Unit 1 Basic economic ideas and resource allocation

The fundamental economic problem arises because resources (inputs used to produce goods and
services) are scarce while people’s wants and needs are unlimited. Wants are unlimited because
there is always likely to be something else that a person wants whatever their income.
What to produce?
How to produce?
For whom to produce?

The fundamental economic problem means that individuals, firms and governments have to
make choices due to the scarcity of resources. Making a choice involves taking decisions on how
to allocate scarce resources between many competing uses.

Opportunity cost is the cost of the choice in terms of the next best alternative that gave up.
Positive statement: A statement that is based on facts or actual science
Normative statement: A statement that is based on economist’s opinion or value judgement and
which cannot be proven.
Time periods:
1.The short run is a time period in which it is possible to change only some inputs
2.In the long run, it is possible for all factors of production or resources to change.
3.The very long run is where not only are all factors of production variable but all other key inputs
are variable.Key inputs can include technology, government regulations and social concerns.
Factors of production are the means by which an economy produces a whole range of goods and
services to meet the needs of its population.
1.Land is a natural resource.---Reward:rent
increase quantity: new discoveries, land reclaim action
increase quality: fertilizers, irrigation system
2.Labour is the human resources available in any economy----Reward: wage
increase quantity: loosening policy that limits immigration, enact policy that encourage birth rate
increase quality: investment in healthcare(maintaining their health condition), training, education
quality of labour---human capital
3. Capital is a type of physical&man-made resource including anything that can be regarded as
made by humans to aid production.----Reward: interest
increase quantity:government subsidies/grants, tax exemption
increase quality:education, training
4.Enterprise is a form of human capital. -----Reward:profit
It organises the other factors of production so as to produce goods and services.
It refers to the ability and inventiveness of the entrepreneurs who are prepared to take risks.
Specialisation refers to a situation where individuals and firms, regions and entire economies
concentrate on producing some goods and services rather than others.
Division of labour：Large numbers of workers within very large production units has allowed the
process of production to be broken down into a series of tasks.

Entrepreneurs are individuals who:

1.organise production by putting together the various factors of production to form a business
opportunity
2.are prepared to take risks by using their own money or by borrowing from banks or other
people to try to achieve their ambitions. The risks are considerable and if their plans fail, they will
lose their own money and that of others.

Economic System:
1. Market economy is an economic system where resources are allocated through market
mechanism/market forces. Most resources are owned by private resources.

Price mechanism:The starting point is that there is excess supply in the market – too much is being produced compared to demand.

Excess supply results in goods being stockpiled in shops and warehouses. To encourage individuals to buy and so clear the excess stocks,

firms reduce the price. This may clear the excess supply, but it is likely to

mean that some firms which previously produced the good will now no longer be willing to do so. With less supply in the market, the

price rises. In time, assuming no change in demand, firms may choose to reenter the market. The increase in supply will lead to a fall in

price and the whole process will continue. Therefore, prices and the self-interest

of individuals and businesses act as a guide to the decisions that have to be made.

2. Planned economy is an economic system where resources are allocated through government
central plannings and most resources are owned by public sector.

3. Mixed economy is an economic system where resources are allocated both by market
mechanism and government plannings, there are government interventions to address market
failure and resources are owned by both private sector and public sector./In a mixed economy,
both the private sector and public sector have a part to play in the allocation of resources.
Advantage:
The government intervenes where necessary to provide public goods, regulate demerit goods,
and reduce inequality, while the market operates freely in most sectors. The main advantage of
this system is that it can balance efficiency (from the market) with equity (through government
intervention). It allows the private sector to drive innovation and productivity while the state
addresses social welfare.
Disadvantage:
Market failure can remain a problem if the government does not intervene effectively, especially
in areas like pollution, housing, or healthcare. Additionally, there can be conflict between public
and private interests, and it may be difficult to find the right balance of intervention—too much
government control may reduce efficiency, while too little may lead to inequality and neglect of
public needs.

