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Contrast Austrian, Neo-classical/liberal, and Socialist approaches to policy.
Describe and illustrate the main economic reasons why a UK government might intervene in the economy.
3.Explain the trade-off faced by policy-makers in seeking to relieve poverty while preserving incentives to work.

4.Explain how behavioural economics differs from ‘neoclassical economics’ in relation to its policy applications?

5.Thinking of the economy as consisting of just a public and private sector, what is the marginal equivalence that would have to hold for the size of the state to be Pareto-efficient? How relevant has this condition been for changes in the actual size of the UK State since 1900?

6.Explain what Cost Benefit Analysis is and outline its strengths and weaknesses.

Reasons Why UK Government Might Intervene in the Economy

In economics, intervention of government and its magnitude is considered as an essential topic to discuss. According to free market economists, government should not intervene in any economic activities, as this activity can cause inefficient allocation of resources while socialist economists always argue for government intervention (Joo, Seo and Min 2018). Therefore, the entire discussion can be stated in the context of the United Kingdom. If the government intervenes within the economy then the UK economy can experience greater equality in income and wealth distribution. This in turn improves equality of outcome and opportunity significantly. In addition to this, government failure can also reduce the chance of market failure. The concept of market failure occurs when an economy cannot allocate resource freely to produce specific goods and services. Therefore, market failure causes welfare loss within economy (Baranzini and Carattini 2017). Firms in the UK may produce public goods or merit goods by small amount through applying available resources and produce private goods by large extend. In addition to this, intervention of the government can be described with the help of macroeconomic concept. To reduce recession, inflation, unemployment or other macroeconomic instability, the government can take fiscal or monetary policies accordingly.

Therefore, government intervention in market intends to overcome market failure. The chief focus of market failure includes price stability through applying minimum prices as well as maximum prices. Within the free market economy, scarce resources are allocated automatically based on price mechanism. In this context, the expenditure along with preference decisions related to consumers as well as supply decisions of businesses help the market to determine equilibrium price and quantity automatically. The UK government could intervene within this market for influencing price mechanism significantly to allocate resources efficiently. This in turn can help the economy to improve desired social welfare as well as allocation of resources.

However, this intervention further causes some negative impacts on the economy as well. For instance, the government may take wrong decisions for produce output. This may happen due to political pressures for which the government spends inefficient projects and receives inefficient outcome. In addition to this, this type of intervention reduces individual freedom of firms. As a result, large-scale firms cannot take efficient business decisions. A market can decide and take best production decision while the government cannot take such decisions efficiently. For instance, the intervention of UK government increases the price of energy and consequently makes it more expensive (Baranzini and Carattini 2017). Constant intervention in the energy sector of the UK government has generated a complex system related to subsidies along with an uncompetitive market. This further fails to provide secure electricity based on low-cost. On the contrary, some economists have argued that the UK government needs to intervene within economic system for keeping the country safe. The chief reason for this statement is Brexit. After taking this decision, the manufacturing sector within the country has started to experience various difficulties while the economy has experienced recession. For expanding business sector by large extend and selling products in international market, the government along with private business owners have taken decisions to merge business as well as energy departments. As Brexit has changed economic conditions of this country, it could be fruitful for the government to intervene for maintaining stability.

Trade-Off Faced by Policy-Makers When Seeking to Relieve Poverty While Preserving Incentives to Work

To explain the difference between behavioural economics and neoclassical economics based on their policy applications, assumptions related to these two approaches are required to explain. The behavioural theory intends to analyse and understand about psychological process of an individual. These psychological processes consider emotions, habits and norms, which further help an individual to take proper decision in different economic contexts (Pete 2014). On the other side, neoclassical economics discusses about the basic concepts of demand and supply depending on the rationality of an individual. Depending on this ability, a firm or individual can maximise utility or profit (Morgan 2015). For understating and analysing various aspects, neoclassical economists consider mathematical discussions. Neoclassical economists provide an inflexible, formalised as well as separate concept that can be differentiate from other concepts of social science. On the other side, behavioural economics considers that a person does not remain consistent with reality. This implies that a person does not have sufficient knowledge regarding any economic phenomena. Therefore, this type of economics enriches standard models that consider rigid assumptions that focus on a person’s realistic behavioural attitude. In this context, it is essential to discuss about indifference curve theory depending on the analysis of consumer choice (Barr 2012). This economic concept highlights the behavioural approach of an individual to reflect his choice for a bundle of good. Unlike neoclassical model, this indifference curve concept does not consider any numerical approach, based on which utility of a consumer can be measured. Therefore, this approach reflects an ordinal one instead of cardinal one.

