!ents )ons n! )i#itin0 t.ition ees #i0&t &e)%

&e"e,

Unsto%%')e $o##o!it/ #"ets

Co##o!ities "ee" to "( #te"i)s .se! in t&e %"o!.$tion o 0oo!s, T&e/

#/ 'e #ine")s n! #et)s s.$& s oi)> $o)> tin > $o%%e" et$, T&e/ )so

in$).!e 0"i$.)t.") 0oo!s s.$& s "i$e> s.0"> (&et> 6o." et$, T/%i$))/>

$o##o!ities "e .se! to #n.$t."e 0oo!s n! se"vi$es,

Co##o!it/ #"ets "e $&"$te"iBe! '/ 6.$t.tin0 %"i$es n! %"o!.$e"

in$o#es (&i$& #e it !i$.)t to %)n .t."e invest#ent %"o0"#s #"ets

(&e"e t&e $)i#te #/ e$t t&e s.%%)/ in n/ one /e",

T&e %"o')e# o .n$e"tin s.%%)/ o $o##o!ities in n/ one /e"s is

$o#%o.n!e! '/ t&e ten!en$/ o !e#n! o" t&ee 0oo!s to t&e %"i$e

ine)sti$, A good harvest generally leads to a larger fall in prices and

revenue whereas a poor harvest will lead to a larger rise in price

and total revenue. Conse.ent)/> "#e"s #/ #e &.0e %"o2ts one /e"

n! &.0e )osses not&e", It 0ives "ise to #"et i)."e,

In t&e )on0 ".n> t&e s.%%)/ o 0"i$.)t.") $o##o!ities &s in$"ese!

!"#ti$))/ !.e to #-o" te$&no)o0i$) innovtions, Fo" e3#%)e> M $"o%sin$"ese /ie)! n! "esistn$e to !"o.0&t n! %ests, Ho(eve"> t&e 0"o(t& in

!e#n! &s i)e! to ee% .% (it& t&e s.%%)/, Co##o!ities ten! to 'e$o#e

ine)sti$ in !e#n! sin$e e$& in!ivi!.) &s )i#ite! oo! inte, T&is )e!s

to ."t&e" )) in t&e %"i$e o $o##o!ities n! "even.e o "#e"s,


36/50

L'o." M"et

W&t !ete"#ines t&e (0e "te in t&e )'o." #"et?

In $o#%etitive )'o." #"et> t&e (0e "te is !ete"#ine! '/ t&e #"et

o"$es o !e#n! n! s.%%)/, T&e !e#n! o" )'o." is .n!e"ten '/ 2"#s>

(&i$& "e.i"e (o"e"s to &e)% %"o!.$e 0oo!s n! se"vi$es, T&e s.%%)/ o

)'o." $o#es "o# t&e 0ene") %o%.)tion n!> in %"ti$.)"> t&e (o"o"$e o

n e$ono#/,

T&e !e#n! o" )'o."

T&e !e#n! o" )'o." is !e"ive! !e#n!, T&is #ens t&t t&e !e#n!

o" )'o." $o#es "o# t&e !e#n! o" t&e %"o!.$t o )'o.", Fo" e3#%)e>

t&e !e#n! o" '.i)!in0 (o"e"s is !e"ive! "o# t&e !e#n! o" ne(

&o.sin0,

T&e 20."e 'e)o( s&o(s &o( n in$"ese in !e#n! o" ne( &o.sin0 (i))

$.se n in$"ese in !e#n! o" '.i)!in0 (o"e"s s.$& s '"i$ )/e"s n!

$"%ente"s, T&e ee$t is to in$"ese t&e (0e "te "o# We to W1 n! t&e.ntit/ e#%)o/e! "o# Ne to N1,


37/50

+ Ne( &o.sin0 #"et '+ L'o." #"et o" '.i)!in0 (o"e"s

An in$"ese in !e#n! o" ne( &o.sin0 n! '.i)!in0 (o"e"s,

Dete"#innts o !e#n! o" )'o."

De#n! o" 2n) %"o!.$t

An in$"ese in !e#n! o" 0oo! o" se"vi$e is )ie)/ to $.se n

in$"ese in !e#n! o" t&e )'o." invo)ve! in #in0 it, Fi"#s &ve

%"o2t in$entive> i !e#n! n! %"i$es in$"eses> to s.%%)/ #o"e o

0oo! o" se"vi$e,

T&e (0e "te

A )) in t&e (0e "te #ens t&t )'o." 'e$o#es #o"e o"!')e n!