Evaluation 的点： government failure 的程度

Production possibility curve (PPC):

The PPC shows the maximum level of output of each of the two goods that can be produced.
Production possibility curve shows all combinations of two goods that an economy is able
toproduce with all its given resources being fully and efficiently employed.

position of points:
1. points on PPC:fully used Fops--efficient
2. points inside PPC: not fully used--inefficient
3. points outside PPC: impossible

movement along PPC: reallocation of existing resource, shows the law of opportunity cost
shift in PPC: the productive capacity of the economy, the total ability to produce, has changed----
change in quantity and quality of fops and technology
quantity of labour: immigration/increase in retirement age/ decrease in leaving school age/ more
women enter the labour market
quality of quality: education and training， R&D
quantity of capital: net investment
*unemployment rate 上升， 点向内移
因为 labour force= employed+unemployed, quantity of labour 不会改变
shape of PPC:
concave: increasing opportunity cost
opportunity cost changes as the economy moves from one point to another on the production
possibility frontier. For each additional unit of televisions produced, the opportunity cost of
producing televisions gets larger and larger as the production of cars decreases. This is a situation
of increasing opportunity costs. The two goods require
different factors of production.

straight line: constant opportunity cost--when the PPC is a straight line, opportunity
costs do not change as the economy moves from one point to another on the PPC.
Constant opportunity costs are due to the factors of production
being equally well suited to the production of both goods. For this to occur, goods require the
same factors of production, for example, where two similar types of sports trainers are being
produced.

classification of goods and services:

1.public goods: Public goods are goods that have characteristics of non-rivalry and non-
excludablility. For example fire protection, the police force, national security, street lighting,
traffic lights and flood control systems, light house
Non-rivalry means that as more and more people consume the good, the benefit to those already
consuming the good must not be reduced
Non-excludability means that once the good has been provided for one consumer, it is impossible
to stop anyone else from benefiting from the good.----Free rider problem
Problem: The market may not produce them. There may be a consumer demand for such
products (consumers are willing and able, in principle, to pay for the product’s services), but the
free market may not have a mechanism for guaranteeing their production.
Private sector doesn’t have incentive to produce them.

2.Free goods: Free goods have zero opportunity cost since consumption is not limited
by scarcity. For example, air, rainfall and water in a local water

3.Private goods(economic goods): Private goods are goods that have characteristics of rivalry and
excludablility, such as food items, drinks, clothing, household goods and petrol.
Rivalry means the consumption by one person reduces the availability for others.
A good is excludable if other consumers can be prevented from using or consuming it, like by
charging a price.
4.Quasi-public goods: Goods that may appear to be public goods do not meet both
of these characteristics in full. e.g. toll road
5.Merit good: Merit good is a good that is thought to be desirable but underprovided by the
market due to information failure. e.g. education. healthcare, vaccination,inoculation
Reasons of underconsumption of merit goods:
Information failure arises because consumers do not recognise how good or bad a particular
product is for them
Low income---lack the disposable income to be able to afford to buy the goods in the quantity
they would like or not at all.

6.Demerit good: Demerit good is a good that is thought to be undesirable but overprovided by
the market due to information failure. e.g. cigarettes, alcohol, fast food
Reasons of underconsumption of merit goods:
Information failure arises because consumers do not recognise how good or bad a particular
product is for them
Low income---lack the disposable income to be able to afford to buy the goods in the quantity
they would like or not at all.

