Market-Based & Interventionist Policies (HL IB Economics)

Revision Note

Market-Based Policies

  • Market-based strategies create the conditions for private individuals & firms to pursue an economic activity with the aim of maximising output and profit

Market-based Strategies to Generate Economic Growth & Development


Strategy


Explanation


 Advantages


Disadvantages 

Trade liberalisation

  • Removing the barriers to international trade such as tariffs, quotas etc.

  • More trade increases output, employment & incomes

  • Lowers costs of production for firms

  • May result in lower prices for consumers

  • More efficient global allocation of resources

  • Global competition intensifies and some firms may fail

  • There may be an element of structural unemployment as inefficient industries die out

Privatisation

  • Government firms are usually so big that private enterprise refrains from trying to compete with them. Privatisation encourages new firms to enter the market & compete, thus increasing the total supply in the economy

  • May increase competition leading to an increase in output, employment & incomes

  • Private firms may be more efficient than government firms

  • Competition may result in cheaper prices for consumers

  • The money from the sale of assets can be used to provide more merit and public goods

  • Government assets are often sold off cheaply at prices below fair market value

  • The quality of services may deteriorate as private firms focus on profit maximisation

  • Unemployment may increase as private firms seek to cut their wages in order to maximise profits

  • Prices may actually rise as firms provide a monopoly service e.g. rail travel

Deregulation

  • This is the process of removing government controls/laws from markets in order to increase competition

  • Any regulation increases costs of production for firms and deregulation decreases costs which may result in greater supply

  • Less regulation may result in innovation and more enterprise in an economy

  • Deregulation may create an environment of corruption leading to inefficiency

  • Deregulation may increase the quantity of negative externalities

  • Deregulation may allow foreign firms to monopolise industry within the nation, leading to higher prices and less output

Interventionist Policies

  • Interventionist strategies are put in place by governments to correct the failings of the free market and promote the welfare/development of its citizens

  • Interventionist strategies aim to increase human capital, productivity and output
     

Interventionist Strategies to Generate Economic Growth & Development


Strategy


Explanation


 Advantages


Disadvantages 

Tax policies

  • A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality

  • Redistribution often starts with the provision of free education & healthcare paid for from tax revenue

  • Tax revenue provides the means of supporting poorer households and the unemployed

  • Sometimes, the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes

  • If the tax burden is too high it may become a disincentive to work

Transfer payments

  • Transfer payments are usually given to the poorest & most vulnerable people in society and include unemployment & disability payments, pension payments, heating discounts, public transport subsidies etc.

  • The poorest households are supported

  • Money received from transfer payments generates consumption in the economy and increases aggregate demand

  • Poorer countries have less money available to support the poor

  • There is an opportunity cost for the government associated with each transfer payment

  • Supporting the poor makes good economic sense but is sometimes politically unpopular

Minimum wages

  • Minimum wages are set above the free market rate and firms are not allowed to pay anyone less than the legal rate

  • Workers receive higher wages and have more disposable income

  • Consumption increases leading to increased aggregate demand

  • Standard of living increases with higher income

  • Costs of production for firms increase, possibly leading to less international competitiveness

  • With higher costs of production, output may fall leading to increased unemployment

Did this page help you?