2"#s "e )ie)/ to !e#n! o" #o"e )'o.",

Ot&e" )'o." $osts

Fo" e3#%)e> )) in e#%)o/e"s= ntion) ins."n$e $ont"i'.tions on'e&) o t&ei" st is )ie)/ to t&e "ise t&e .ntit/ !e#n!e!,

P"i$e o ot&e" $to" in%.ts

An in$"ese in t&e %"i$e o $%it) #i0&t en$o."0e 2"#s to e#%)o/

#o"e )'o." n! $.t '$ on t&e .se o #$&ine"/ n! e.i%#ent

(&e"e %ossi')e, T&is is 'e$.se )'o." n! $%it) #/ 'e s.'stit.tes

in t&e %"o!.$tion %"o$ess,

ove"n#ent e#%)o/#ent "e0.)tions

T&e e(e" t&e n.#'e" o "e0.)tions> t&e 0"ete" t&e !e#n! o")'o." is )ie)/ to 'e, Fo" e3#%)e> i it 'e$o#es es/ to &i"e n! 2"e

st> o" to $&n0e (o"in0 $on!itions> t&en t&e in$"ese! )'o."

6e3i'i)it/ #/ en$o."0e 2"#s to e#%)o/ #o"e %eo%)e,

T&e s.%%)/ o )'o."


38/50

T&is "ee" to t&e .ntit/ n! .)it/ o )'o." &o."s oe"e! to (o"

ove" 0iven ti#e %e"io!, So#eti#es it is )so !e2ne! s t&e n.#'e"

o &o."s (o"e" is (i))in0 to (o" t 0iven (0e "te ove" %e"io!

o ti#e,

T&e (0e "teAn in$"ese in t&e (0e "te (i)) en$o."0e #o"e %eo%)e to oe" t&ei"

se"vi$e o" (o", A higher wage rate means the opportunity cost

of leisure time increases, encouraging people to work longer

hours.

Wo"in0 $on!itions

I#%"ove#ents in (o"in0 $on!itions (i)) ten! to in$"ese t&e s.%%)/ o

)'o." s.$& s 0oo! %ension> %i! &o)i!/s> -o' se$."it/ n!

%"o#otion %"os%e$ts,

Net Mi0"tionT&is "ee"s to t&e !ie"en$e 'et(een i##i0"tion n! e#i0"tion o

)'o.", Ove" "e$ent /e"s> t&e UK &s e3%e"ien$e! si0ni2$nt in$"ese

in i##i0"tion "o# Cent") n! Este"n E."o%e &e)%in0 to 'oost t&e

e$ono#/,

In$o#e t3

A "e!.$tion in in$o#e t3 (i)) in$"ese !is%os')e in$o#e n! so oe"

0"ete" in$entive o" %eo%)e to (o", Mn/ %eo%)e (i)) s.'stit.te

(o" o" )eis."e ti#e> !e$"esin0 t&e s.%%)/ o )'o.",

T"!e .nions

T"!e .nions $t to in$"ese i#%"ove (0e "tes n! i#%"ove ot&e"

(o"in0 $on!itions t&"o.0& $o))e$tive '"0inin0 (it& e#%)o/e"s, T&is

#/ )e! to n in$"ese in t&e s.%%)/ o )'o.",

ove"n#ent "e0.)tions

An in$"ese in t&e e#%)o/#ent %"ote$tion o" t&e int"o!.$tion o

ntion) #ini#.# (0e (i)) ten! to i#%"ove (o"in0 $on!itions n! so

in$"ese t&e s.%%)/ o )'o.", Ho(eve"> it is )so %ossi')e t&t t&e

0ove"n#ent "e0.)tion "e!.$e t&e s.%%)/ o )'o." in o$$sions s.$&

s #3i#.# (o"in0 &o."s %e" (ee,

So$i) t"en!s

T&e"e &s 'een si0ni2$nt in$"ese in t&e n.#'e" o (o#en in t&e

(o"o"$e ove" t&e %st : /e"s, T&is "e6e$ts n i#%"ove#ent in

e.) o%%o"t.nit/ $&i)!$"e $i)ities n! so$i) ttit.!es,


39/50

Ho( Do ove"n#ents Atte#%t To Co""e$t M"et Fi)."e?

T&e 0ove"n#ent $o.)! tte#%t to .se n.#'e" o !ie"ent %o)i$ies@

#es."es in o"!e" to $o""e$t #"et i)."e, T&e/ in$).!e;

1, In!i"e$t t3tion9, S.'si!ies to'$$o n! )$o&o),

T&e o))o(in0 !i0"# s&o(s t&e #"et o" %et"o)> in$).!in0 'ot& t&e

MPC $."ve n! t&e MSC $."ve, In "ee #"et> t&e e.i)i'"i.# %"i$e is

OPe n! t&e e.i)i'"i.# .ntit/ Oe, Ho(eve"> t&e so$i) o%ti#.#%"i$e is OP1 n! so$i) o%ti#.# .ntit/ is O1> (&e"e MSC Q MS,

T&e ve"ti$) !istn$e Y "e%"esents t&e e3te"n) $osts *i" %o)).tion+ o"

e$& )it"e o %et"o) $ons.#e!,/ %)$in0 t3 e.) to t&e e3te"n) $ost o Y %e" )it"e> t&e

0ove"n#ent s.$$ess.))/ inte"n)ise t&e e3te"n)it/ *%o)).tion+, T&e

tot) t3 $o))e$te! is s&o(n '/ t&e "e P1YW, ot& %"o!.$e"s n!