Unit 2 The price system and the microeconomy

Price mechanism: the means of allocating resources in a market economy, means by which decisions of
consumers and producers interact to determine the allocation of scarce resources between different goods and
services
Demand refers to the quantity of a product that buyers are willing and able to buy at different
prices per period of time, ceteris paribus or other things equal.
Individual demand: the amount of a product an individual would be willing and able to
buy, at different prices.
Market demand: the total demand for a product at different price.
market demand= sum of individual demand horizontally
Law of demand:
1. income effect
price 上升， purchasing power 下降， real income 下降， quantity demanded 下降
2. substitute effect
price 上升，people have incentive to buy cheaper goods, quantity demanded 下降
3. diminishing marginal utility 递减边际效用
quantity demanded 上升， marginal utility 下降， willingness to pay 下降

factors affecting shift in demand curve

1. income
normal goods: goods and services that are characterised by a positive relationship between
income and demand.
inferior goods: goods and services that are characterised by a negative relationship between
income and demand.
2. the price and availability of related products
Substitutes are alternative goods that satisfy the same want or need.
e.g.e Coca-Cola and Pepsi,Kit Kat and Hersheys chocolate bar
good X price 上升，good Y demand 上升
extent depends on the substitutability (how close a substitute is to the product)
Complements are goods that have a joint demand as they add to the satisfaction that consumers
get from another product.
e.g.cars and petrol, cricket bats and balls, PCs and monitors
a fall in the price of petrol is likely to result in the increased use of cars
3. fashion, taste, and attitudes
4. number of buyers
5. future expectation
Supply: Supply is the quantity of a product that suppliers are willing and able to sell at given
prices over a period of time, ceteris paribus or other things equal.
Individual supply: the supply of one firm.
Market supply: the total supply of a product supplied by all the firms in the industry.
The factors affecting supply
1. Costs: Supply decisions taken by firms are always driven by the costs of producing and
distributing their products to customers.
2. The size and nature of the industry: If an industry is growing in size, then more products will
be supplied to the market.
3. The change in price of other products
4. Government policy: Governments influence companies and their supply of products in many
ways. A new tax on a product may result in a reduction in supply; subsidies will usually result in
an increase in supply.
5. uncertain weather conditions
6. joint supply: two goods were produced together but for different purpose.
price for 羊皮上升，supply of 羊毛上升
PED：

useful:determine total revenue:elastic, P 上升，TR 下降;inelastic, P 上升，TR 上升

disadvantage:
1. difficult to measure
2. PED will change over time
3. other factors affecting total revenue, such as XED, YED
Price elasticity of demand (PED) can be a useful tool for businesses when determining how
changes in price affect total revenue. If demand is elastic, an increase in price will lead to a
decrease in total revenue, while if demand is inelastic, a price increase will result in higher total
revenue. However, there are also several disadvantages to relying on PED. Firstly, it is often
difficult to measure PED accurately, as it requires detailed data on consumer behavior. Secondly,
PED is not constant and may change over time due to factors like trends, consumer preferences,
or availability of substitutes. Finally, total revenue is also influenced by other factors such as cross
elasticity of demand (XED) and income elasticity of demand (YED), which means PED alone
cannot fully explain revenue changes.

YED :

useful:
useful for firms to make decisions:1.in economic growth, people’s disposable income increases,
sell luxury/normal goods, to increase total revenue;2. in recession, income were decreased, sell
inferior goods to increase total revenue or reduce price of goods;3.give producer opportunity to
classify products as normal or inferior goods
disadvantage:
1. difficult to measure
2. the nature of goods is difficult to change
3. it is really difficult to predict economic cycle accurately
Income elasticity of demand (YED) is useful for firms when making strategic decisions based on
changes in consumers’ income. During periods of economic growth, people’s disposable income
increases, so firms can focus on selling normal or luxury goods to boost total revenue. In contrast,
during a recession when incomes fall, firms might shift to selling inferior goods or reduce prices
to maintain revenue. YED also helps producers classify their products as normal or inferior goods,
which guides future planning. However, there are several disadvantages. First, YED is difficult to
measure accurately due to limited or unreliable data. Second, the nature of goods—whether they
are seen as normal or inferior—is hard to change in consumers’ minds. Lastly, predicting the
economic cycle is very challenging, which makes it hard to apply YED effectively in real time.
XED:

