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Inequality
MARKET FAILURE (3.4)
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MARKET FAILURE (3.4)
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life’s not fair
Would the world be a better place if everyone earned the same income and had the
same access to resources? On the one hand - yes. On the other hand - no.
Markets require inequality to function effectively. For example if one good is more
desired than another, then society wants firms in that market to earn higher profits. This
sends a price signal to all producers to increase investment in that good.
However, there’s a difference between inequality and inequity. The first is about
everyone getting the same outcomes (e.g. profit, income). The second is about everyone
having the same opportunities.
This unit looks at how the two differ, how they both affect markets, and policies that the
Government can implement to ensure equity.
by the end of this unit, you should be able to answer these questions...
1
what’s inequality and how
does it lead to inequity?
inequality
2
how do we measure
inequality?
3
how can governments
resolve inequality?
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Study Notes
Equity and Equality
Achievement Standard 90631
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c
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inequa
it’s not fair!
This topic looks at the difference between equity and equality ... or inequity and inequality.
It then looks at how we can use a Lorenz curve to graphically show the level of inequality
in a country / economy.
by the end of this topic, you should be able to...
o describe the difference between equality and equity
o explain why inequality can be good in markets and why inequity is not
o use a Lorenz curve to measure / illustrate inequality in a country
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remember - try the exercises and then read the notes to learn what you don’t know.
Equity vs Equality
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Consider the following.
1. Indentify whether each of the following situations are examples of equity, equality, inequity or inequality.
• all five years can attend a state school free________________________
• all teams in a competition score the same points________________________
• anyone who can afford $20 000 each year can attend a private school
________________________
• the top 200 year 13 students will be allowed into law school ________________________
Exercise 5.1
• all retired people get free public transport________________________
• on average lawyers earn $30 000 more per annum than teachers________________________
2. Explain how high inequality can lead to inequity.
______________________________________________________________________________
______________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
3. When people die, they often leave an ‘inheritance’ for their children. In this way families can build up wealth
over time. Is this fair? Explain why this can be seen as both good and bad.
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
4. Complete equality is when all individuals earn the same income, and all firms earn the same profits. Explain
why this would be inefficient in a market economy.
____________________________________________________________________________________________
____________________________________________________________________________________________
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____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
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Lorenz Curves are the most common measure of inequality in an economy.
1. Complete the table below and use the figures to draw Lorenz Curves for the imaginary countries and answer the questions that follow.
COMPARATIVE NATIONAL INCOME DISTRIBUTION FIGURES FOR THREE COUNTRIES
Betaland
Gammaland
Cumulative Percentage of National Income Compared
to Population
Decile
Alphaland
% of income
% of income
1
6
1
1
10
6
1
2
6
2
1
20
12
3
3
7
3
1
4
8
5
2
5
9
7
2
6
10
9
3
7
11
12
5
8
12
15
10
9
14
18
25
10
17
28
50
% of income
Population
Cumulative %
Alphaland
Betaland
Gammaland
Cumulative % of income Cumulative % of income Cumulative % of income
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Exercise 5.2
Percentage of National Income by Decile
Lorenz Curves
MARKET FAILURE (3.4)
2. Which country has the most unequal distribution of income? _________________________________
3. The New Zealand government has several methods of redistribution at its disposal to address the inequality
problem. For any two of these methods, other than taxation, explain how they can be used.
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
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Equity and Equality
notes
The last type of market failure we look at is inequity. Inequity, as we will see, differs to inequality
and leads to the inefficient use of resources by society.
Equity vs Equality
Think of a running race (figure 5.1). Usually
we ensure that all competitors start together
so that they have the same chance of
winning. That’s equity, i.e. everyone has the
same opportunity.
Figure 5.1 ... Equity vs. Equality
EQUALITY
All competitors finish together
FINISH
However if we changed the start so that the
slower people got a head start and everyone
finished together, that’s equality. Equality is
when people get the same outcome.
Equity is about opportunity and fairness.
Equality is about outcomes.
Inequity and inequality are the opposite,
i.e. people not having the same opportunity
(inequity) or people having different
outcomes (inequality).
