Complete Economic Environment
& Business Unit 4 Revision
Quick Recap Notes On Unit 4
A2 Level

Do Markets Always Work?
Section 1

How Markets Work
• Profit Signalling Mechanism is the feedback loop that
controls the allocation of resources in an economic
system.
• Dynamic Markets are those which are constantly
changing, countless decisions are made by buyers and
sellers after the nature and behaviour of the market.
• Innovation can lead to a shift in the allocation of
resources. It is needed to create new products for
consumers and adapt to changing requirements due to
constantly changing markets.
Ch.1

Market Failure
• Market Failure is a less than optimal allocation of resources.
There are many reasons for market failure, including:
1. Some goods and services may not be produced at all, or to
the quantities that would most benefit society
2. Market externalities may occur, when production and
consumption of goods have positive an negative effects
3. Imperfect competition may lead to x-inefficiency
4. Monopolists may try to dominate markets and exploit
consumers
5. Markets may be slow to react to disequilibrium
6. Imperfect knowledge or uncertainty
Ch.2

Market Failure
• Merit Goods are seen as socially desirable, and would be under
produced if left to the market to provide (e.g. NHS)
• Under Production occurs when there are significant benefits to
society from providing goods and services, even if consumers
cannot pay the free market price for them.
• Efficiency involves creating and selling a product at a price that
buyers are willing and able to pay.
• Public goods are provided collaboratively by the community or
government. Public goods can be non excludable (one they are
available, no one can be excluded from benefitting such as road
pavements) and non rivalry (individuals obtain benefits but this
does not stop everyone else from benefitting.
Ch.2

Market Failure
• Public goods are subject to the free-rider problem. As
they cannot be provided efficiently by the private sector,
they are provided by the public sector and
consumed/paid for collectively.
• Governments may intervene in markets in order to
provide goods and services, funded through taxation.
This can, however, lead to market failure.
• Regulation is a method used to control markets and
prevent companies from exploiting consumers through
higher prices. (e.g. Ofgem and the energy market)
Ch.2

Market Failure
• Demerit Goods involve significant social costs are
are likely to be over produced and over consumed.
• Equity involves a fair distribution of income and
wealth.
• Inequality is an aspect of market fail as poverty
entails significant social costs. This can be
improved with the use of income redistribution,
using the tax system and the provision of merit
goods.
Ch.2

Externalities
• Private benefits are received by a firm or individual
when goods and services are purchased.
• Private costs are those paid by individuals and firms
when buying goods and services.
• External benefits reflect positive side effects from
firms using products they have paid for.
• External costs reflect the side effects of a firm or
individual using a product, having a negative effect
on third parties.
Ch.3

Externalities
• Social benefits are the total benefits arising from producing
goods and services.
• Social costs are the total costs of producing goods and
services.
• Externalities include all the costs and benefits that affect third
parties. Whenever the externalities associated with
production or consumption are significant, there is market
failure.
• If market prices and profits do not accurately reflect the true
costs and benefits to society of a particular business, then
there is a misallocation of resources.
Ch.3

Are Externalities Acceptable
• Not all externalities are negative, positive externalities
can benefit society as a whole. These goods are often
under produced and under consumed.
• Marginal social benefit is the amount that society as a
whole gains from the consumption of one more item.
• Marginal social cost is the cost to society as a whole
from the consumption of one more item.
• Efficiency is achieved at the point at which the
marginal social benefit curve intersects the marginal
social cost curve.
Ch.4

Are Externalities Acceptable
• Increasing consumption to the socially optimum level
provides welfare gain.
• Manufactures are interested in maximising profits,
therefore pollution is not their main concern. They will
choose to produce at a level of output at which the
extra cost of producing one more item is equal to the
extra sales revenue.
• In order to ensure there will not be too many external
and private costs in society, government intervention
may be required to reduce consumer spending.
Ch.4

Are Externalities Acceptable
• Cost benefit analysis involves investigating all the
private and external costs and benefits of a possible
project.
• The government is responsible for many services
within society, including health and education,
therefore they must decide on the best allocation of
resources since funding for investment is limited.
• The government may use cost benefit analysis to
assess the social costs and benefits for a particular
project.
Ch.4