useful:
1.help entrepreneurs make decisions: by producing two stronger complements. such as 打印机和墨
盒 ,the entrepreneur could lower the price of one producct and raise another to increase total
revenue
2.help producers to analyse the strategy of its competitor: by knowing XED for itself, change in
price to see competitors’
disadvantage:
1. hard to measure accurately
2. other factors affecting total revenue(PED, YED)
Cross elasticity of demand (XED) is useful for entrepreneurs in making pricing and production
decisions. For example, if two products are strong complements, like printers and ink cartridges,
the producer can lower the price of one and raise the price of the other to increase total
revenue. XED also helps firms understand their competitors' strategies; by knowing the XED
values, a business can predict how a price change in its product might affect demand for a rival’s
product. However, XED has disadvantages. It is difficult to measure accurately due to the
complexity of market behavior. Additionally, total revenue is not only affected by XED, but also by
other factors like price elasticity of demand (PED) and income elasticity of demand (YED), so XED
alone cannot explain all revenue changes.

PES:
useful: knowledge of PES can help to explain the speed and ease with business , and can respond
to changing market condition thus making production plan
disadvantage:
1. some products are difficult to store
2. agriculture --inelastic: price not stable due to weather, growing time may also matter
3. lack of capital/information
Price elasticity of supply (PES) is useful because it helps businesses understand how quickly and
easily they can respond to changes in market conditions. If supply is elastic, firms can adjust
production plans efficiently when prices change, which helps maximize profit and meet demand.
However, there are also disadvantages. Some products, especially perishables, are difficult to
store, limiting the ability to respond quickly. In agriculture, supply is often inelastic due to factors
like weather conditions and long growing times, making prices unstable. Moreover, some firms
may lack the capital or information needed to adjust production, reducing the practical
usefulness of PES in real decision-making.
Joint demand (complements)
The existence of complements gives rise to the concept of joint demand wheregoods are
consumed together. It would be expected that an increase in the sales ofone would lead to an
increase in the sales of the other.
Alternative demand (substitutes)
Some goods, on the other hand, are seen as examples of alternative demand: thatis, they are in
competition with each other and either one is demanded or the other.It would be expected that
an increase in the sales of one would lead to a decreasing the sales of the other. Goods that are
in alternative demand are known as 'substitutes'.
Derived demand
Derived demand is where the demand for a component depends upon the final demand for a
product that uses that component. Derived demand can also be used in relation to the demand
for workers.
Joint supply
Joint supply occurs when the production of one good involves the production of another.
It can often take place in the chemical industry where one chemical may be produced as a by-
product of the production of another. It would be expected that a fall in the market price of one
may affect the quantity supplied of the other.However, an increase in the price of one of the
products could mean that a firm will decide to produce more of both goods.
The functions of price in resource allocation
1.Rationing: prices perform an important function in a market as a rationing mechanism. If a
producer has a limited capacity to produce certain products.when these products are expensive it
will have the effect of rationing demand.For example, in the case of exclusive brands of cars,
which tend to be very expensive, the high price will limit demand to only those people who can
afford to pay this high price.
2.Signalling: the price mechanism allocates resources because price changes act as signals when
the conditions of demand and supply in a market change The Scottish economist Adam Smith
(1723-90) argued that prices in a market therefore act as an 'invisible hand' in allocating scarce
resources. This signalling function of the price mechanism is very important in the transmission
of preferences-it is the way in which consumers indicate their preferences for one product rather
than another.
3.Incentivisation: for a competitive market to work efficiently, all economic agents(e.g.
individuals and firms) need to be able to respond to incentives. For example,if there is an
increase in the demand for a product and the price goes up, firms know that for selling each
product they will receive a higher average level of revenue per unit, and the possibility of earning
a higher profit acts as an incentive.

