Questions:
1. The question is based on material in the Text. Text material which may be relevant to the question may be drawn primarily from any of Text chapters 3, 4, 5, 6, 7, 8 or 9. The question addresses the following learning outcomes:
• be able to apply demand and supply analysis to make a range of market related decisions
• be able to critically examine and demonstrate why it might be necessary for government to intervene in the production of goods and services and in the distribution of income.
Schooling, for children between specified ages, is compulsory. However, not all of these children
attend public schools. Parents can elect to send their children to private schools (which we will assume is the only alternative to public schooling). There is debate in the community over the amount of subsidy provided by government to private schools. Some argue that this subsidy should be eliminated in order to reduce government outlays on education and that it is wrong for the government to subsidize private schooling. In the context of the demand and supply of schooling, evaluate this argument.
Hint: Assume that the average expenditure per student by government on students in public education must remain constant.
2. The question is based on material in the Text. Text material which may be relevant to the question may be drawn primarily from any of Text chapters 3,4,5 and 6. See text “reading Between The Lines:
Why a crackdown on illicit Drugs Increases Crime”. (page 94 -95) edition 7. The question addresses the following learning outcomes:
• be able to make decisions that incorporate the relevant benefits and cost analysis
• be able to apply demand and supply analysis to make a range of market related decisions
You have been employed as a Consultant Economist by the NT Government in particular the NT Police and NT Health Departments. You’ve been asked to advise about the affects of a) increase in the police crackdown on illicit drugs in the NT and b) using government revenue to better educate the NT population about the serious health problems related to illicit drug use. Assume that illicit drugs are an inelastic good.
It is known that schooling is very important for the children for establishing their position in the society and the economy. Thus it is very important to strongly establish the education sector in the economy so that each and everyone can have equal opportunities in education. In an economy, there can be public and private schools where the students can gain their education. It is evident that all the children do not necessarily attend the public schools. The parents can also attend the private schools as these are the only alternative to the public schools. The amount of subsidy that can be provided by the government in private schools is one of the topics of debate as it is argued that the government should reduce the subsidies in private sector.
Education can be referred as one of the significant industries as it can help in the growth and development of the society and the economy. In this context it can be said that the private and public schools are substitutes of one another. There can be difference in terms of the quality of education that is provided to the students and in terms of other facilities. Here it can be said that the private schools costs more than the public schools (TheAustralian, 2015). The government has to subsidise the private schools extensively which is at the cost of resource allocation in public schools. Thus there is disparity in the expenditure on students in both the public and private sector. It can also be said that the taxpayer’s money is spent on the private sector and thus it should be reduced for the equal expenditure per student. As a result of the reduction in the subsidies in private schools, the demand for public schools will be affected as they are substitutes of one another. Thus efficient allocation of resources will be achieved.
In this context several economic theories can be presented here. It is known that in a competitive industry, the forces of demand and supply basically estimate the equilibrium demand and equilibrium supply in the industry. The industry demand basically represents the total quantity demanded of the product at various prices in the industry. Thus the demand curve is the locus of all the combinations of quantity demanded and supplied in the market. On the other hand, the supply represents the total quantity supplied by the suppliers at various price levels (Pindyck and Rubinfeld, 2013). So the supply curve is basically the locus of all the combinations for the quantity supplied and the price of the product. The supply curve is upward sloping and the demand curve is downward sloping. In the following diagram the equilibrium in the industry can be shown.
The price elasticity of demand basically refers to the responsiveness of the quantity demanded with respect to the changes in the price of the product. The price elasticity of demand is the percentage change in the quantity demanded as a result of one percent change in price. The cross elasticity of demand represents the change in quantity demanded of a related commodity (complement or a substitute) as a result of the change in the price of a product. If 1% change in the price of the product leads to more than 1% change in the quantity demanded of the related good, then the cross-price elasticity of demand is elastic. On the other hand if the change is less than 1% then the price elasticity of demand is elastic (Rassenfosse and Potterie, 2011). The cross-price elasticity of demand is positive for substitutes and it is negative for the complements.
It is known that there can be disparity in various industries in an economy. Similar disparity is seen in the education sector as well. It is known that the cost borne by the private school service providers are very high and their main aim is to maximise their profits in the industry. Thus the government must intervene and provide the subsidies to the private schools so that they are able to provide the service in the industry. But such activity increases the misallocation of resources and it also leads to inefficiency in the market (Krugman and Wells, 2013). Here it can be said that the average expenditure per student in the public sector needs to be remain constant. But it is seen that the average expenditure per student in the private sector increases significantly.
It is known that the government provides extensive amount of subsidy to the private schools. Thus, if the subsidy is reduced then the price of the service will increase due to increased cost and thus the demand for the service will fall. In the following diagram it is shown that the supply of the service has increased due to an increase in the subsidy.
It is known that the government subsidy is provided to the private schools due to increased cost of the service, so that the needs of the society are fulfilled and it can lead to the growth of the economy as well. Here the concept of cross-price elasticity can be presented as well. It is known that the private schools are costly and thus families from high income background usually opt for the private schools (Pindyck and Rubinfeld, 2013). Thus it is evident that if the price of the private education will increase then the demand for the service will depend on the cross-price elasticity of demand for the service. If the cross-price elasticity of demand is elastic then the demand for public schools will increase and the private schools will fall and if it is inelastic then there will not be significant changes in the demand. Thus if the cross-price elasticity of demand is inelastic in the industry then the government should make the expenditure in public schools rather than on private schools for providing greater benefits to all students in the economy with improved facilities and quality of the service.