ST A RT
EQUITY
All competitors start together
Equity: Fairness . . . when everyone has the same opportunity.
Equality: When everyone receives the same outcomes.
What’s Good About Inequality and Bad About Inequity?
Inequality is not market failure. In fact we need inequality for markets to work.
If all firms earned the same profit from making any good or service, there would be no incentive
to make that goods and services that consumers most want. And there would be no incentive for
workers to train for the jobs that are most needed by society. For example, why would people
train for six years (with no income) to be a doctor when they could leave school and earn the same
income as a checkout operator at the local supermarket?
Inequality creates incentives that cause markets to work. Earning more (or less) profit from different
products causes firms to allocate our scarce resources to producing the goods and services that
consumers value the most (see figure 14.2 overleaf).
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Figure 5.2 ... Incentives and Resource Allocation
MARKET FOR DESKTOP COMPUTERS
$
MARKET FOR TABLET COMPUTERS
$
S
S
PT’
PT
PD
PD’
D’
QD’
QD
D
D
Q
QT
D’
QT’
•
Since the release of the first iPad, consumers have started to demand more 'tablet' computers which
provide them with the features that they want.
•
This has caused the demand for tablets to rise ... and the demand for desktop computers to fall.
•
Increased demand for tablets creates a shortage at PT which is resolved by firms raising the price to PT’ .
This causes market output of tablets to rise to QT’ .
•
At the same time the fall in demand for desktops creates a surplus at PD. Firms will respond by
dropping prices to sell their stock. So the price will fall to PD’ and market output will fall to QD’.
•
The difference in the price of tablet and desktop computers, causes firms to switch their resources
from the production of desktop computers (that consumers want less of) to producing tablet
computers. Unequal prices have led to allocative efficiency.
Q
However inequity is market failure. It’s not fair and it leads to a waste or resources.
For example some poeple don’t have as good access to education and healthcare as
others. This means that they don’t get the same chances to succeed and contribute
to society.
Assuming that poor people are just as intelligent and able as anyone else,
failing to provide them with as good an education or healthcare is a
waste of resources. And it’s not fair.
Inequality is not market failure. In fact inequality is a sign of market success.
But too much inequality can lead to inequity. For example people on higher
incomes can afford better education and healthcare for their families. This gives
them (and their children) better chances to succeed in life and so creates inequity over time and
generations.
Using Lorenz Curves to Measure Inequality
To measure inequality in a country, we use a Lorenz Curve.
A Lorenz Curve records how what percentage of a country’s total income each person earns, and
then graphs this. The greater the ‘bow’ in the curve, the greater inequality there is between the
highest income earners and lowest income earners in a country.
Figure 14.4 shows how a Lorenz Curve can be calculated and drawn. You will see that the graph
also has a ‘line of absolute equality’. This is what the Lorenz curve would look like if everyone
earned exactly the same income as each other. It helps us to analyse Lorenze Curves. The further
away the curve is from the line of absolute equality, the greater the inequality in a country.
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Figure 5.3 ... Creating Lorenz Curves
% of Population
% of Income
Cumulative
% of Population
Cumulative
% of Income
1st 10%
1
10
1
2 10%
1
20
2
3 10%
2
30
4
4 10%
4
40
8
5th 10%
6
50
14
6th 10%
9
60
23
7 10%
12
70
35
8 10%
15
80
50
9 10%
20
90
70
Last 10%
30
100
100
nd
rd
th
th
th
th
% Income
A Lorenz Curve shows what percentage
of total income is earned by various
percentages of a country’s population.
Lorenz curves are created by dividing
the population of a country (and the
income they earn) into regular groups.
These are then ranked from lowest
income earners to highest. This is done
in the left-hand table above. This table
breaks the population up into ‘deciles’,
i.e. groups of 10%.
These percentages are then added
together cumulatively. This is done in
the right-hand table. This table shows
that the poorest 10% of the population
earn 1% of the total income and that
the poorest 20% (including the first
10%) earn 2% of the total income and
so on.
This is then transferred to a graph that
typically creates a curved line as shown
to the right.