Unit 3 Government microeconomic intervention

Market failure is an inefficient allocation of goods and services in the market. In this case, the
free market mechanism does not make the best use of scarce resources
1.tax:
indirect taxes are taxes on the sale of goods and services.
direct taxes are taxes on income and wealth.

indirect tax is a tax used to discourage the production and consumption of demerit goods
such as cigarettes and high-sugar sports drinks.
ad valorem taxes 从价税 are a proportion or percentage of the price charged by the retailer.
按价格比例征税
specific taxes 从量税 are in the form of a fixed amount per unit purchased.按数量固定征税
indirect tax shift the supply curve to the left
Incidence of tax is a term used to describe the extent to ehich the tax burden is borne by the
producer, by the consumer or by both.
The incidence of an indirect tax depends on the price elasticity of demand. If demand is inelastic,
consumers bear most of the tax; if elastic, producers bear more of the burden.

2.subsidy: direct payments made by governments to the producers of goods and services

aim:
to keep down the market prices of essential goods(merit goods+public goods)
to encourage greater consumption of merit goods
to contribute to a more equitable distribution of income
to provide services that would not be provided by the free market
to raise producers’ income, especially in the case of farmers
to provide an opportunity for exporters to sell more goods
to reduce dependence on imports by paying subsidies to domestic producers of close substitutes.
incidence of subsidy is a term used to describe the extent to which the subsidy benefit is borne
by the producer, by the consumer or by both.
Subsidies are hard to target fairly, as both rich and poor can benefit equally from them. While
subsidies on essentials like food and public transport aim to support low-income groups, they can
also cause inefficiency, shortages, and misallocation of resources.

Staple foods like rice, bread and cooking oil are subsidised in some low and lower middle-income
economies.
disadvantage:
1.Not targeted: all consumers, including high-income groups who can afford market prices, enjoy
the subsidised prices.
2.Resource misallocation: subsidising prices may lead to overconsumption and artificial demand,
causing shortages.
3.Inefficiency: if the subsidy is paid to producers, it may create a disincentive to improve
efficiency, as they rely on government support rather than making their operations more
productive.
4.Misuse of funds: there is no guarantee that the subsidy money will be used for its intended
purpose, such as reducing prices or increasing supply.
5.Difficult to estimate the right amount: It is hard to calculate how much subsidy is needed for
each product or sector.
6.High cost to government: subsidies can be a big burden on the government budget and reduce
money available for other services like healthcare or education.---opportunity cost

Mass transit (public transport) is heavily subsidised in all parts of the world.
advantage:
1.Helps low-income earners – Makes commuting more affordable and gives people access to jobs
and education.
2.Supports social mobility – Allows elderly and vulnerable groups to travel and stay socially
active.
3.Lowers pollution – Fewer cars on the road means better air quality and less environmental
damage.
4.Benefits the whole community – Improves quality of life and creates a more efficient,
connected society.

4. The direct provision of goods and services: Governments provide certain important services
free of charge at the point of use or consumption.
Such services are financed through the tax system. If these services are used equally by all
citizens, then those on lowest incomes gain most as a percentage of their income, thereby
lowering inequality.
The two most common instances of direct provision are merit goods and public goods

advantage:able to solve the problem of underprovision of merit goods and public goods.
The government can ensure that goods like education, healthcare, and public safety are available
to all, even when the private market fails to provide them adequately.

disadvantage:
1.Leads to inefficiency – Government provision can result in higher costs due to bureaucracy, lack
of competition, and less incentive for efficiency compared to the private sector.
2.Lack of information – Governments may lack the detailed knowledge of consumer preferences
and needs, leading to less effective provision of services.
3.Increases government spending – Direct provision requires significant public funds, which can
lead to higher taxes or increased government debt, representing an opportunity cost for other
important public services or investments.

5. Maximum price
Maximum price is a policy of price control that government might adopt, which is a price ceiling
imposed below the free market equilibrium price, to prevent the price from rising and further
exceeding it.