Firstly, both behavioural and neoclassical economic theories consider that consumers are rational and consequently they focus to maximise their utility. In this context, consumers experience income constraint or budget constraint though the concerned person has complete knowledge on information. Hence, based on rational thinking the consumer can take proper decision. Secondly, consumers can successfully rank her preferred bundle of output based on satisfaction, obtained from each basket (Pendakur 2018). The consumer may not calculate the actual amount of satisfaction. However, the concerned person can arrange respective bundle of goods through knowing the level of satisfaction obtaining from each of them. The indifference curve represents a consumer’s preferences and the curve generally has a convex shape. The indifference curve follows certain features, which are consistency as well as transitivity of choice. The theory considers that consumer’s choice is consistent, which implies that if an individual selects bundle of good A over B in one period then the same person will never select bundle of good “B” over “A” in different period (Hands 2017). In addition to this, consumer’s choice is considered as transit, which implies that if an individual prefers A over B and B over C, then the person always selects A over C. Therefore, an individual can maximise his utility at given budget constraint through achieving his equilibrium. In this context, it needs to mention that an indifference curve represents the locus of points that reflect some bundle of goods yielding same utility. Therefore, an individual remains indifferent at any point of the same utility curve. Therefore, this approach chiefly focuses on the concept of behavioural economics stating about the preference of a consumer.

Behavioural Economics vs. Neoclassical Economics in Relation to Policy Applications

Cost-benefit analysis implies a business process through which an organisation can take essential business decisions. The organisation sums entire benefits received from an action. The organisation also collects costs related to this action and subtracts this value from total benefits. For each business decision, firms need to analyse cost benefit for understanding risks as well as rewards associated with the actions (Nas 2016). Without this analysis, a firm can get the chance to incur loss through conducting unprofitable actions. In this context, the firm can waste its capital and time. Therefore, some features of this analysis can be described briefly. Firstly, this cost-benefit analysis helps a firm to evaluate rewards or losses associated with a project (Mishan 2015). Through this analysis, the organiser can identify potential benefits of investment in product development, marketing ideas, operational changes and infrastructure enhancements. Secondly, this analysis helps a firm to prepare budgets for a particular project accurately and easily. The firm can make required budget based on all possible costs associated with the project while the predicted benefits is used to understand sales. Thirdly, the organiser can select one project among many through analysing cost-benefit (Mechler 2016). After selecting the profitable project, the organiser can successfully select investment. This project can provide fastest return for this investment while the remaining capital can be used in other projects.

This cost benefit-analysis has some strengths as well as weakness. Through conducting this analysis, the firm receives the opportunity to understand about the cost pattern for launching the project. It will be fruitful for the organisation to define and list these costs for evaluating next expenditure. It becomes sometimes impossible for investors or organisers to predict total costs accurately (Schofield 2018). An organiser receives this advantage due to simplicity, considerations, objectivity and goal setting features of the firm. With the help of this analysis, an organiser can simplify the complex business decisions. Moreover, this analysis further acts as a decision-making tool for the concerned businessperson. Hence, this analysis provides a specific object based on which a firm can compare different business projects. Therefore, it can be easier for the organiser to set proper goal after calculating the net benefit. A firm experiences more difficulties to calculate benefits associated to a project rather than its costs. However, this analysis has some limitations as well. The organiser can assume that he has covered all costs structures, required for the project. However, it can be possible that the organiser does not cover some unforeseen costs. In this context, this analysis will be failed to prove advantage to this organisers. Therefore, a cost-benefit analysis may not guide the organiser accordingly.

References:

Baranzini, A. and Carattini, S., 2017. Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environmental Economics and Policy Studies, 19(1), pp.197-227.

Baranzini, A. and Carattini, S., 2017. Effectiveness, earmarking and labeling: testing the acceptability of carbon taxes with survey data. Environmental Economics and Policy Studies, 19(1), pp.197-227.

Barr, N., 2012. Economics of the welfare state. Oxford University Press.

Hands, D.W., 2017. The road to rationalisation: A history of “Where the Empirical Lives”(or has lived) in consumer choice theory. The European Journal of the History of Economic Thought, 24(3), pp.555-588.

Joo, H.Y., Seo, Y.W. and Min, H., 2018. Examining the effects of government intervention on the firm’s environmental and technological innovation capabilities and export performance. International Journal of Production Research, pp.1-22.

Mechler, R., 2016. Reviewing estimates of the economic efficiency of disaster risk management: opportunities and limitations of using risk-based cost–benefit analysis. Natural Hazards, 81(3), pp.2121-2147.

Mishan, E.J., 2015. Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

Morgan, J. ed., 2015. What is neoclassical economics?: Debating the origins, meaning and significance. Routledge.

Nas, T.F., 2016. Cost-benefit analysis: Theory and application. Lexington Books.

Pendakur, K., 2018. Welfare analysis when people are different. Canadian Journal of Economics/Revue canadienne d'économique, 51(2), pp.321-360.

Pete, L., 2014. Regulatory policy and behavioural economics. OeCD Publishing.

Schofield, J.A., 2018. Cost-benefit analysis in urban & regional planning (Vol. 20). Routledge.

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