$ons.#e"s %/ t&e t3> !e%en!in0 on t&e "e)tive e)sti$ises o

!e#n! n! s.%%)/, T&e $ons.#e" t3 "e is YP1PeT n! t&e

%"o!.$e" t3 "e is PeTW,


40/50

A!vnt0es o in!i"e$t t3es to $o""e$t #"et i)."e45

In!i"e$t t3es "e 'se! on t&e %"in$i%)e t&t t&e %o)).te"s %/ 'ot&

%"o!.$e"s n! $ons.#e"s, In!i"e$t t3es (o" (it& #"et o"$es &e)%in0 to inte"n)ise t&e

e3te"n) $ost (&i)e #intinin0 t&e $ons.#e" $&oi$e,

T&e )eve) o %o)).tion s&o.)! )) s o.t%.t o t&e 0oo! n! se"vi$e is

"e!.$e! n! t&e %"i$e is in$"ese! t&e so$i) o%ti#.# %osition o

MS QMSC $n 'e $&ieve!,

T3 .n!s "e "ise! o" t&e 0ove"n#ent n! t&ese $n 'e .se! to

$)en .% t&e envi"on#ent o" to $o#%enste t&e vi$ti#s o %o)).tion,

Dis!vnt0es o in!i"e$t t3es to $o""e$t #"et i)."e45

It is !i$.)t to .nti/ t&e %o)).tion n! t&en %)$e #onet"/ v).e

on it, Conse.ent)/> t&e so$i) o%ti#.# %osition #i0&t not 'e

$&ieve!,

In!i"e$t t3es in$"ese t&e $ost o %"o!.$tion o" 2"#s> #in0 t&e#

)ess $o#%etitive> $o#%"e! to 2"#s in ot&e" $o.nt"ies (&e"e s.$&

t3es "e not %%)ie!,

Fi"#s #i0&t "e)o$te to ot&e" $o.nt"ies (it& )ess st"in0ent t3es on

%"o!.$tion, T&e !e#n! o" 0oo!s n! se"vi$es #/'e "e)tive)/ %"i$e ine)sti$

n! so t&e ove")) !e!.$tion in %o)).tion )eve)s #/'e s#)),

T&e t3 "even.e $o))e$te! #/ not 'e .se! to $o#%enste vi$ti#s o"

$)en .% t&e envi"on#ent,

It #i0&t en$o."0e t&e !eve)o%#ent o i))e0) #"ets s.$& s to'$$o

n! )$o&o) s#.00)in0 to %/in0 &i0& t3es,


41/50

9, S.'si!iesA s.'si!/ is 0"nt %"ovi!e! '/ t&e 0ove"n#ent to en$o."0e t&e

%"o!.$tion n! $ons.#%tion o %"ti$.)" 0oo! n! se"vi$e,

S.'si!ies "e oten %%)ie! on 0oo!s n! se"vi$es (it& si0ni2$nte3te"n) 'ene2ts s.$& s e!.$tion n! &e)t&$"e, T&e/ #/ )so 'e

0iven to )te"ntive o"#s o e$ono#i$ $tivit/ (&i$& $"ete )ess

%o)).tion s.$& s %.')i$ t"ns%o"t n! "ene(')e ene"0/,

A!vnt0es o s.'si!ies %%)ie! to "ene(')e ene"0/ #"ets45

T&e/ "e!.$e i" %o)).tion,

Usin0 "ene(')e so."$es &e)%s to %"o#ote s.stine! e$ono#i$ 0"o(t&,

T&e "te o $ons.#%tion o non "ene(')e "eso."$es is "e!.$e!,

S.'si!ies (o" (it& t&e #"et o"$es o !e#n! o s.%%)/, T&e/ &e)%

to inte"n)ise t&e e3te"n) 'ene2ts "o# "ene(')e o"#s o ene"0/,

+ E)e$t"i$it/ "o# "ene(')e ene"0/ so."$e * (in! n! (te"+'+ E)e$t"i$it/ "o# non "ene(')e ene"0/ so."$es * $o) n! oi)+

Dis!vnt0es o s.'si!ies %%)ie! to "ene(')e ene"0/ #"ets45

T&e"e is n o%%o"t.nit/ $ost to t&e 0ove"n#ent o s.'si!ies, It #/

)e! to &i0&e" t3es o" $.ts in 0ove"n#ent s%en!in0,

Fi"#s #/ 'e$o#e ine$ient in %"o!.$tion i t&e/ "e)/ .%on s.'si!ies,

Win! %o(e" #/ 'e )ess "e)i')e so."$e o ene"0/ t&t t"!ition)