100
90
80
Line of
Absolute Equality
70
60
50
40
less
inequality
30
Lorenz
Curve
greater
inequality
20
10
10
20
30
40
50
60
70
80
90 100
% Population
Limitations of Lorenz Curves
Lorenz curves are a very useful and quick way of analysing inequality in a country, but they have some limitations, such as:
Income vs. Wealth
Lorenz curves measure income, not wealth. Someone who owns an expensive mansion and lives
off their savings, but earns no income will seem poor on a Lorenz Curve. Over time people
accumulate wealth, meaning that wealth is typically less evenly distributed than income. This can
be even more so over generations as parents bequest their wealth to their children.
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Individual vs. Household Income
Lorenz curves record individuals’ income, but people typically live in households where they share
assets (e.g. house, car) and expenses (e.g. food). Lorenz curves do not take this into consideration.
Stage of Live
People have different incomes at different stages of their life, e.g. university student, young worker,
retired person. Retired people usually have low incomes and high wealth which is held in assets
such as their house or savings. On a Lorenz curve they show as poor regardless of their wealth. .
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topircvention:
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one for all and all for one
So if inequity is bad and long-term inequality leads to inequity ... what can
we do about it?
This topic looks at some of the economic and social policies that governments
can implement to reduce inequity in a country.
by the end of this topic, you should be able to...
o describe how the government uses taxes and transfer payments
to improve equity
o explain the concepts of horizontal and vertical equity
o describe how collective provision of goods is an alternative solution
to addressing inequity
o evaluate the equity and efficiency of government interventions
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remember - try the exercises and then read the notes to learn what you don’t know.
Exercise 5.3 Tax Attacks
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Calculate and discuss the tax issues in the questions below.
1. Why does the government collect taxes?
____________________________________________________________________________________________
____________________________________________________________________________________________
2. Use the marginal tax rates on page 7 to calculate the income tax payable by the following people:
a. Reg earns $16 000 per annum
Tax Payable: $ ____________________________
b. Mere earns $36 000 per annum Tax Payable: $ ____________________________
c. Phillipa earns $53 000 per annum
Tax Payable: $ ____________________________
d. Zelda earns $152 000 per annum
Tax Payable: $ ____________________________
3. For each of the people above, calculate their average tax rate. Write your answer in brackets alongside the
dollar amount of tax.
4. Explain how your answers to (2.) and (3.) illustrate the principle of ‘vertical equity’.
____________________________________________________________________________________________
____________________________________________________________________________________________
5. Calculate the total tax paid by the following two individuals in dollar terms and as a percentage of their total
income.
BEN THE BUILDER
DR. MURRAY
Income:
Income:
Wages
$75 000
Tax:
PAYE
$
PAYE
$4 950
$7 750
$1 200
$940
Fuel Excise Duty
Alcohol Excise Duty
$100
Alcohol Excise Duty
Rates and Water
Average Tax Rate:
$2 500
$
$200
Rates and Water
Total Tax Paid
%
$
GST
Fuel Excise Duty
Total Tax Paid
$150 000
Tax:
GST
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Wages
Average Tax Rate:
$4 200
$
%
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Tax cuts
were finally introduced by the Labour Government in 2008. Read the following resources and
answer the questions that follow.
While personal tax cuts deliver meaningful tax savings, they have been delivered while meeting the Government’s
four tests, specifically personal tax cuts:
• Will not lead to greater inequality in our society.
• Have been designed not to exacerbate inflationary pressures in the economy.
• Will not require borrowing to fund them.
• Will not require cuts to public services.
The Budget, 2008 http://www.treasury.govt.nz
1. Explain how personal tax cuts could lead to greater inequality in New Zealand?
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
2. Explain how the personal tax cuts referred to in the above resource might increase efficiency in the New
Zealand economy?
Tax Cuts and Government Spending
MARKET FAILURE (3.4)
____________________________________________________________________________________________
____________________________________________________________________________________________
3. Why could tax cuts lead to the government borrowing money to fund them?
____________________________________________________________________________________________
____________________________________________________________________________________________
Exercise 5.4
____________________________________________________________________________________________
____________________________________________________________________________________________
4. How could tax cuts lead to the inflationary pressures?
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
5. Rather than cutting personal tax rates, the government could have increased government spending. How
could the government increase its spending to improve equity in New Zealand?