Are Externalities Acceptable
• Cost benefit analysis has some limitations, including:
1. The fact that situations will change, therefore a
range of estimates must be based on different
assumptions.
2. Social costs and benefits cannot also be valued in
money terms, and therefore factors should be
identified clearly.
3. The analysis is based upon guesswork – it is very
hard to quantify the costs and benefits of a
particular project.
Ch.4

Government Policy
• Pollution and other external costs may arise during
the production process, buy also through the
consumption, use of disposal of goods.
• Governments can create regulations requiring
producers to stop using processes that generate
negative externalities. This can be achieved
through the use of clean technologies – which
raise costs, leading to higher prices for consumers.
This can result in a loss of international
competitiveness.
Ch.5

Government Policy
• Regulation has reduced some external costs, such as
health and safety. Some developed nations may use
strategies to prevent pollution, such as providing
financial assistance to developing nations to cut
emissions.
• Another strategy could be use is to impose
environmental charges. Environmental charges are
government imposed fees for using natural resources.
• Green taxes are taxes on output in order to compensate
for negative effects of production and consumption on
the environment.
Ch.5

Government Policy
• Green taxes can be adjusted to reflect the amount of pollution.
The effect of green taxes is to increase the price of goods.
• However green taxes and subsidies are not a perfect solution.
Taxes are likely to be transferred into the high prices set for
consumers.
• There are equity issues concerned with regressive tax systems
used for consumers to pay for goods. This can cause in unequal
distribution of wealth, negatively impacting the economy and
growth.
• Public attitudes can determine the environmental causes of a
company’s actions. Educating customers can exert pressure on
manufacturers to modify products through market forces.
Ch.5

Government Policy
• A Carbon Pollution Tradable Permit works by giving firms
maximum levels of carbon that they can emit during production.
• These have grown in popularity, combining market incentives
with command and control measures.
• If a firm is efficient and reduces its pollution level below the
permitted limit, then it can gain a credit which can be sold to
less efficient producers who exceed their permitted limit.
• This command and control system determines the overall level
of pollution and the market mechanism will distribute the right
to pollute.
• The Emissions Trading Scheme of tradable permits that can
operate on an international level with countries trading quotas.
Ch.5

Should Markets Be Regulated?
Section 2

Regulation
• Competition is beneficial for consumers, it increases choice
and encourage firms to charge reasonable prices. If
consumers are unhappy with one supplier, they simply switch
to an alternative. The less competitive supplier will have to
cut costs and lower prices in order to regain market share.
• Big companies with large market power may have less
incentive to produce efficiently – customers are paying more
for products than they really should.
• These firms have large economies of scale and this can help
raise standards of living for people. It is likely these firms will
look for international markets to locate productions in order
to cut costs.
Ch.6

Regulation
• A Merger occurs when one company takes over another and
the two agree to merge.
• Where there is market power, there is market failure – the
allocation of resources will be affected. In a monopoly,
consumers may get a smaller quantity of a product for a
higher price. In an oligopoly, there may be interdependence.
• Interdependence refers to the situation where competing
firms watch one another’s actions and make price/production
decisions in light of competitors decisions.
• These growing market powers may prevent businesses from
operating responsibly, so regulation is needed.
Ch.6

Regulation
• Anti-competitive practices include collusion and
other restrictive practices. Businesses acquire market
power which gives them control over their markets
using pricing and marketing strategies.
• Collusion is when competing producers agree to
avoid any action that would make competition stiffer.
• A Cartel is an agreement not to compete with two or
more producers within an industry.
• Collusions and cartels are both illegal as they are
anti-competitive practices.
Ch.6

Regulation
• Tacit Collusion is when competing firms avoid price
cutting strategies in order to charge prices that
guarantee good profits.
• Price wars involve substantial price cuts as each
competitor tries to increase market share.
• Competition can lead to price wars, where each
competitor tries to undercut other producers in order to
increase market share. Companies may try to adopt non-
price competition to differentiate their brand or cut
prices through predatory practices in order to regain
market share.
Ch.6