#et&o!s,


42/50

t&is s$&e#e en$o."0es 2"#s to invest in $)en te$&no)o0/

n! envi"on#ent))/ "ien!)/ #et&o!s o %"o!.$tion,T&e e#issions

t"!in0 s$&e#e )so ))o(s 2"#s to invest in s$&e#es t&t "e!.$e

$"'on !io3i!e e#issions o.tsi!e t&e EU,

A!vnt0es o t"!')e %o)).tion %e"#its45

Fi"#s (i)) 0en.ine)/ t"/ to "e!.$e %o)).tion 'e$.se t&e/ &ve

2nn$i) in$entive to !o so, T&e 0ove"n#ent $n "ise .n!s '/ se))in0 .% to 1:8 o t&ei" %e"#its

to %o)).te"s, T&e "even.e $o.)! 'e .se! to $)en .% t&e envi"on#ent o"

$o#%enste vi$ti#s,

P"o!.$tions $osts (i)) in$"ese o" 2"#s t&t e3$ee! t&ei" %o)).tion

))o(n$es sin$e t&e/ &ve to %."$&se !!ition) %e"#its n! t&is

%"ovi!es so."$e o "even.e o" $)ene" 2"#s t&t $n se)) t&ei" e3$ess

%o)).tion %e"#its,

Fi"#s #/ 'e ')e to 'n t&ei" e3$ess %o)).tion %e"#its o" .se in t&e

.t."e,

Dis!vnt0es o %o)).tion %e"#its45

T&e E."o%en $o##ission #/ iss.e too #n/ %e"#its so t&t t&e"e is

)itt)e in$entive o" 2"#s to "e!.$e %o)).tion,

T&e E."o%en $o##ission #/ ))o$te too e( $"'on %e"#its so t&t

%"o!.$tion $osts o" EU 2"#s in$"ese "%i!)/> "e!.$in0 t&ei"

inte"ntion) $o#%etitiveness,

Dis%.tes &ve "isen ove" t&e ))o$tion o $"'on %e"#its to 2"#s so#e2"#s 'e)ieve t&e/ s&o.)! "e$eive )"0e" ))o(n$es n! &ve ten

)e0) %"o$ee!in0s 0inst t&e E."o%en $o##ission,

So#e 2"#s #/ si#%)/ %ss t&e $ost o %."$&sin0 %e"#its to t&e

$ons.#e" o" %"o!.$ts (&ose !e#n! is ine)sti$,

Po)).tion %e"#its #/ $"ete n ent"/ '""ie" o" ne( 2"#s to ente" t&e

in!.st"/> so "est"i$tin0 $o#%etition,


43/50

T&e"e is $ost to t&e 0ove"n#ent o #onito"in0 %o)).tion e#issions

"o# t&e #n/ 2"#s (it&in t&e s$&e#e,

EU 2"#s #/ voi! in investin0 in e3%ensive te$&no)o0/ to "e!.$e

t&ei" o(n e#issions '/ .n!in0 $&e%e" $"'on o settin0 s$&e#es in

!eve)o%in0 $o.nt"ies,

The emissions trading system allows rms to invest on schemes

that reduce carbon dioxide emissions outside the EU. Eg! "hina and

#ndia

, E3tension o %"o%e"t/ "i0&tsT&is invo)ves t&e 0ove"n#ent ))o$tion %"o%e"t/ "i0&ts to

o"0nistions ove" t&e o(ne"s&i% o "eso."$es "e0"!in0 to (&t .ses

t&e/ $n 'e %.t to n! (&t "i0&ts ot&e"s &ve ove" t&e# n!e3tension %"o%e"t/ "i0&ts &s 'een %%)ie! to t&e ses> "ive"s>

#o.ntins n! i" n $e"tin ses,A)) too oten> ne0tive e3te"n)ities "ise (&en t&e"e is )$ o

%"o%e"t/ "i0&ts ove" "eso."$e t&e"e is n in$entive to '.se t&e .se

o "eso."$e i t&e"e is no %"o%e"t/ "i0&ts; o" e3#%)e ove" 2s&in0 in

t&e No"t& Se,

A!vnt0es o %"o%e"t/ "i0&ts45

P"o%e"t/ "i0&ts .se t&e #"et #e$&nis# to ens."e n e$ient .se o

"eso."$es, T&is #ens t&e o(ne" o t&e %"o%e"t/ "i0&t (i)) $&"0e

$ons.#e"s n! %"o!.$e"s o" .sin0 it,

T&e"e is n in$"ese in t&e no()e!0e n! e3%e"tise o" t&e

o"0nistion (it& t&e %"o%e"t/ "i0&t, It tes (/ %"ess."e (/ "o#

t&e 0ove"n#ent to $$ess t&e %o)).tion,

T&e"e is 0"ete" )ie)i&oo! t&t t&e %"o%e"t/G *"eso."$es+ (i)) 'e

#n0e! $"e.))/ to ens."e its vi)'i)it/ o" .t."e 0ene"tions> s

(it& t&e $ont"o) o $o! $t$&e"s "o# t&e No"t& Se,

P"o%e"t/ "i0&t o(ne"s $n $&"0e 2"#s t&t nee! to %o)).te t&e

envi"on#ent, T&e .n!s $n 'e .se! to $)en .% t&e envi"on#ent n!