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
____________________________________________________________________________________________
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Exercise 5.5
Monopoly
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Imagine a game of monopoly.
Imagine a game of Monopoly. At the start of the game, everyone is equal. All players are dealt the
same money (wealth) to start with and all have the same opportunities (no properties are preowned). But soon, after a few rounds, one or two players start to gain an advantage over the other
players. They earn more money with which to buy properties . . . from which they earn more money
to buy more property, etc.
1. Why do you think the game is called ‘Monopoly’?
____________________________________________________________________________________________
____________________________________________________________________________________________
The free market is similar, though of course infinitely more complex. It has the similar principle that the rules
are (or at least should be) the same for everyone. The rules in Monopoly are fair but they allow, even facilitate,
an unfair situation to develop between the players. So too the free market.
2. If the rules are fair, what economic principle is this an example of? ________________________________
3. Are the rules the same for everyone in society? _________________________________
4. Give one example of where the rules are the same for everyone and one example of where they are different.
• _________________________________________________________________________________________
• _________________________________________________________________________________________
Though the rules of Monopoly are fair, the game is designed to have an unequal outcome. The goal is to be
richer than your opponents. In society, inequality is allowed to occur but for different reasons. The chance
to get ahead provides an incentive for people to perform better, to work harder. Inequality can be good for
economic efficiency. However, prolonged inequality can eventually lead to inequity (not desirable).
5. People try to build up advantages to ‘get ahead’ in society. Give two examples of such advantages.
• _________________________________________________________________________________________
• _________________________________________________________________________________________
6. Explain how prolonged inequality may lead to inequity?
____________________________________________________________________________________________
____________________________________________________________________________________________
7. How would you change the rules of Monopoly to stop an unequal outcome?
____________________________________________________________________________________________
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____________________________________________________________________________________________
8. What mechanisms exist in society to make everyone more equal?
____________________________________________________________________________________________
____________________________________________________________________________________________
Answer the multiple choice questions below:
1. A tax system where the marginal tax rate is zero on income up to and including $10 000 and 20% on income
greater than $10 000 is . . .
a. regressive.
b.proportional.
c. progressive.
d. a lump sum tax.
2.
Horizontal equity refers to the situation where . . .
a. a country employs a progressive tax system.
b. everyone pays the same proportion of tax, regardless of their income.
c. everyone pays the same amount of tax, regardless of their income.
d. people with the same amount of income pay the same amount of tax.
3.
If the government were to raise the top tax rate for income earners, this would probably
a. increase equity and have no effect on efficiency.
b. reduce equity and have no effect on efficiency.
c. increase equity but reduce efficiency.
d. reduce equity but increase efficiency.
4.
Equity concerns are not addressed through the government’s . . .
a. stabilisation role.
b. allocative role.
c. distributive role.
d. regulatory role.
5.
Which of the following statements is correct?
a. Equality is a matter of fact and equity is a matter of opinion.
b. Equity is a matter of fact and equality is a matter of opinion.
c. More equitable means more efficient.
d. More equal means less equitable.
6.
Which of the following statements is most correct?
a. The free market solution is always equitable.
b. A progressive tax system aims for absolute equality of income.
c. Equality has the same meaning as equity.
d. The government intervenes in the market to increase equity.
7.
Progressive taxes and the targeting of benefits are aimed at . . .
a. increasing both equity and equality.
b. increasing equity and decreasing equality.
c. decreasing equity and increasing equality.
d. decreasing both equity and equality.
8.
The distribution of wealth is likely to be . . .
a. the same as the distribution of income.
b. less equal than the distribution of income.
c. more equal than the distribution of income.
d. made more equal by the abolition of capital gains taxes and inheritance duties.
9.
Which of the following statements is true?
a. Efficiency gains can only be achieved at the expense of equity losses.
b. There is no efficiency-equity trade-off.
c. Increased equity can only be achieved through increases in efficiency.
d. Increased efficiency may sometimes result in a reduction in equity.
