What are the effects of government policy on economic behavior

Published on the Aug 19, 2016 11 months ago by murmurnun - End › Aug 26, 2016 11 months ago
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Homework subject

Good afternoon, 

I am doing a homework for my economics class and I have a few questions. I would like to know what are the effects of government policy on economic behavior please.

I have started my work but I am still missing some impacts of policies.

Homework progress

  • State provision: those in poverty gain access to services they otherwise wouldn't be able to afford. But free access to these services reduces the incentive to work and is expensive to provide.
  • Progressive taxation: progressive taxation helps to reduce relative poverty, but it can also contribute to the poverty trap. Also, if high income earners are taxed too much, there is a risk that some of them will move abroad to an economy where they are less taxed. This could result in a loss of labor and money from the economy.

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Posted on Aug 19, 2016

I think the first two you have are correct. Here's what I can tell you:

  • Benefits: although means-tested benefits can be used to reduce absolute and relative poverty, they may reduce the incentive to work too, they can contribute to the poverty trap. Removing means-tested benefits could remove the poverty trap and greatly increase the incentive to work. In the long term, this could mean a reduction in poverty. However, at least in the short term, it would cause larger differences in income, and relative and absolute poverty would increase. Replacing means-tested benefits with universal benefits would help to remove the poverty trap, but the cost of these extra benefits might mean that those on low incomes are taxed more.
  • Economic growth: economic growth can be difficult to achieve, it requires sufficient resources to increase output and for markets to grow so that the increased output is always bought. Economic growth can actually result in larger inequalities in income, it might mainly benefit the rich so that they become even richer. It can also cause problems, like damage to the environment or the using up of finite resources. This will limit economic growth in the future, which might mean more poverty and inequality. 
  • National Minimum Wage: this can counteract monopsony power, if a monopsony is taking advantage of its power by paying workers low wages, the national minimum wage can stop the monopsony from doing this by raising the amount it pays. However, the national minimum wage might cause a reduction in the demand for labour because some employers would need to raise workers' wages, so they might wan to employ fewer people. This would lead to a rise in unemployment and therefore a rise in poverty. A national minimum wage doesn't take into account that the cost of living varies depending on where someone lives, so the standard of living for people who are earning the national minimum wage will vary depending on where they live. Also, the national minimum wage doesn't benefit anyone who is unemployed or poor.

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