Regulation
• Cartels collude by:
1. Restricting Output: typically involving negotiation
and agreement between business
2. Market Sharing Agreements: make each business a
dominant supplier to a particular part of the market
3. Price fixing: involves an agreement between
competitors to sell the same product or service at
the same price
4. Bid Rigging: firms have agreed between each firm
that will win the contract
Ch.6

Regulation
• Other restrictive practices include:
1. Full-line forcing: involves forcing a purchaser to buy the
full range of goods offered
2. Tie-in sales: the purchase of one product is made
conditional on the sale of another
3. Resale price maintenance: refusing to supply a product
unless it is sold at an agreed price.
4. Refusal to supply: threat to retailers that will impact
profits
5. Discriminatory Pricing: some outlets offer better prices
than others.
Ch.6

Regulation
• Natural Monopolies are when it would be wasteful for more
than one company to supply a product (e.g. water supply).
They have high infrastructure costs, leading to a high cost of
duplicating the services which would be wasteful.
• There is a strong incentive for natural monopolies to abuse
their market position to increase profits and enhance power.
This type of abuse raises pressure from consumers for
government regulation.
• Privatisation is a method that was introduced in order to
bring an element of competition, however anti-competitive
practices made it clear that regulation is necessary.
Ch.6

Regulation
• Natural monopolies avoid new firms from entering the
market. In order to attract newcomers, conditions had to be
created to overcome barriers to entry. This enabled
governments to encourage firms to price competitively and to
reduce the amount of subsidies paid to industries.
• Market power can give businesses opportunities to raise
prices, leading to falling consumer spending power.
Competition has an important role in raising purchasing
power and standards of living.
• Competition makes businesses more innovative and versatile,
increased pressures from rival firms. This is likely to reduce
profitability for companies.
Ch.6

Government Action
• The Competition and Markets Authority gathers information
about the competitiveness of markets and responds to
complaints about anti-competitive practices.
• In the short run, competitiveness can give consumers lower
prices and greater choice, whilst in the long run it may enhance
a country’s international competitiveness.
• Consumer production laws work in combination with
competition law to protect public interest. It ensures businesses
cannot exploit consumers to reap large profits.
• Often, monopolies lead to consumers facing higher prices and
lower levels of consumption than it would be if the market was
competitive.
Ch.7

Government Action
• Sunk costs are costs that have already been paid for and
cannot be redeemed in the event of the business closing
down or failing to make a profit.
• Public Interest means the interests of society as a whole.
• The CMA have the power to restrict large organisations
from exploiting consumers, such as by:
1. Investigating how mergers can restrict competition
2. Conduct studies and investigations
3. Initiate criminal proceeding for those in cartel agreements
4. Undertake regulatory references and appeals
Ch.7

Government Action
• The government had created the CMA as strong competition
policy can encourage firms to strive for greater productivity
and high performance leading to enhanced economic growth.
A competitive environment may give businesses the
confidence to invest in the UK.
• Mergers who have more than 25% of the market, defined as a
monopoly, would be investigated to ensure the market is
sufficiently contestable to allow for meaningful competition.
• Regulatory Capture occurs when regulators begin working for
businesses instead of consumers. (e.g. Ofgem working with
British Gas instead of protecting consumers)
Ch.7

Effects of Policies
• Over the last 10 years, competition policy has
strengthened. Measures such as the 2002 Enterprise Act
have contributed to a stronger stance to unfair competition
in order to protect the consumer. The lure of monopoly
profits, however, impact regulation within industries, with
bribes allowing businesses to get away with unfair
practices.
• It is argued that government cannot predict the effect of a
merger with any certainty, and therefore intervention may
result in the blocking of mergers which could had led to the
rationalisation and price cuts in public interest.
Ch.8

Effects of Policies
• The government offering incentives for whistleblowing has
tempted a number of companies which have engaged in
anti-competitive practices to come forward.
• International trade has helped market become more
competitive. Businesses that cannot expand in domestic
markets due to saturation can expand through export sales.
• Government Failure is when government intervention
makes a situation worse rather than better. This can lead to
resources not being allocated efficiently as the market may
best know how to allocate resources, worsening the market
distortions.
Ch.8

