Economics · May / June 2020 · Paper 21 · Question 5
0455
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The question as text
Australian firms have been praised for introducing new technology. The actions of some of these firms, however, cause market failure. The Australian government uses subsidies, among other policies, to reduce market failure. Government spending is used both to improve the performance of individual markets and the macroeconomy. The Australian government increased its spending in 2017, in part to reduce unemployment.
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5(a)[2]
State two objectives of firms. One mark each for two from:
survival, social welfare, profit maximisation and growth.
5(b)[4]
Explain how a subsidy can correct market failure. Logical explanation which might include: A payment to increase production (1)
and lower price (1)
can increase consumption of merit goods (1)
products with positive externalities (1)
which are under-consumed if left to market forces (1)
can be paid to private sector firms to produce public goods (1)
would not be produced if left to market forces (1).
5(c)[6]
Analyse, using a production possibility curve (PPC) diagram, the effect of advances in technology on an economy. Up to 4 marks for the diagram: Axes correctly drawn (1). Initial curve drawn as a curve or a downward sloping line to the axes (1). New curve drawn as a curve or a downward sloping line to the axes (1). Shift to the right indicated by arrow or lettering (1). Up to 2 marks for logical analysis: Advances in technology raise the quality of capital (1)
increase productive capacity (1).
5(d)[8]
Discuss whether or not an increase in government spending will reduce unemployment. In assessing each answer, use the table below. Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other but, overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content. Why it might:
may raise total (aggregate) demand, encouraging firms to hire more workersmay be spent on education which may increase people’s skillsmay be spent on healthcare which may make people fitter and more employablemay be spent on subsidies to firms which will encourage them to increase output and take on more workers. Why it might not:if spent on unemployment benefits, it may encourage some people to leave their jobsif there is full employment, it will just cause inflationspending on education may be ineffective e.g. develop the wrong skillshigher total (aggregate) demand may encourage firms to use more capital goods rather than labour.
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