$o#%enste t&e s.e"e"s,

Fi"#s t&t !#0e t&e envi"on#ent (it&o.t %e"#ission $n 'e

%"ose$.te! n! #!e to %/ o" $)en .% o%e"tion,


44/50

Dis!vnt0es o %"o%e"t/ "i0&ts45

It is oten !i$.)t o" 0ove"n#ent to e3ten! %"o%e"t/ "i0&ts Fo"

e3#%)e> UK #e#'e"s&i% o t&e EU #ens t&t t&e EU 2s&in0 'ots

"e entit)e! to 2s& in UK te""ito"i) (te"s,

It #/ 'e !i$.)t o" 0ove"n#ent to e3ten! %"o%e"t/ "i0&t (&i$&$ove"s #o"e t&n one $o.nt"/, Fo" e3#%)e> t&e )o00in0 o t&e

A#Bonin "in o"est in "Bi) is o.t o t&e -."is!i$tion o !eve)o%e!

$o.nt"ies, T&e e3te"n) $osts (&i$& "ise $nnot esi)/ 'e inte"n)ise!,

It $o.)! 'e !i$.)t to t"$e t&e so."$e o envi"on#ent) !#0e, In

t&e $se o As'estos s.e"e"s (&o (o" o" #o"e t&n one As'estos

$o#%n/> it &s 'een e3t"e#e)/ !i$.)t to %"ove (&i$& $.se! t&e

!isese, Conse.ent)/> $o#%enstion %/#ents &ve 'een (it&&e)!,

T&e )e0) $ost invo)ve! in %"ose$.tin0 %o)).te" $o.)! e3t"e#e)/ &i0&>

!ete"#inin0 vi$ti#s "o# tin0 $o#%enstion,

7, ove"n#ent "e0.)tionsIn tte#%t to $o""e$t #"et i)."e> t&e 0ove"n#ent #/ %."s.e

%o)i$/ o "e0.)tion, T&is $n 'e o))o(e! in 9 'si$ (/s, T&e 2"st

(o.)! 'e to "e.est t&e 2"#s %o)).tin0 to $.t !o(n t&ei" %"o!.$tion

)eve)s o" in e3t"e#e $ses> s&.ttin0 t&e# !o(n, Ho(eve"> t&e"e "e

n.#'e" o ot&e" #es."es (&i$& $n 'e seen s o"#s o 0ove"n#ent

"e0.)tion t&t "e .se! to "e0.)te t&e o%e"tion o 2"#s t&t invo)ve

in $"etin0 ne0tive e3te"n)ities, Fo" e3#%)e> t&e Envi"on#ent)P"ote$tion A$t (&i$& sets #ini#.# stn!"!s> t&e i#%osition o 2nes

o" %e"&%s t&e %"ovision o s.'si!ies to 2"#s t&t "e invo)ve! in

envi"on#ent))/ "ien!)/ #et&o!s o %"o!.$tion,

A!vnt0es45

T&e/="e si#%)e to .n!e"stn!, Fo" e3#%)e> t&e settin0 .% o )e0)

"est"i$tions on t&e 0e )i#its o" t&e s)e o to'$$o n! )$o&o), It is %ossi')e to 2ne o" s&.t!o(n $o#%nies (&i$& &ve '.se! t&e

"e0.)tions, Fo" e3#%)e> '/ e#ittin0 !n0e"o.s )eve)s o to3i$ (ste,

T&e est')isent o $ons.#e" %"ote$tion )(s 0inst 2"#s t&t se))

.nse %"o!.$ts o" #e )se $)i#s 'o.t t&ei" %"o!.$t, M/ &e)%

"e!.$e t&e %"o')e# o s/##et"i$ ino"#tion,

Dis!vnt0es45


45/50

It #/ 'e e3%ensive to #onito" t&e 'e&vio." o 2"#s,

T&e"e #/ 'e e3t" $osts to 2"#s, Fo" e3#%)e> t&e $ost o inst))in0

%o)).tion #onito"in0 e.i%#ent,

It #/ 'e !i$.)t to .nti/ n! tt$& #onet"/ v).e to %o)).tion

e#issions,

Re0.)tion %"events t&e o%e"tion o t&e %"i$e #e$&nis# ove" ".)in0

it $o#%)ete)/ "t&e" t&n (o"in0 (it& it,

, .e" sto$ s$&e#esA '.e" sto$ s$&e#e #/ 'e o%e"te! '/ 0ove"n#ent 0en$/ to

"e!.$e %"i$e 6.$t.tions o $o##o!it/ n! st'i)ise %"o!.$e"

in$o#es, It invo)ves t&e 0en$/ settin0 t"0et %"i$e "n0e o"