Effects of Policies
• Small, efficient competitors can be protected by
competition law, especially when there are large
barriers to entry and economies of scale to contend
with.
• When a number of small businesses are competing,
together they help to create a pool of highly skilled
people who can innovate and develop new markets.
The competition law protects these smaller
businesses who may be concerned with unfair
competition.
Ch.8

Can The Government Control
The Economy?
Section 3

Macroeconomic Problems
• In times of a recession, consumers quickly cut back
spending in order to save more. Banks reduced their
loans to businesses and stopped lending to each other
whilst unemployment rose fast. Governments move to
bail out their weakest banks by borrowing to buy
significant shares.
• Leakages reduce the demand for domestically produced
goods through savings, taxes and imports.
• Injections increase demand for domestically produced
goods through investment, government spending and
exports.
Ch.9

Macroeconomic Problems
• The Multiplier Effect is when more is gained from
society than the initial amount spent. If leakages are
low, the multiplier will have a greater effect of
aggregate demand.
• Full Employment Output or full capacity output, is the
maximum potential output for the economy as a
whole. An increase in aggregate demand will bring the
economy closer to full capacity output. Governments
can stimulate aggregate demand by using policies to
stimulate growth and employment or to dampen down
inflation.
Ch.9

Macroeconomic Problems
• Governments have four principal objects to ensure
the economy will stay strong, this includes:
1. Sustained economic growth
2. Stable prices
3. High employment rates
4. Sustainable position of balance of payments
• The Balance of Payments record all transactions
with the rest of the world over the course of a year.
Ch.9

Macroeconomic Problems
• Aggregate demand can be influenced by interest
rate changes. Lower interest rates – an expansionary
policy – can reduce the cost of borrowing.
• This may encourage consumers to increase levels of
debt to support higher levels of consumption or
encourage firms to borrow more in order to invest in
capital equipment.
• Interest rates can also be used as a contradictory
policy in order to cause a reduction in aggregate
demand.
Ch.9

Macroeconomic Problems
• Monetary Policy uses interest rates to vary the cost of
borrowing and influence the level of aggregate
demand.
• Bank Rates are interest rates which the bank of
England charges banks when they need to borrow.
• Fiscal policy involves changes in taxation in order to
influence government spending and public borrowing.
• A Public sector deficit occurs if government spending
exceeds tax revenue and borrowing is needed to cover
the costs.
Ch.9

Macroeconomic Problems
• Expansionary Policies are used to shift aggregate
demand to the right, through reduced interest rates, tax
cuts and increased public expenditure.
• Contractionary Policies include higher interest rates, tax
increases and expenditure cuts.
• A Trade-Off is when two objects cannot be met. Policies
to achieve faster growth may lead to lower
unemployment, however may increase inflationary
pressure and contribute to an increase in imports.
Policies that are designed to reduce inflation are like to
lead to slow growth and increase unemployment.
Ch.9

Macroeconomic Problems
• The four main macroeconomic objectives (inflation,
unemployment, growth and balance of payments) are
closely linked to the total level of spending in the economy.
Macro-economic policy influences economic activities.
• The government can use fiscal policy to influence
aggregate demand as they are a large employer and
purchaser of goods and services.
• Monetary policy is conducted by the Bank of England.
• Supply side policies work to expand output by making
markets work more efficiently, and can be useful in
promoting economic growth.
Ch.9

Macroeconomic Problems
• Economic growth refers to the annual increase in income and
output for the economy as a whole.
• Real GDP Measures the value of goods and services production
within the economy, adjusted for inflation.
• Stimulating economic growth has important aspects:
1. There must be sufficient aggregate demand to make it worth
producing more
2. Growth is achieved by increase the productive capacity of the
economy, which can involve the quality of inputs, such as
production, land, labour and capital.
3. Aggregate demand can increase by using existing resources more
effectively and by innovation and technological change.
Ch.9

Macroeconomic Problems
• Production Innovation occurs when new and
improved products are bought to he market.
• Process Innovation involves the use of new
technologies in the production process.
• Human Capital refers to the skills, training and
experience of the workforce.
• Immigration stimulated production by providing an
easily available source of labour, including people
with scarce skills.
Ch.9

