Why is economic growth important to an economy?

The greatest benefit of economic growth is a rise in the living standards. This is provided economic growth exceeds population growth, real GDP per capita will rise  a higher level of consumption of goods and services.

Rapid economic growth rate makes it easier to redistribute income to the poor (lower income group). When there is economic growth  income rises, the government can redistribute income from the upper income group to the lower income group without the need to raise tax rates, i.e. without penalising the
high income earners  the rich pays more taxes. In addition, economic growth  firms’ profit level rises  pays more corporate tax  a positive effect on government finances  boosting tax revenues and providing the government with extra funds to spent on programmes to alleviate poverty and close the income gap between the rich and poor.


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Cigarettes is a type of demerit good as it exhibits negative externalities from consumption. They are deemed to be socially undesirable. Negative externalities refer to incidental costs to third parties that are not taken into account by those who are involved in the activity.

A smoker will only take into account his private costs (price of the packet of cigarettes and own smoking-related health problems) and private benefits (satisfaction derived from smoking).

However, he does not consider the negative externalities that would be generated by his smoking (smoking-related health problems on passive smokers, costs incurred to society for having to provide healthcare for smoking-related health problems as well as clearing and maintenance costs for the litter).

The social cost from undertaking the activity is the private cost faced by the smoker as well as external costs accruing to third parties. Negative externalities will lead to divergence of private cost and social cost. With the presence of negative externalities, social cost will be greater than private cost.

Market failure is likely to exist because the negative externality is underpriced by the price mechanism. If cigarettes were provided through the free market, social costs of smoking exceed the private costs. Private optimum occurs at Qe where PMB (the benefit to the individuals of smoking the last unit of cigarette) equals PMC (the cost to the individual of smoking the last unit of cigarette).

The socially efficient level is where SMC=SMB i.e. at output Qs. Therefore, there are too many scare resources devoted to the consumption of cigarettes. There will be over-consumption of cigarettes because society values an extra unit of cigarette less than what it would cost society to produce it. Shaded area represents the welfare loss to society as a result of this over-allocation of resources. Society as a whole could be made better off if the current level of cigarettes were reduced to socially efficient level. (Qs)

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Refer to the news article:

Economics Tuition Discussion Topic: Explain why plastic carriers are a source of market failure.

  • Plastic carriers are typically non-biodegradable. The usage of plastic carriers is considered an activity that generates negative externalities, especially when carriers are used only once. Negative externalities arising from an economic activity are the incidental costs to third parties that are not taken into account by those who undertake the activity.
  • In deciding whether to accept and use an additional plastic carrier, such as for the purpose of containing goods he purchased, an individual will only take into account his private marginal cost and private marginal benefit. His private benefits include the convenience derived from the use of a light-weight carrier which is also water-proof. His private costs include the effort taken to dispose of the carrier after use.
  • Typically, many shoppers do not incur extra cost for the use of plastic carriers as many shops do not explicitly charge for carriers.
  • However, this individual does not consider the negative externalities that would be generated by the use of plastic carriers – the mess in generated in public areas due to irresponsible disposal of such carriers that other citizens have to endure; toxins entering the atmosphere when the plastic carriers are incinerated which may be inhaled by citizens. These are not taken into consideration by the individual using the carriers.


Explain over-allocation of resources in the case of excessive usage of plastic carriers

  • Based on the price mechanism, the market equilibrium level of plastic carrier usage is where private marginal cost (PMC) equates to the private marginal benefit (PMB). Individuals who use the carriers do not take into account the negative externalities arising from their usage.
  • Due to the presence of negative externalities as explained above, the social marginal cost (SMC) is greater than PMC at the market equilibrium level of plastic carrier usage. As such, at the market equilibrium, society values the usage of a carrier less than what it would cost to society. The socially efficient level of plastic carrier usage is where social marginal benefit equates to SMC i.e. the external costs are taken into account. The price mechanism thus over-allocates resources to the usage plastic carriers i.e. there is over-usage of plastic carriers whereby the market equilibrium level of plastic carrier usage exceed the socially efficient level.
  • This over-usage of plastic carriers leads to problems with waste management and contamination of the atmosphere, resulting in a loss of welfare to society, otherwise known as deadweight loss.

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Economics Essay Question: Explain possible factors that could affect the price of private property.

Demand factors

  • Increase in population size due to influx of foreigners: as there are now more buyers in the market for private property, demand is likely to have increased, leading to higher price
  • Income level: as economies begin to recover from the global crisis, it is likely that consumers’ incomes will increase. With the increase in income, demand for normal goods and luxury goods – such as private property – would increase. As demand for private property is likely to be income elastic – given that private property can be viewed as a luxury good and buyers are likely to spend a large proportion of their income on it – the increase in demand following the recovery may be substantial leading to higher price
  • Ease of securing housing loans and low interest rates: As home buyers are highly likely to require a loan for purchase of property, low interest rates would mean low cost of borrowing and that could increase demand for property leading to higher price

Supply factors

  • Increase in developers’ cost of production (e.g. higher sand cost) and can lead to a fall in supply leading to higher price
  • Expectations of future developments in property market:
    • With a positive outlook of the global economy, developers may wish to increase supply of property in future, which can leading to lower price
    • With higher competition from rival developers and the need to undertake product differentiation which is likely to be costly, the increase in supply may be moderated.
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