10.A Lorenz Curve which is a straight 45 degree line shows . .
a. absolute equality of income.
b. absolute inequality of income.
c. a normal distribution of income.
d. a very high degree of taxation within the country.
Inequity & Inequality
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Exercise 5.6
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Government Intervention
notes
Why Does the Government Intervene to Minimise Inequity?
While the government is happy with inequality as it provides incentives for markets to work, it does
not like inequity ... or inequality that leads to inequity, especially in the long-term. Reasons for this
include:
Social Reasons
For social reasons, i.e. social justice, the government chooses to ensure everyone enjoys a basic
standard of living or quality of life. This includes a minimum level of income and access to basic
amenities (e.g. health-care, housing, education).
Economic Reasons
Because we choose to ensure that everyone has a minimum level of income, this creates a financial
burden on the government, which taxpayers must support. This is expensive to the government.
More importantly however, long-term inequality can lead to inequity. People on low incomes can
often not afford as good an education as richer people, e.g. attend university to study medicine, law,
engineering. This can mean they don’t have an equal chance (equity) to get higher paying jobs.
Therefore they earn less income and their children suffer the same fate.
Given that poorer people are no less intelligent than richer people, it is not good for an economy
that otherwise intelligent people are denied the opportunity to contribute to the economy as best
they can. This is a waste of resources and so allocatively inefficient.
The Distributive and Allocative Roles of Government
In regards to inequity and inequality, the government has two types of policies – distributive and
allocative. Typically these exist to target inequity – which may result from inequality.
Distributive Role of Government
This is where the government takes income or wealth from one group of people and transfers it to
another group. Examples of the distributive role of government include:
•
•
•
•
taxes
benefits and other transfer payments
targeted schemes (e.g. training subsidies)
regional development
Allocative Role of Government
This is where the government provides a good or service directly to the public. Examples of the
allocative role of government include:
• health-care
• education
• provision of infrastructure (e.g. roading)
Government Intervention: Direct and Indirect Taxes
Benjamin Franklin stated that “in this world, nothing is certain but death and taxes.” Taxes are a
compulsory payment to government that the government needs to pay for the goods and services
it provides.
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There are two main types of taxes that governments collect – direct taxes and indirect taxes. Direct
taxes are ones that are paid directly to the government by the person who owes the tax. Examples
of direct taxes include PAYE and Company Tax. Indirect taxes are those taxes that are paid to the
government via someone else, such as GST. Figure 5.4 summarises these two types of taxes.
Tax: A compulsory payment to government.
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Figure 5.4 ... Direct vs. Indirect Taxes
Direct Taxes
Tax is paid by the individual straight to
the government (e.g. PAYE, Company
Tax, Fringe Benefit Tax).
Indirect Taxes
Tax is collected by a third party (e.g.
shops, businesses) and then paid to the
government (e.g. GST).
Progressive vs. Regressive Taxes
In New Zealand the central government charges individuals different tax rates depending on their
income level. Table 5.1 shows the current tax ‘brackets’.
Table 5.1: NEW ZEALAND PAYE TAX RATES
Income Bracket
$
Marginal Tax Rate
0 - 14 000
10.5 %
$ 14 001 - 48 000
17.5 %
$ 48 001 - 70 000
30.0 %
$ 70 001 +
33.0 %
Under this tax system, an individual’s marginal
tax rate (the amount of tax paid on the next dollar)
rises as their level of income rises. Someone
earning $10 000 would pay a tax rate of 10.5%,
i.e. a total tax bill of $1 050. That person’s aftertax income would be $8 950. A person earning
$20 000 would pay 10.5% tax on their first $14
000 of income and 17.5% on her remaining $6
000. That equates to a total tax bill of $2 520.
Comparing these two people, the first person
pays an average tax rate of 10.5% ($1 050 ÷ $10
000 = 10.5%), while the second person pays
an average tax rate of 12.6%. Under PAYE,
both your marginal and average tax rates rise
as you earn more income. PAYE is called a
‘progressive’ tax.
This compares to a ‘regressive’ tax where the
average tax rate falls as you earn more income.