The maximum price is set at P1, which is below the market

equilibrium price P. This makes the product more affordable, especially for low-income
consumers.

disadvantage:
1. shortage= Q2-Q1--inefficiency
At the maximum price P1, demand increases to Q2 while supply falls to Q1, creating a shortage
(Q2 − Q1). This means that not everyone who wants the product can get it, leading to inefficient
allocation of resources. Some consumers who value the product highly may not be able to buy it,
while others may consume it inefficiently.
2. black market
When goods are in shortage, some people may try to buy and resell the product illegally at higher
prices. This is especially common for goods like housing or fuel. In such cases, the intended
benefit of helping low-income consumers is lost, and prices may actually rise above the legal
maximum in underground markets.
3. waiting list
With limited supply and high demand, consumers often have to wait in long queues or register on
waiting lists to get the product. This can lead to time wastage and frustration, especially for
essential items. It also creates unfairness, as those with more time or better access may get the
product more easily than others.

6. Minimum price: Minimum price is a policy of price control that government might adopt,
which is a price floor imposed above the free market equilibrium price, to prevent the price from
dropping below it.
1.Surplus → Inefficiency
When the government sets a minimum price above the equilibrium, quantity supplied increases
while quantity demanded decreases, leading to a surplus. This means too much of the good is
produced but not sold, resulting in allocative inefficiency and wasted output.
2.Waste of resources
If the surplus is stored, destroyed, or bought by the government, it leads to a waste of land, labor,
and capital. Governments may spend taxpayer money to purchase or manage the excess supply,
which could have been used for more productive purposes (opportunity cost).
3.Black market risk
Because the legal price is higher than many consumers are willing to pay, some producers or
sellers may illegally sell the good at lower prices. This creates a black market, undermining the
purpose of the policy and possibly leading to unsafe or unregulated trade.

7. Provision of information

EXAMPLE:
compulsory information on cigarette packets warning of the dangers of smoking
public health announcements and campaigns
advice on non-prescription medicines
nutrition and allergy information on food packaging.
advanage:
The improved provision of information has advantages. By improving the provision of
information, consumers can be aware of the harm of demerit goods, when consumers receive
clearer information, they are more likely to adjust their behavior rationally. This will decrease
demand for demerit goods as people consume less of the demerit goods.
disadvantage:
1.Costly to implement – opportunity cost
Providing accurate and widespread information (e.g. health campaigns, nutrition labels,
consumer rights education) can be very expensive. The government must spend money on
research, advertising, and public outreach. This creates an opportunity cost, as the same funds
could have been used for other services like healthcare or education.
2.Takes a long time to be effective
Changing consumer behavior through information is a slow process. People may ignore or resist
new information, especially if it challenges their habits or beliefs. For example, anti-smoking
campaigns may take years to show real results. This makes provision of information less effective
in the short term

8. Buffer stock scheme:A buffer stock scheme is designed to smooth price rises and
falls by buying and selling stocks of products depending on market conditions.
advantage:
1.Stabilises product prices
By buying up excess supply when prices are low and releasing stock when prices are high, the
government helps keep prices stable and prevents extreme fluctuations.
2.Ensures a stable supply
In times of poor weather or other shocks that reduce supply, the government can release stock to
prevent shortages and ensure that the product remains available.
3.Stabilises producers' income
When prices are too low, the government buys the product at a target price, helping to protect
farmers or producers from income volatility, especially in agriculture.
4.Increases market confidence
Both consumers and producers are more confident when they know that prices and supply are
managed. This can lead to more investment and planning in the market.
disadvantage:
1.Costly to run:Buying and storing the product requires significant government spending (e.g.
storage, transportation, administration), leading to a high opportunity cost.
2.Difficult to predict the right amount: It’s hard to know how much to buy or sell to maintain the
correct buffer. Misjudgment can lead to overstocking or undersupply, wasting resources.
3.Not all products are storable: Some goods, especially perishable products like fruits or milk,
cannot be stored for long periods, which limits the effectiveness of the scheme.

Addressing income and wealth inequality

Economic reasons for inequality of income and wealth:

1.a lack of formal employment opportunities, particularly for young people, but also for those
with professional skills
2.poor vocational training, which means that local industries cannot obtain the labour needed to
maintain a viable operation in national and international markets
3.a lack of investment in the education and health sectors, which holds back human capital
needed to promote economic growth
4.poor infrastructure such as roads, railways, power and water supplies
5. a low rate of savings, which holds back private and public sector investment
6. the inability of many people to obtain credit to fund small businesses and improved personal
education.

