Economics (AS & A Level) · Feb / March 2021 · Paper 42 · Question 1

Equality in markets and economic performance Adam Smith’s proposition that free markets organise economic resources for the benefit of everyone rests upon the even distribution of power between the market participants. Without that even distribution, the proposition fails. The reality of markets today is that the distribution of power is uneven and the markets are exploited by the powerful for their own gain. Markets are imperfect. These imperfections hinder economic equality. Economic equality is linked to economic power and requires ownership and control over economic resources. Concentration of economic power, particularly in the hands of large global companies can adversely affect local economies. For example, local business owners have to work longer hours to compete with giant corporations. The growth in the power of large companies is a cause of inequality in the distribution of income and wealth. The companies have an ability to make high profits, to practise price discrimination and exploit consumers. This sometimes leads to regulation by governments. Consumer protection is usually the aim. Take-overs are monitored. Progressive taxes on high incomes are used. Social welfare, inheritance taxes and greater workers’ rights all attempt to deal with excessive inequality. However, it is also said that large companies contribute disproportionately more to a country’s economic growth than smaller ones. Such companies are more productive, pay higher wages, enjoy higher profits and are more successful in international markets. Therefore, differences in economic growth between countries, it is argued, could be linked to the difference in the number of large firms. In Spain and Italy, firms are on average 40% smaller than those in Germany. Increasing the size of firms in Spain and Italy, it is said, is the key to improving their comparative economic growth. Firms with more than 250 employees are only 5% of manufacturing firms in Spain and Italy. This compares with a much higher 11% of firms in Germany. The average firm size in Spain is 49.3 employees, and in Italy it is 42.7 employees. Both are lower than the average of 76.4 employees per firm in Germany. Sources: adapted from www.euractiv.com and www.destatis.de Table 1.1 shows GDP and inflation rates for Germany, Italy and Spain in 2017. Table 1.1 GDP growth rate (% p.a.) Inflation (% p.a.) Germany 2.2 1.7 Italy 1.5 1.3 Spain 3.1 2.0 Source: RSA Journal, Issue 1 2018

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