$o##o!it/ * #3 n! #in %"i$e+> n! t&en inte"venin0 to #e s."e

t&t t&e %"i$e "e#ins (it&in t&is 'n! !es%ite s.!!en $&n0es ins.%%)/ o" !e#n!,E3#%)e4 5 Coee 'en Co$o et$,In ti#es o 0oo! &"vest *n! in$"ese in s.%%)/+ t&e %"i$e #/ 'e in

!n0e" o ))in0 too )o( n! so t&e 0en$/ './s .% t&e e3$ess s.%%)/

o t&e $o##o!it/> !!in0 to its sto$%i)e, In ti#es o %oo" &"vest *

!e$"ese in s.%%)/+> t&e %"i$e #/'e in !n0e" o "isin0 too &i0& n!

so t&e 0en$/ se))s "o# its sto$%i)e,

P"t *+ o t&e o))o(in0 !i0"#s s&o(s t&e o%e"tion o '.e" sto$

s$&e#e o" $o$o, T&e initi) e.i)i'"i.# %"i$e Pe is (it&in t&e %"i$e"n0e o P7 n! P

in$"eses s.%%)/ to 1 (&i$& $.ses t&e %"i$e to )) to P1, T&e 0en$/

inte"venes '/ %."$&sin0 t&e .ntit/ Y (&i$& %"events t&e %"i$e

"o# ))in0 'e)o( t&e #ini#.# t"0et %"i$e P


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*+ A0en$/ %."$&se o sto$s * 0oo! &"vest+

*'+A0en$/ s)e o sto$s * %oo" &"vest+

A!vnt0es o '.e" sto$ s$&e#e45

T&e/ "e!.$e $o##o!it/ %"i$e 6.$t.tions> &e)%in0 to st'i)ise

%"o!.$e" in$o#es,

T&e"e is 0"ete" $e"tint/ in t&e #"et> )e!in0 to #o"e invest#ent,

T&e/ &e)% to ens."e %"ovision o $o##o!ities o" $ons.#e"s even in

ti#es o %oo" &"vest,

Dis!vnt0es o '.e" sto$ s$&e#e45

A se"ies o 0oo! &"vest in $onse$.tive /e"s #/ %.t too #.$&

2$tion) %"ess."e on t&e 0en$/ t&t &s to ee% %."$&sin0 !!ition)

sto$s n! it #/ 'e$o#e too e3%ensive to .n!, T&is %"o')e# #/

"e6e$t t&e initi) settin0 o t&e %"i$e in t&e 2"st %)$e oten t too

&i0& )eve) !.e to s/##et"i$ ino"#tion 'et(een %"o!.$e"s n! t&e

0ove"n#ent 0en$/,


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T&e )on0 ".n t"en! o in$"ese! %"o!.$tivit/ in t&e 0"i$.)t.") se$to"

$"etes $ontin.o.s %"ess."e on t&e 0en$/ to %."$&se !!ition)

sto$s n! "e.i"es !o(n("! !-.st#ent o t&e inte"vention %"i$e

"n0e *s&o.)! "e!.$e t&e #ini#.# %"i$e+,

T&e"e #/ 'e si0ni2$nt $osts sso$ite! (it& t&e sto"0e n!

se$."it/ o sto$%i)es, Us.))/> )"0e '.i)!in0s "e "e.i"e!,

T&e sto$s #/ 'e %e"is&')e ove" )on0 %e"io! o ti#e> s%e$i))/

0"i$.)t.") $o##o!ities, T&e 0en$/ #/ )ose #one/ i t&e $"o%s 0et

s%oi)t,

A se"ies o %oo" &"vests #/ )e! to t&e 0en$/ ".nnin0 o.t o sto$s

to "e)ese to t&e #"et, T&is #ens t&e #"et %"i$e e3$ee!s t&e

#3i#.# %"i$e n! so t&e '.e" sto$ s$&e#e '"es !o(n,

O%%o"t.nit/ $ost,

, Mini#.# %"i$in0T&e 0ove"n#ent #/ st'i)ise $o##o!it/ %"i$es n! %"o!.$e" in$o#es

t&"o.0& 0."ntee! #ini#.# %"i$e o" #n/ $o##o!ities in$).!in0

s.0"> (&et n! '")e/, Us.))/ t&e #ini#.# %"i$e is set 'ove t&e

"ee #"et %"i$e> $.sin0 0"i$.)t.") s."%).ses, T&ese "e %."$&se!

