Written by Tom Furber (economics tutor)
These are extra evaluation points based on the video page linked here.
Contents
Microeconomics question – Evaluate microeconomic polices to reduce healthcare waiting lists (25 marks)
Evaluating taxes for cigarettes
Ways for firms to avoid paying the tax
However, this depends on whether firms try to avoid paying the cigarette tax. Firms producing cigarettes may switch to producing e-cigarettes instead, in order to avoid an increase in costs from paying the cigarette tax. As a result, cigarette producers may not see as much of a rise in costs. Moreover, e-cigarette supply may shift right, leading to lower e-cigarette prices and increasing demand for e-cigarettes. Nearly one in ten young people currently vape according to the NHS. E-cigarettes may have their own adverse health impacts, resulting in a decline in health, which could worsen NHS waiting lists.
The design of the tax
However, this depends on how the cigarette tax is designed. Cigarette tax rates may be tiered in some countries and dependent on the cigarette length or packaging on the cigarette box, according to the Economics for Health* report on cigarette taxes around the world. In this case, cigarette producers may redesign the lengths of cigarettes or packaging to minimise their tax burden. This means that in practice, the cost of producing cigarettes may not rise as much. So the price of cigarettes may not increase. Hence consumer demand for cigarettes may not fall as much and consumer health may not improve significantly.
NB: I should note on reflection that these two points for taxes are somewhat similar. The price elasticity of demand point in the video is often quite effective evaluation for the effect of taxes.
Evaluating subsidies for healthy food
Unintended consequence – firm dependence
However, the effectiveness of subsidies depends on how firms react to the subsidy. Firms may become dependent on the subsidy money, perhaps because the firm no longer needs to make as much revenue to survive. As a result, the firm may not invest as much in improving the taste or health benefits of their food and the subsidy may be used to prop up the company’s balance sheet, rather than to reduce prices for consumers. So prices may not fall and quality may not rise, so consumers’ health may not improve as demand for healthy food may not rise. So waiting lists may only be reduced by a small extent.
Value of the cross elasticity of demand
However, this depends on the cross-price elasticity of demand (XED) between healthy and unhealthy food. Instead of being substitutes, an unhealthy food item such as salt could be a complement (negative XED) with a healthy food such as vegetables, with salt being used to improve the taste of food, consuming vegetables and salt together. As a result, a subsidy for healthy food, while reducing the price of healthy food, could actually increase the demand for salt, leading to a higher equilibrium quantity of salt consumed. So subsidising healthy food has an unclear overall effect on health – it may encourage the consumption of vegetables but also the consumption of salt, which may have its own adverse health effects.
Macroeconomics question – Evaluate policies to increase the rate of economic growth (25 marks)
Evaluating government spending on infrastructure, such as HS2
Infrastructure may be placed where it is not needed
However, the success of high speed rail depends on rail lines being put in the right place. Altered proposals for HS2 had the train line stopping in Old Oak Common, further outside central London, rather than London Euston in the centre, in order to save on cost. This may mean the high speed rail line is not speeding up the time taken to travel between London and Birmingham to a significant extent, two large population centres where high speed connections may have more of an impact. So, there may not be much of an increase in geographical mobility of labour, so productivity may not increase. So building HS2 may not lead to an increase in the trend rate of economic growth.
Working from home
However, this depends on the proportion of workers working from home. With about half of workers in the UK working from home some or all of the time, workers are more mobile, being able to apply for remote jobs in other parts of the country. This could make high speed rail less necessary. Even if HS2 is built, workers will not suddenly become more able to apply for a greater variety jobs, as they can already apply for jobs elsewhere and work remotely. So productive capacity may not increase, so HS2 may not generate significant long-run economic growth.
Evaluating lower interest rates
Current level of interest rates and the liquidity trap
However, this depends on the current level of interest rates. The Bank of England’s Bank Rate was as low as 0.1% in 2020. At this level, the Bank of England may not be able to lower interest rates far below zero. This is because savers may be incentivised to withdraw their money and keep it at home, rather than keeping the funds at the bank where negative interest rates mean savers are losing money. If savings have already left the banking system, then lower interest rates are unlikely to reduce the incentive to save further, as households may not be affected by falling interest rates. So consumption, AD and the rate of economic growth may not increase as much.
Pass-through of interest rate changes
However, this depends on whether commercial banks pass on the lower central bank interest rate to borrowers. Some banks in the UK were criticised by the then Chancellor Jeremy Hunt for not passing on rate changes to customers in 2022-23. Commercial banks may decide not to pass on lower interest rates to borrowers, in order to prevent the banks’ spending on paying interest. As a result, even if the Bank of England’s interest rate falls, other interest rates may not fall to the same degree throughout the economy. So the cost of borrowing may not fall, so consumption and AD may not rise. So lower interest rates may not generate economic growth.
Related economics resources
A-Level Economics notes and resources for Edexcel | AQA
Sources for some facts provided above (external links):
- NHS England on e-cigarette use among young people.
- Economics for Health on cigarette design.
- Sky News article on then Chancellor Jeremy Hunt suggesting that banks were not passing on interest rate changes sufficiently quickly.
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