Macroeconomic Problems
• The government can help the growth process by:
1. Controlling firms through regulation and
competition policy to ensure competitiveness
2. Education and training improved to prevent
skills shortages through investment
3. Offer tax breaks and grants to stimulate
investment
4. Fund research and development to facilitate
technological improves and process innovation.
Ch.9

Macroeconomic Problems
• The long term trend rate of growth is the rate at which
the productive capacity of the economy can be expanded
through investment in physical and human capital and
the development of new products and technologies.
• Negative growth often calls for expansionary polices to
stimulate the economy, contributing to the multiplier
effect. The injection of government spending into the
economy will have a ripple effect. Higher sales of one
firm will lead to increased sales of another. This will
income will increase demand and consumption in the
economy.
Ch.9

Stabilisation Policy
• The threat of inflation will trigger moves to reduce
aggregate demand. In a recession, demand may fall and
cash flow may suffer. Firms may become increasing
dependent on bank loads in order to survive, leading to
falling profits and investments.
• Contractionary policies will be used to tack a boom if it is
leading to overheating in the economy and inflation is
accelerating.
• Expansionary policies will be used to stimulate an
economy that is stagnating.
Ch.10

Stabilisation Policy
• Claimant Count unemployment includes all the people
who register for unemployment benefits.
• LFS (Labour Force Survey) unemployment is everyone
who are willing and able to work but do not have a job.
• Cyclical unemployment occurs during a recession. This
develops as a consequence of falling aggregate demand.
• Unemployment can have significant social costs to
society. Businesses try to avoid redundancies and cut
back recruitment during a recession. Expansionary
policies can be used to stimulate growth and
employment within the economy.
Ch.10

Stabilisation Policy
• Hyper Inflation can cause households to lose confidence as
the value of savings and dramatically fall. Inflation can cause
uncertainty and make businesses planning difficult.
• Stable prices are important for a company’s
competitiveness. Inflation raises domestic producer’s prices,
making them less competitive on an international level.
• Supply Constraints is when all the available resources are
fully employed and the economy is close to full capacity
output.
• Demand Inflation is a general rise in prices caused by
excessive aggregate demand.
Ch.10

Stabilisation Policy
• Cost Inflation is caused by rising costs of production.
• Stagflation is a combination of stagnation (zero or no
economic growth) with inflation (a general rise in prices).
• There is normally a trade off between inflation and
unemployment, but with stagflation they are both rising
at the same time.
• Quantitative Easing is a way of providing additional
monetary stimulus to reduce the impact of recession.
This is a way of increase the supply of money into the
banking system.
Ch.10

Supply Side Policies
• Supply side policies are used to make markets work more
efficiently. They are intended to increase the average rate of
growth, such as by developing a flexible labour force,
improving training & education, strengthening competition
policy or providing incentives to work.
• In the long run, aggregate supply can be made to expand be
investment in human and physical capital, new technologies
and better efficiency.
• Healthy economies are constantly changing in response to
the shifts in the patterns of demand and new technologies.
The social costs of unemployment make many supply side
policies cost effective.
Ch.11

Supply Side Policies
• Commonly used supply side policy strategies include:
1. Regulating markets to prevents distortions
2. Deregulating markets or privatising parts to increase
competition
3. Changing the tax system
4. Directing funds towards reducing supply constraints
• The poverty trap is when unemployed people are better off
claiming benefits than entering full time employment. Those
who are employed must pay tax and national insurance, so for
some they will gain more by claiming benefits. The minimum
wage could be used an an incentive to get people to work.
Ch.11

Supply Side Policies
• Corporation tax are taxes on business profits.
• Changes in demand and new technologies affect what is
produced. Nimble businesses that can adapt to change can reap
large profits, whilst those who are inefficient may face falling
demand, leading to redundancy through frictional and structural
unemployment.
• Supply side policies can be used to reduce the level and costs of
structural unemployment over the long run.
• Occupational Immobility of labour is when labour do not have
the correct skills for the jobs that are available.
• Geographical Immobility of labour is when labour cannot move
to areas where jobs are available.
Ch.11