GST is an example of a regressive tax. As people
earn more income, they spend proportionally
less of their income. This means that though
someone who is wealthier may pay more GST
than someone with less income, as a proportion
of his or her income (i.e. average tax rate) it will
be lower.
Figure 5.5 ... Marginal and Average Tax Rate
Tax Rate
(%)
33.0
30.0
17.5
10.5
14 000
48 000
70 000
Income
($)
The graph above shows New Zealand’s marginal and average tax rates
as from 1st October 2008.
The solid line shows the marginal tax rates and the dashed line shows
the average tax rate. As can be seen, the average tax rate rises as an
individual earns more income . . . but more gradually than the marginal
tax rate.
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Progressive Tax: A tax where a person’s average tax rate rises as their income rises.
Regressive Tax: A tax where a person’s average tax rate falls as their income rises.
Vertical and Horizontal Equity
New Zealand’s tax system is designed on the belief that people on higher incomes can afford to contribute more
in the way of tax. This means that people are taxed on their ability to pay, while they receive benefits based on
their needs. This is the concept of vertical equity.
Horizontal equity is the notion that people should pay the same amount of tax regardless of how they earn their
income. Whether you earn income from buying and selling houses (capital gains), by trading shares, get paid
in cash or get paid with a free car and accommodation, you should pay the same marginal tax rate. This is the
reason for fringe benefit tax.
Vertical Equity: The belief that people on higher incomes should pay a higher tax
rate because they are more able to afford it.
Horizontal Equity: A belief that people should pay the same marginal tax rate on
their income regardless of how they earn it.
Government Intervention: Transfer Payments
The government can reduce extreme inequity by providing welfare payments to individuals, e.g. the unemployment
benefit, sickness benefit, etc.
Government Intervention: Allocation
The government also provides certain goods and services such as healthcare and education to all New Zealanders
to ensure that all households and individuals have equitable access to healthcare.
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Government Interventions - Equitable and Efficient?
The ‘Leaky Bucket’ Problem
Figure 5.6 ... The Leaky Bucket
A social welfare system, where the government takes income from one
group and distributes it to others – either directly in the form of cash
or indirectly through the provision of goods and services – will create
inefficiencies. These inefficiencies are sometimes referred to as the
Leaky Bucket problem, i.e. not all of the money collected from the
wealthy makes it into the hands of the beneficiaries.
Rich
Inefficiencies of a welfare system include:
Cost of Administration
To run a welfare system, the government must operate
an organisation to collect the tax (Inland Revenue
Department) and one to disburse it. This costs the
economy.
Reduced Incentives for Income Earners
Any progressive tax is going to reduce the incentive to
workers to earn a higher wage. Workers may choose not
to seek higher paid jobs or work overtime because their
extra income is reduced by taxes.
Poor
The ‘Leaky Bucket’ problem refers to the
inefficiencies of any government programme
that attempts to redistribute income.
Administration costs, reduced incentives for
workers, etc. mean that some of the income
collected from taxpayers will not make it to
the beneficiaries of the scheme.
Reduced Incentives for Private Producers
When the government chooses to provide goods and services such as housing, health-care and
education, the government is taking over the job that private firms would produce. As we’ve seen,
this is done because private firms may provide insufficient quantity at too high a price. Nevertheless
the government is reducing business opportunities for private firms.
Increased Dependency
People on the benefit or earning close to the minimum wage may choose to stay on the benefit,
rather than actively seeking work. This reduces the productivity of the labour force.
For these reasons and others, the government must always consider the trade-off between improving equity in the
country and affecting the allocative efficiency of the economy. Sales taxes, welfare systems, provision of goods
and service may well improve equity (and equality) in New Zealand but they can reduce the efficiency of the
economy.
Equity
Figure 5.7 ... Equity vs. Efficiency Trade-off
Efficiency
A
Efficiency
B
Equity
All government policies must balance the need to promote allocative
efficiency and increasing equity in society. At times, the two objectives are in conflict with each other.
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MARKET FAILURE (3.4)
UNIT 5
Inequality
Unit Content:
Understanding
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(poor)
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5.1 Describe and Show Inequality
• Equity vs Equality
• What’s Good About Inequality and Bad About Inequity?