Policies to redistribute income and wealth

1.Minimum wage rate: A minimum wage rate is a legal requirement of what employers must pay
an employee per hour.
advantage:
1.Reduces poverty:By setting a wage floor, minimum wage can help increase income for the
lowest-paid workers and reduce poverty in many economies.
2.Improves living standards
Workers who remain employed receive higher pay, which can improve their quality of life.

disadvantage:
1.May cause unemployment
Higher wages increase labor costs for firms. As a result, employers may hire fewer workers,
creating unemployment (as shown by Q1–Q2 in the diagram).
2.Limited impact in informal sectors
In many low-income economies, a large portion of workers are in the informal sector, where
minimum wage laws do not apply or are not enforced.
3.Not relevant for the self-employed
Minimum wage laws don’t help self-employed individuals or family-run businesses, which are
common in lower-income economies.

2.Transfer payments: A transfer payment is a payment from tax revenue that is received by
certain members of the community.
Examples of transfer payments include:
• old age pensions
• unemployment benefits
• housing allowances
• food coupons
• child benefits.
The extent to which transfer payments can be paid is dependent on how much tax is collected
and how many people have paid tax.
advantage:
1.Reduce poverty: They provide financial support to vulnerable groups such as the elderly and
unemployed, helping to reduce absolute poverty.
2.Promote equity: Transfer payments help redistribute income, leading to a more equitable
(fairer) distribution of wealth in society.
disadvantage:
1.Disincentive to work: Regular benefits (e.g. unemployment payments) may reduce people’s
motivation to work, which could increase the unemployment rate.
2.Depend on tax revenue: In low-income countries, transfer payments are limited by the size of
the tax base—many people may not pay taxes, especially in informal sectors, so the funds
available are low.
3.Inefficiency: If fewer people work due to benefits, the economy’s output may be lower than its
potential—causing productive inefficiency.
4.Costly-opportunity cost

3.Progressive income taxes, inheritance and capital taxes

disadvantage: tax avoidance/ disincentive to the rich

Another advantage of progressive taxation is that it may encourage high-income earners to reinvest their income or make charitable donations.

Since higher levels of income are taxed at higher rates, individuals and firms might choose to reduce their taxable income by investing in

businesses, creating jobs, or supporting social causes through donations. This not only helps reduce income inequality indirectly but also stimulates

economic activity and supports the wider community.

However, there are also disadvantages of progressive tax. One major drawback of progressive tax is that high-income earners may engage in tax

avoidance strategies. They might use offshore accounts, or complex financial arrangements to reduce their taxable income. While this doesn’t

necessarily involve breaking the law, it undermines the effectiveness of the tax system in redistributing wealth. Another disadvantage is that

progressive tax may create a disincentive for high-income earners to work harder or invest more. Knowing that a significant portion of additional

income will be taxed at a higher rate, some wealthy individuals might choose to work less or reduce their investment. Additionally, the prospect of

high taxes might even encourage wealthy individuals to immigrate to countries with lower taxes to protect their income, potentially resulting in the

loss of skilled workers to other economies. This could ultimately harm the domestic economy by reducing talent and innovation

&

一种方式是征收遗产税（inheritance tax）：当一个人继承的财富超过一定金额时，他需要向政府支付一部分作为税款。这样可以防止财富集中在少数家庭，促进财富再分配。

另一种是资本利得税（capital tax）：当一个人出售资产（比如房产、股票）时，如果资产增值了，那么他需要对这部分增值部分缴税。

不过，这些措施的整体效果较小，因为避税手段较多，征收难度较大，而且很多人并不属于这些税的征税对象。

4.State provision of essential goods and services

The two main examples of free provision in many economies are health care and junior and
secondary education.