Supply Side Policies
• Policies that focus on education and training have
the potential to increase productivity and reduce
labour costs (and reduce structural unemployment)
• Policies that encourage competition can help
businesses compete in international markets
• Public funding of research & development can bring
cost saving technologies
• Changes to minimum wages and tax systems have
increased incentives to work.
Ch.11

Economic Policy
• Interdependence is when the actions of one
company influence the way other businesses make
their decisions.
• The Chinese economy provides a huge market for
developed economy exports. Domestic producers
who did not adapt to change and take advantage of
new, growing markets had to close down.
• Trade negotiations have more recently been used in
order to reduce trade barriers, in turn prompted
growth.
Ch.12

Economic Policy
• Deficits can be caused by a lack of competitiveness.
Domestic exporters goods can become too expensive to
compete, leading to a fall in demand and profits.
• In order to help exporters, a depreciated currency
enables them to become more competitive, making their
goods cheaper. An economy that is very competitive may
accumulate a big current account surplus.
• Globalisation has bought greatly increased specialisation
to countries, which has been seen to encourage
economic growth.
Ch.12

Economic Policy
• A Shock is an unpredictable or unexpected
event.
• Increased trade and Globalisation have both
entailed huge international capital
movements. Countries who have not been
making risky loans had suffered as they relied
on exports. These countries faced large falls in
aggregate demand.
Ch.12

Policy Effectiveness
• Successful policy making means planning now for problems that
may occur in the future, however economies remain vulnerable
to shocks.
• Structural changes are necessary to resolve long term problems,
however have high social costs – so improvements are needed
in policy making to ensure markets work more efficiently to
boost economic growth.
• Barriers such as protectionism prevents competition on global
markets.
• Multinationals supply many cheap, effective products that are
valued, however they try to protect themselves by bribing
government officials, making them too powerful.
Ch.13

Policy Effectiveness
• Suppliers of products with negative income elasticity
of demand do better when incomes are falling.
Cheap sources of tourism can benefit as substitutes
for expensive experience that will make people feel
unable to afford on reduced incomes.
• Within a recession high end restaurants and luxury
goods are likely to become vulnerable. Firms that
export, however, benefit from the depreciated
pound, making it easier to compete abroad.
Ch.13

Should The Government
Intervene In Society?
Section 4

Income Redistribution
• Income is a fair distribution of income and wealth.
• Wealth is the total value of everything a person owns,
less any debts.
• A problem with inequality is that it leads to poverty.
• Absolute poverty is when incomes are insufficient
enough to provide basic necessities.
• Relative poverty occurs when income is insufficient
enough to participate fully in society. Poverty can occur
because of low incomes or employment – which has
known effects if increased health risks.
Ch.14

Income Redistribution
• Structural changes have affected employment within
the UK – those with scarce skills and abilities have seen
pay grow. Through new jobs have been created, those
without skills get lower paid jobs and more difficulty
finding jobs, contributing to the widening gap between
the richest and poorest in society.
• Businesses have to ensure households as they provide
both labour and consumption. Depending on the
current economic climates, these variations in income
and employment determine the demand for goods.
Ch.14

Income Redistribution
• Wide disparities in income are generally associated
with low wages. This may allow businesses to employ
people at a low cost.
• Capital and enterprise may be scarce in some
countries, so the share of revenue going to owners and
managers may be high.
• Low levels of education and training could be a
deterrent as businesses need people with skills.
• Extreme poverty can create social costs, risking
political instability and creating uncertainty.
Ch.14

Income Redistribution
• Regressive taxes take a higher percentage of
total income from poorer people and vice versa.
• Progressive taxes that a higher percentage of
total income from the wealthiest and vice versa.
• The redistribution of wealth can directly impact
the poorest, who depend on state healthcare
and education. This allows them to have a
better quality of life.
Ch.14

