Economics: Internal Assessment
Commentary 1: How government legislation maximizes positive externalities of consumption of vaccines to ensure citizens’ economic well-being
Title of the article Covid-19: ‘Jab holidays’ for Hong Kong civil servants and warning of harsher penalties ahead as drive launched to boost
vaccine uptake
Source of the article HKFP. https://hongkongfp.com/2021/05/31/covid-19-jab-holidays-for-hong-kong-civil-servants-and-warning-of-harsher-penalties-
ahead-as-drive-launched-to-boost-vaccine-uptake/
Unit of the syllabus to Unit 2: Microeconomics
which the article relates
Key concept being used Well-being
The chosen article discusses the Hong Kong government’s launching of ‘a new campaign to drive a higher vaccination rate within the next three months’, including the provision of incentives to vaccinated individuals. This essay explores how government legislation maximizes positive externalities of consumption of vaccines to ensure citizens’ economic well-being. Government legislations are various measures taken by the government to regulate the private sector’s activities in alignment to economic goals. Positive externalities of consumption, or external benefits, are positive spillovers to a third party lying outside the transaction caused by the consumption of a good.
(Figure 1) The supply curve is given by S=MPC=MSC. This intersects with the demand curve, given at D=MPB, to give the market quantity of Qm and market price of Pm. The MSB curve represents the optimum level of vaccine consumption in order to reach Qopt. This, intersected with MSC, gives the most socially optimal number of vaccines administered. However, MPB<MSB, such that Qm<Qopt, meaning not enough people are willing and able to consume vaccines at a socially optimal level. The external benefit of vaccine consumption includes reaching herd immunity, and therefore ensuring the health and well-being of society - which is not felt at this point in time, as Qopt, i.e. ‘70% of the population’, is not yet reached. There is welfare loss, as there is an underallocation of vaccines to consumers, leading to market inefficiency.
(Figure 2) The demand curve shifts upwards from D1=MPB1 to D2=MPB2 as a result of government legislation, as the government provides consumers with incentives such as ‘extra paid vacation days’, ‘a lucky-draw for an apartment worth over HK$10 million’. The appeal of vaccination is thus increased as consumers receive additional private benefits, increasing the marginal private benefit by the same amount as the external benefit, shifting D=MPB outwards such that the new curve is equivalent to MSB. Therefore, demand intersects with supply at Qopt, producing a socially optimal level of output. Price increases from P1 to P2=Popt, such that producers are willing and able to produce sufficiently more vaccines for the population. Welfare loss is eliminated since the consumption value of the vaccine increases, compensating for the previous underallocation of resources and subsequently eliminating allocative inefficiency.
Considering the stakeholders, Hong Kong citizens are advantaged by the legislation, as they receive additional benefits such as complementary rewards, on top of the immunity received from the dose itself. Government expenditure increases drastically, as they have to simultaneously purchase more vaccines from vaccine firms, provide lucky-draw prizes, incentivize firms to take part in vaccination reward schemes and afford to set up a department to enforce regulations. The opportunity cost of government spending on healthcare, which should also be prioritised, is forgone, which may negatively impact the well-being of the rest of society. However, vaccine firms receive a higher revenue with increased price and quantity sold, which increases production; subsequently, workers experience higher job stability and more employment opportunities.
The policy has varied effects in the short and long term. In the short term, resource allocation is inefficient as both public and private spending increases significantly, with how changes in consumption may not happen immediately but rather takes a long time as firstly, vaccines typically take two weeks to take effect, and secondly, it may take months for enough people to vaccinate themselves; ‘Hong Kong’s vaccination drive has seen a slow uptake’ as only ‘21% of the eligible population’ has taken the jab from February to May. Producers may not be able to adapt to the increased demand in such a short time either, so vaccine supply may decrease. Yet in the long term, if the legislation proves effective, the acquisition of herd immunity in Hong Kong will allow a higher level of overall well-being to be achieved.
Finally, the assumption of ‘ceteris paribus’ needs to be challenged. Despite the legislation, variable conditions which may hinder the vaccine market from reaching Qopt were not considered: firstly, information about side effects and vaccine disinformation may be spreading simultaneously, increasing consumer distrust in vaccines; the regulation is also politically unfavored by some citizens which thus reduces effective demand. Secondly, vaccines do not guarantee immunity - people may act more carelessly once they are vaccinated since they are granted the privilege of facing lenient COVID restrictions, thus leading to moral hazard, if incentives enable them to freely visit ‘cinemas, museums and sports venues’. In addition, it may be difficult to calculate the external benefits to fully internalise the externality.