As one of the economic consultants for advising about the policy crackdown on the illicit drugs in the NT and regarding the use of government revenue to better educate the NT population about serious health-related problems related to the illicit drug use, various recommendations can be given. It is also assumed here that the illicit drugs are inelastic goods.
It is evident that in recent times, the illicit drug use is one of the major issues that are faced by an economy and it is also affecting the social benefits as well. It is known that the illicit drugs are very harmful for the health of the people. The illicit drugs can be stated as the abuse of illegal drugs or the misuse of the prescription medication. Thus the use of such drugs can lead to health related issues. Such illicit drug use is very high among the adolescent people. Thus the supply of such drugs must be controlled within the economy by the government and the legal authorities. Thus it is necessary that the police crackdown is increased on the illicit drugs in an economy so that the use of such illicit drugs can be controlled (ABC News, 2014). The government can take various measures in order to control the use of illicit drugs in the economy. Here two options are basically presented for controlling the drug use. One option is increasing the police crackdown and the second option is using the government revenue for educating the people about the ill effects of drug use. Here relevant cost-benefit analysis can be conducted for making the feasible decisions (Crimecommission.gov.au, 2015).
Similar theories can be incorporated in this context as well. In the industry, the equilibrium price and quantity is determined by the forces of demand and supply basically estimate the equilibrium demand and equilibrium supply in the industry. The industry demand basically represents the total quantity demanded of the product at various prices in the industry. Thus the demand curve is the locus of all the combinations of quantity demanded and supplied in the market. On the other hand, the supply represents the total quantity supplied by the suppliers at various price levels (Hoag, 2013). So the supply curve is basically the locus of all the combinations for the quantity supplied and the price of the product. The supply curve is upward sloping and the demand curve is downward sloping.
Here the concept of elasticity can also be considered. The price elasticity of demand refers to the responsiveness of the quantity demanded as a result of the changes in the price. In case of elastic demand, when there is 1% change in the price of the product, the quantity demanded will change more than 1%. On the other hand, in case of inelastic demand, when there is 1% change in the price of the product, the quantity demanded changes less than 1%. It is the percentage change in the price of the product. The price elasticity is negative for normal goods where the quantity demanded falls when the price increases (Krugman and Wells, 2013). The price elasticity of demand is positive for giffen goods where the demand for the product falls when the price falls.
These theories of demand, supply and elasticity can be used here for analysing the given situation. It is evident that, the illicit drug use can significantly affect the health of the individuals and thus it can also impose a social burden due to the health issues of the people. The health related issues can increase the cost borne by the government and thus it is very important to implement measures for addressing the issue. Here the government can increase the police crackdown on drug use and it can also provide education to the NT population with the help of government revenue (Rassenfosse and Potterie, 2011). If the police crackdown is increased in the economy, then the supply of the drug use can be lowered but as the demand for the drugs is inelastic, the impact of the price change will not be significant on the drug use. Similar impact can be seen in terms of imposing tax on illegal drug use. It will increase the prices but the demand will not be affected significantly. In the following diagram, the impact of the reduction in supply is shown by the leftward shift of the supply curve and the resultant impacts are also shown.
In the above diagram, it is seen that the as the supply curve shifts leftwards, the price has increased significantly but the quantity demanded has fallen comparatively less than the percentage increase in price due to the inelastic demand curve. The government can also use their revenue to educate people about the ill effects of drug use and it can be effective for controlling the drug use.
Here the cost and benefit analysis of both the measures used by government for addressing the illicit drug use can be conducted. In case of police crackdown on illicit drugs, the government has to bear minimal cost of regulating and controlling the supply in the market but there will be supply of the product in the industry and afterwards adolescents will have to pay more for acquiring the product (Pindyck and Rubinfeld, 2013). Thus it will lead to social cost and the welfare will be reduced. On the other hand if the government spends the revenue for educating the people regarding the ill-effects of drug use then they can be persuaded for not using illicit drugs. This measure can provide effective results in the economy even though it required higher cost that needs to be borne by the government. Here a combination of both the measures can help in reducing the serious impact on the society. The NT police can increase the crackdown and it can also be combined with increased awareness programmes. The subsidy on the service can be financed by the tax collected for illicit drugs. It can significantly increase the welfare of the society.
References
ABC News, (2014). Police target outlaw biker gangs in drug crackdown. [online] Available at: https://www.abc.net.au/news/2014-04-15/nt-police-crackdown-on-drugs-and-outlaw-biker-gangs/5392124 [Accessed 15 Jan. 2015].
Crimecommission.gov.au, (2015). Illicit drugs | Australian Crime Commission. [online] Available at: https://www.crimecommission.gov.au/organised-crime/crime-types/illicit-drugs [Accessed 15 Jan. 2015].
Hoag, J. (2013). Intermediate microeconomics. Singapore: World Scientific.
Krugman, P. and Wells, R. (2013). Microeconomics. New York, NY: Worth Publishers.
Pindyck, R. and Rubinfeld, D. (2013). Microeconomics. Boston: Pearson.
Rassenfosse, G. and Potterie, B. (2011). On the Price Elasticity of Demand for Patents*. Oxford Bulletin of Economics and Statistics, 74(1), pp.58-77.
TheAustralian, (2015). Public and private schools of thought. [online] Available at: https://www.theaustralian.com.au/news/features/public-and-private-schools-of-thought/story-e6frg8h6-1226808744361 [Accessed 15 Jan. 2015].
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