• Using Lorenz Curves to Measure Inequality
• Limitations of Lorenz Curves
5.2 Government Intervention: Inequity
• Why Does the Government Intervene to Minimise Inequity?
• The Distributive and Allocative Roles of Government
• Government Intervention: Direct and Indirect Taxes
• Progressive and Regressive Taxes
• Vertical and Horizontal Equity
• Government Intervention: Transfer Payments
• Government Intervention: Allocation
• Government Intervention - Equitable and Efficient?
checklist:
I have ...
 done a mind-map of the main ideas (before and after I’ve done the work)
 tried (and marked) all of the exercises
 watched the online videos of this work
 read the notes and summarised the key ideas in the margins of the pages
 made (or downloaded from quizlet) flashcards of the key ideas and definitions
relevant current events and examples:
relevant events and examples for this unit are:
I didn’t really get the following parts of this unit ...
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... and I’m going to ask ___________________ to help me with this
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(good)
MARKET FAILURE (3.4)
tips
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assignments
This standard is internally assessed, and so you may be required to do an assignment. If you do, follow the
guidelines below to help you learn the material and get the grade (excellence) that you deserve.
clarify what you need to do
Read the assignment task carefully AND the marking schedule to
see what you must hand in to achieve this standard. Check whether
you must hand in ...
• original data?
• graphs and/or diagrams?
• a typed essay or a video podcast?
Talk to your teacher about this. Check your understanding with other students in your class.
check when you need to do the work
Most assignments have a number of deadlines. These may include:
• initial hypothesis / proposal
• first (or final) draft
• final assignment
The early deadlines are a chance to check with your teacher that you’re on the
right track ... so use them. Even if you don’t think you’ve got it right, ALWAYS
hand something in to get feedback.
ask questions
You may need to gather some data or information, and some theory. AT THE START ...
think about what information you will need.
• Who will you ask, or where will you read for this information?
• What questions will you ask?
If you get this part of the assignment right at the start, the rest will be much easier.
set a timeline ... and stick to it!
Draw a timeline of what you need to do - by when. Put this into
your diary ... your cellphone ... on your bedroom roof ... wherever
you’re going to see it - and do something about it!
Don’t ... don’t ... just don’t leave it all until two nights before the
final hand-in (submission) date.
final check
Try to finish early (two weeks is ideal). Then put your
assignment aside and don’t look at it for a few days. Then
read it right through and check that (1) it makes sense and (2)
meets the assessment criteria.
NOW GET GOING!
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90
MARKET FAILURE (3.4)
tips
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teachers
number of concepts
There are four types of externalities listed in the standard:
• externalities of production and consumption
• public goods
• imperfect information
(i.e. market dominance and abuse)
• inequitable income distribution
You must assess at least two of these.
Note:
merit and demerit goods are not direcly mentioned, however I have included them as part of externalities where they seem to belong best. Any analysis of merit or demerit goods must put them in the context of externalities, or possibly public goods.
style of assessment
You can assess this standard in a variety of ways:
• test(s)
• portfolio of work
• assignment
The important thing is that you can provide evidence of students’ understanding
of two or more micro-economic concepts ... as per the standard.
data / information
The standard does NOT REQUIRE students to use data or information with their analysis ... though this may be
a logical thing to include, e.g. if calculating a Lorenz Curve, or to compare the equity of policies.
If students do collect data, it should be genuine and relevant data. In this situation, students should provide
a bibliography so that you can check the validity of the data (and help them learn this skill for further study).
However, a bibiliogaphy is not a requirement of the standard.
achievement criteria
• achieve
Students must use theory (i.e. models such as
graphs) to explain two or more market failures and
a government intervention to address each failure ...
and evaluate the government policy with regard to
equity and efficiency.
• achieve with merit
Students’ understanding must be at a higher level
(“in-depth”) than for an achieved grade.
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• achieve with excellence
Same as merit ...
AND
Students make a justified recommendation for the best
government intervention based on equity OR equality.
MARKET FAILURE (3.4)
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