In conclusion, government legislation compensates for the external benefit received by society from the consumption of vaccines through providing incentives to increase demand. Government action has effectively improved the economic well-being of society: ‘the city’s fourth wave of infections has officially subsided, with no locally-transmitted cases’ ‘reported for 37 straight days’; bringing society closer to developing herd immunity from COVID-19.
Commentary 2: The effect of contractionary monetary policy on reducing economic pressures caused by inflation
Title of the article US Economy Will ‘Narrowly Avoid’ Recession in 2022 and 2023, IMF Says
Source of the article Bloomberg. https://www.bloomberg.com/news/articles/2022-06-24/us-economy-to-narrowly-avoid-recession-in-2022-23-imf-says.
Unit of the syllabus to Unit 3: Macroeconomics
which the article relates
Key concept being used Choice
The chosen article discusses the US Federal Reserve’s attempt to increase its interest rates to curb inflation, especially following COVID-19 and the Russian invasion of Ukraine having restricted global supply, created labour shortages and additional uncertainties. This essay explores how contractionary monetary policy reduces economic pressures caused by inflation, as well as the opportunity costs of choosing this policy over other policies. Contractionary monetary policies are macroeconomic policies aimed at decreasing price levels by either increasing interest rates or restricting money supply. Inflation is the sustained increase in general price level of goods and services in an economy.
(Figure 1) The aggregate demand curve before inflation-inducing events, such as the pandemic and Russia-Ukraine conflict, is given at AD, and the aggregate supply curve is given at SRAS1, producing an equilibrium price level of Plp and output Yp, reaching potential output and thus aligning with the LRAS curve. ‘Since Russia’s invasion of Ukraine in February, global oil prices have risen dramatically, exacerbating inflation that had been stoked by pandemic-related supply-chain disruptions and, especially in the US, the fiscal response to Covid-19’. This led to supply-shocks affecting costs of production, shifting SRAS1 to SRAS2 and causing a movement upwards along the AD curve, leading price levels to rise to Pl2 and a reduction in real output to Yrec, resulting in cost-push inflation.
(Figure 2) With the implementation of contractionary monetary policy, money supply decreases and interest rates increase alongside a reduction in the amount of money demanded, the US already having ‘raised rates by 1.5 percentage points this year and officials forecast about 1.75 points of further cumulative tightening in 2022’ as the Fed plans to quickly get ‘its benchmark rate to 3.5%-4%’. As a rise in interest rates increases cost of borrowing and profits from depositing, causing consumer and investment spending to decrease thus affecting C and I components of AD, AD1 shifts left to AD2 and returns to its original price levels at Plp, the lowered price level signifying a reduction in inflationary pressures. Real output further decreases with this policy from Yrec1 to Yrec2, further reducing rGDP, a negative effect following the government’s choice to influence AD instead of AS.
The policy’s effects vary with stakeholders. Increased interest rates mean that borrowers experience higher costs, and lenders and depositors make higher profits, so American consumers may spend less and deposit more due to higher interest rates. Commercial banks are able to experience higher profits from higher interest rates, and with less borrowers and more depositors, their cash reserve levels may increase thus increasing their financial security and adaptability to emergency. The government does not face any political pressure, as monetary policies are operated by the central bank, i.e. the Fed, which is independent of the US government. However, firms may subsequently receive less revenue due to decrease in aggregate spending; loans are made more expensive so they are likelier to halt investment. The economic slowdown may mean companies hire fewer employees amid global supply constraints, which may exacerbate unemployment but given the US is experiencing ‘domestic labor shortages’, a reduction in labour demand may ameliorate labour shortage issues.
In the short-term, the economy would likely ‘slow in 2022/23’ as low aggregate demand and high interest rates significantly reduce aggregate spending and output, which may cause a recession. However, in the long-term, the US may be able to recovery from excessive ‘all-time high’ inflation, allowing lower cost of living and thus higher levels of spending, investment and overall economic activity, allowing the economy to recover from its previous inflation-induced economic stagnation and offset the slowed economic growth from the contractionary monetary policy.