'/ t&e 0ove"n#ent 0en$ies t t&e 0."ntee!G #ini#.# %"i$e, T&is

is s&o(n in t&e !i0"#,

A #ini#.# %"i$e o P9 $.ses !e#n! to $ont"$t "o# e to 1> n!

s.%%)/ to e3ten! "o# e to 9, It )e!s to n e3$ess s.%%)/ o 19,

ove"n#ent e3%en!it."e on t&e s."%).s is s&o(n '/ t&e "e 19YW

n! tot) "# "even.e in$"eses "o# OPee to OP9Y9, T&e e3$ess

s.%%)/ is sto$%i)e! '/ t&e 0ove"n#ent,


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A!vnt0es o #ini#.# %"i$e45

A "e!.$tion o $o##o!it/ %"i$e 6.$t.tions #es it esie" o"

$ons.#e"s to '.!0et t&ei" s%en!in0,

F"# in$o#es "e st'i)ise! n! in$"ese!> )e!in0 to 0"ete"

invest#ent in 0"i$.)t."e, E#%)o/#ent in t&e $o.nt"/si!e is #intine!> &e)%in0 to "e!.$e ".")

."'n ine.)it/,

S.%%)/ o 0"i$.)t.") $o##o!ities is 0."ntee! even in ti#es o %oo"

&"vest> !.e to s."%).s sto$%i)es,

A0"i$.)t.") s."%).ses $n 'e .se! s o"# o o"ei0n i! to

!eve)o%in0 $o.nt"ies,

Dis!vnt0es o #ini#.# %"i$e45

T&e %"i$e o oo! in$"eses> (&i$& $o.)! )e! to &"!s&i% o"

$ons.#e"s on )o( in$o#es,

ove"n#ent s%en!in0 on 0"i$.)t.") s."%).ses invo)ves n o%%o"t.nit/

$ost, It #/ &ve to "ise t3es o" $.t on s%en!in0 on ot&e" %"o0"#s,

T&e"e "e in$"ese! sto"0e n! se$."it/ $osts o" t&e oo! s."%).s,

T&e 0"i$.)t.") s."%).s #/ &ve to 'e !est"o/e! !.e to t&ei"

%e"is&'i)it/4 o" e3#%)e #i)> "es& %e$&es> to#toes et$,

T&e 0"i$.)t.") s."%).ses #/ 'e so)! in ove"ses #"ets t ve"/

)o( %"i$e, T&is $o.)! !#0e "#e"s in !eve)o%in0 $o.nt"ies> (&o "e.n')e to $o#%ete 0inst $&e% 0ove"n#ent o(ne! oo!,

E3$ess s.%%)/ "e%"esents n ine$ient ))o$tion o "eso."$es,

F"#e"s "e 0."ntee! n in$o#e (&i$& #i0&t $.se t&e# to 'e$o#e

)ess e$ient ove" ti#e, T&e"e is )ess in$entive o" "#e"s to i#%"ove

t&e .)it/ o t&e oo! o" to ee% %"o!.$tion $osts !o(n,

A)) t&ese !is!vnt0es "e instn$es o 0ove"n#ent i)."e,


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ove"n#ent Fi)."e

T&is o$$."s (&en t&e 0ove"n#ent inte"vention in t&e "ee #"et )e!s to

net (e)"e )oss "t&e" t&n 0in, It is (&e"e t&e 0ove"n#ent $.ses

#is))o$tion o "eso."$es in #"et,

E3#%)es o $o##on o"#s o 0ove"n#ent i)."e

Hi0&e" t3es &ve en$o."0e! i))e0) s#.00)in0 o to'$$o n! )$o&o)

into t&e UK, O"0nise! $"i#e &s ente"e! t&ese #"ets> )e!in0 to

s#.00)in0 on #ssive s$)e, T&e 0ove"n#ent &s )ost si0ni2$nt

#o.nt o t3 "even.e "o# t&ese i))e0) $tivities,

T&e %"o%ose! t3 on &o.se&o)! (ste #/ so.n! 2ne in t&eo"/ '.t 'e

.n(o"')e in %"$ti$e, So#e )o$) $o.n$i)s &ve %"o%ose! $&"0in0&o.se&o)!s n e3t" ee i t&e/ &ve #o"e t&n 9 s$s o ".''is&

$o))e$te! e$& (ee, T&is $o.)! !ve"se)/ e$t )"0e #i)ies n! )o(

in$o#e &o.se&o)!s, It $o.)! )e! to n in$"ese on 6/ ti%%in0 o"

!is%.tes 'et(een &o.se&o)!s ove" t&e o(ne"s&i% o ".''is& '0s>

es%e$i))/ in #.)ti 5 o$$.%n$/ %"o%e"ties,

S.'si!ies to '.s t"ns%o"t #/ not )e! to s.'stnti) "ise in

%ssen0e" n.#'e"s s #oto"ists oten %"ee" t&e $onvenien$e o

%"ivte $" -o."ne/s, In so#e $ses> '.s t"ns%o"t #/ 'e $onsi!e"e!