Income Redistribution
• Businesses want to hire people best suited for a job and
will pay the rate that motivates and attracts people they
want.
• Unskilled employees have little productive potential.
Employers can simply substitute capital for labour if
wages look too high.
• For the economy, businesses are a direct source of tax
revenue. The tax system aims to redistribute wealth, but
businesses may adopt transfer pricing or tax evasion.
This gives less tax revenue for the government, despite
redistribution reducing significant social costs.
Ch.14

Government Intervention
• The EU is committed to create a level playing field,
and so apply their regulations and rules to all
businesses to protect consumers and employees.
Governments can intervene in the following ways:
1. Regulation and legal restraints
2. Projects financed by government funds that address
specific problems and needs.
3. Incentives that work via tax breaks or direct
subsidies to provide rewards that lead to change.
Ch.15

Government Intervention
• Market forces can be a powerful element in the
process of securing economic growth as it has the
potential to improve standards of living.
Governments may encourage dynamism to ensure
that all individuals have opportunities to benefit.
• Unemployment benefits can leave people with little
incentive to work as they may be worse off through
paying income tax and national insurance.
• The Poverty Trap is when people are better off
claiming benefits than working.
Ch.15

Government Intervention
• The government tries to create incentives to
work, including:
1. Introducing the national minimum wage as a
strategy to reduce poverty and created
incentives to work.
2. Working families tax credit ensured that most
people who are not well paid can be better off
when they are at work. It is argued that these
two factors have made work more attractive.
Ch.15

Government Intervention
• There are some who play the benefit system to
reach an acceptable standard of living without
working. Benefit cheats who are officially
unemployed may take up employment for
undeclared jobs as additional capital stimulus.
• High taxes may create a disincentive to work for
some businesses who have to work harder as more
of their profit may become taxed. This could make
the UK a less attractive market for wealthy
consumers and businesses.
Ch.15

The Environment
• Environmental policies are used by governments in order to control
environmental damage and reduce the increasing levels of climate
change. Some methods used include:
1. Regulation to fix levels of output
2. Extending property rights
3. Entering into international treaties
4. Issuing pollution permits
5. Subsidies to encourage green technologies
6. Taxes on emissions
7. Legislation to enforce modified behaviour
• Extending property rights mean giving people more control over
their assets.
Ch.16

Business Implications
• The pattern of demand for goods and services are
always changing. Growing demand for some goods
usually means reduced spending on others.
Changing tastes and preferences, income and new
technologies can impact prices as well as new
product development.
• Innovation will have a competitive advantage when
governments may intervene in markets as
companies can adapt their products in profitable
ways.
Ch.17

Business Implications
• Some businesses can adapt to market change and enable
them to take regulation and government intervention
swiftly into their operation. These businesses would be
market orientated, making research and innovation a high
priority. Their adaptability is a key element that allows
them to maintain competitiveness in world markets.
• Some businesses may lobby governments, leading to a
less healthy aspect of government intervention.
Regulatory capture may become a problem therefore
regulators must hire staff that are knowledgeable to the
market.
Ch.17

Business Implications
• Increase in trade associated with Globalisation as bought
significant benefits.
• Trade increases the potential size of the market for
businesses that can export, making innovation worthwhile
as costs of research can be spread over a wider market.
This will open up more trade opportunities and to reap
economies of scale that can increase competitiveness.
• Environmental regulations are aimed at reducing the
damage to the environment and saving resources. Their
increased costs can make businesses lose their
international competitiveness.
Ch.17

Business Implications
• Influencing behaviour by using incentives or legal controls
can discourage activities that have high social costs. This
may lead to resources being used to evade controls.
• Redistributing income through tax systems reduces
inequality. Intervention may discourage investment into
the UK, such as through higher corporation taxes.
• Supply side policies can be used to provide training for
unemployed people.
• Demand side policies may stimulate spending and
economic activity in a recession, however it must not
increase aggregate demand with the worry of inflation.
Ch.17

Business Implications
• Competition law can be used to ensure businesses are
stimulated by the need to deliver goods that are good
value for money. However they must use their profits
to innovate new ideas, which could improve standards
of living.
• Employment and consumer protection laws ensure
businesses treat employees and consumers fairly. It can
lead to improved standards of living, however it may
reduce the incentive to recruit as, for example, a risk of
injury could be very expensive.
Ch.17