n ine"io" 0oo!, As "e) in$o#es in$"ese> t&e !e#n! o" '.s se"vi$es

(i)) )), T&is s.00ests t&t t&e 0ove"n#ent s.'si!ies "e (ste o t3

%/e"=s #one/,

*oad pricing ! A $on0estion s$&e#e (i)) &e)% "e!.$e e3te"n) $osts

s.$& s noise %o)).tion> t"$ $on0estion n! i" %o)).tion, Ho(eve"> i

t&e $&"0e is set too &i0&> it $o.)! )e! to n .n!e" .ti)istion o "o!

s%$e, It #/ )so )e! to .ni"ness to )o( in$o#e #oto"ists (&o

$nnot o"! to %/ t&e !i)/ $&"0e, F."t&e"#o"e> it #/ "e!.$e t"it

o" '.siness (it&in t&e $on0estion $&"0e Bone, T&e so$i))/ o%ti#.#.ntit/ o t"$ #/ not 'e $&ieve!,

.e" sto$s n! #ini#.# %"i$es in 0"i$.)t.") #"ets

T&ese s$&e#es oten )e! to &.0e oo! s."%).ses (&i$& &ve to 'e

!est"o/e! o" !.#%e! in #"ets o !eve)o%in0 $o.nt"ies, T&e

0ove"n#ent &s !isten!e! t&e o%e"tion o t&ese #"ets> )e!in0 to


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n ove" s.%%)/ n! #is))o$tion o "eso."$es, T&is )so "e%"esents

(ste o t3 %/e"=s #one/,

Ntion) Mini#.# W0e *NMW+

A NMW set 'ove t&e "ee #"et (0e #/ )e! to .ne#%)o/#ent in

$e"tin )'o." #"ets s.$& s 0"i$.)t."e> te3ti)es et$, T&e %."%ose ot&e NMW is to %"ote$t )o( %i! (o"e"s '.t in t&e so#e $ses> it #/

in$"ese %ove"t/ )e!in0 to .ne#%)o/#ent,

A))o$tion o 2s&in0 .ots

T&e E."o%en $o##ission is "es%onsi')e o" ens."in0 s.stin')e

)eve) o 2s&in0 in t&e No"t& Se '/ ))o$tin0 2s& $t$&e"s *.ots+ o"

e$& $o##e"$i) 2s&in0 'ot, Ho(eve"> envi"on#ent)ists %oint to

"e!.$in0 2s& sto$s n! ')#e t&e 0ove"n#ent o" settin0 2s& .ots

t too &i0& )eve), T&e"e=s ."t&e" %"o')e# o 2s&in0 'ots t&"o(in0

!e! 2s& to ee% t&e# (it&in t&ei" .ots n! t&e %oo" #onito"in0 o

2s& $t$&e"s,

ove"n#ent '."e.$"$/ *"e! t%e+

T&e"e "e v"io.s 0ove"n#ent ".)es n! "e0.)tions> no(n s "e! t%e

t&t &in!e"s t&e o%e"tion o #"et o"$es, Fo" e3#%)e> $on$e"nin0

%"o%os)s o" $onst".$tin0 t&i"! ".n(/ t t&e Het&"o( Ai"%o"t,

V"io.s ti#es $ons.#in0 %)nnin0 in.i"ies &ve to 'e .n!e"ten

'eo"e #-o" %"o-e$ts $n 0o &e!, T&is $o.)! )e! to

.n!e"invest#ent in t&e %&/si$) in"st".$t."e o t&e e$ono#/>

"e!.$in0 UK in("! invest#ent n! UK inte"ntion) $o#%etitiveness,

It is n e3#%)e o t&e ti#e )ies invo)ve! in 0ove"n#ent !e$ision

#in0 (&i$& in!i$tes it is too in6e3i')e to "es%on! to t&e nee!s o

'ot& %"o!.$e"s n! $ons.#e"s,

Poo" #e$&nis# n! its .n$tion s "tionin0 !evi$e,

T&e %"i$e #e$&nis# "ee"s to t&e inte"$tion o t&e #"et o"$es o

!e#n! n! s.%%)/ in o"!e" to !e"ive t t&e e.i)i'"i.# %"i$e n!

.ntit/ to 'e %"o!.$e!@ so)!,In "ee #"et e$ono#/> "eso."$es "e ))o$te! '/ t&e %"o!.$e"s

$$o"!in0 to &i0& %"i$e! $o##o!ities 'ein0 %"o!.$e! 2"st, T&e"eo"e>

!.e to s$"$it/> in o"!e" to !is$o."0e t&e &ve5nots> %"o!.$e"s

$&"0e! &i0&e" %"i$es t&.s #in0 0oo!s vi)')e on)/ o" t&ose (&o

$n o"! t&e# *t&is is no(n s "tionin0+,

Economics unit 1 notes from Sayeedh Ghouse

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Transcript of Economics unit 1 notes from Sayeedh Ghouse