A primary area of concern is the government’s priorities in attempting to fight inflation: the government chooses to prioritise contractionary monetary policy, which has caused real output to decrease even more than previously, over supply-side policies, such as Biden’s ‘Build-Back-Better agenda’ to ‘help release supply-side constraints’, and ‘changes to tax, spending, and immigration policy that would help create jobs, increase supply and support the poor’, which has unfortunately failed to pass in Congress. Monetary policies are a cheaper, more straightforward choice of solution to inflation than supply-side policies; however, this means AD is shifted inwards instead of shifting SRAS and LRAS outwards, reducing real output and widening the recession, whereas the benefit of increasing real output and productivity through supply-side policies is forgone.
In conclusion, contractionary monetary policy decreases price levels by shifting aggregate demand inwards, reducing inflationary pressures, though while potentially creating a recession. The government faces the choice of whether to curb inflation at the expense of economic growth, as well as the choice of implementing a cheaper, easier-to-implement contractionary monetary policy, which has the negative side effect of reduced economic activity, over tariff reductions or costly supply-side policies such as the Build-Back-Better agenda.
Commentary 3: The economic impacts brought by free trade following tariff reductions
Title of the article Exclusive: U.S. rethinks steps on China tariffs in wake of Taiwan response
Source of the article Reuters. https://www.reuters.com/markets/us/exclusive-us-rethinks-steps-china-tariffs-wake-taiwan-response-sources-2022-08-10.
Unit of the syllabus to Unit 4: The global economy
which the article relates
Key concept being used Change
The chosen article discusses the USA’s consideration of rolling back tariffs against China following external sociopolitical factors, preventing the escalation of political tension between countries, possibly easing the severity of the US-China trade war while relieving tariff-induced inflationary pressures. This essay explores the economic impacts brought by free trade following tariff exclusions, bringing a positive change to mediate existing financial tensions from the trade war. Tariffs are taxes imposed on imported goods from other countries. Free trade is a country’s engagement in trade with other countries in absence of tariffs, quotas or similar trade restrictions.
(Figure 1) The domestic demand and domestic supply curves for the US are given at Dd and Sd respectively. With the existing tariff imposition, China trades at a higher price with the US than the world price Pw, at price (Pw + T) where T denotes tariff per unit. Compared to trading at world price, this gives a lower domestic demand at Q3 instead of Q4 and a higher domestic supply at Q2 instead of Q1, and the import quantity from China at (Q3 - Q2). The government receives a tariff revenue from Chinese importers as shaded in the diagram, and deadweight loss occurs with global misallocation of resources as outlined in the diagram; the left triangle denoting the loss of more efficient foreign producers while the right denotes a loss of domestic consumption.
(Figure 2) Following political escalations, the US government decides to eliminate some tariffs and expand the tariff exclusions list to soothe the US-China tension, adopting free trade. For the imported goods on the tariff exclusions list, the price of imported goods reverts from (Pw + T) back down to Pw. Domestic quantity supplied reduces from Q2 to Q1, while domestic demand increases from Q3 to Q4. This increases the import quantities to (Q4 - Q1) from (Q3 - Q2) at the same amount prior to the tariffs, eliminating the deadweight loss and the tariff revenue received by the government for these selected goods.
The tariff exclusions impact different stakeholders varyingly. With the elimination of the deadweight loss illustrated in figure 1, domestic consumers are benefited, as prices of imports are lowered with tariffs eliminated, allowing domestic consumption to be regained; domestic producers who depend on imported raw materials, such as ‘U.S. industries from consumer electronics and retailers to automotive and aerospace’, would also benefit from lower cost of goods and thus lower cost of production if Biden ‘eliminates the duties of up to 25%’, as they gain raw materials from more efficient Chinese foreign producers, eliminating deadweight loss as well. Foreign producers, ie. Chinese producers, clearly benefit from tariff exemptions as they no longer have to pay additionally, reducing costs and raising revenue. Yet domestic producers in the same industries as that of tariff-exempted imports are worse off, as increased foreign imports cause domestic producers to lose international competitiveness, reducing production and threatening workers too as they may face higher risk of redundancy.
The tariff exclusion has varied effects in the short and long term. In the short run, the tariff rollback will experience a time lag in its implementation, as long reviews are needed; ‘the U.S. Trade Representative's office is now in the midst of a statutory four-year review of the tariffs imposed by Trump, which could take a few more months to complete’. However, in the long run, as the tariff reduction is imposed, this will foster economic growth, reduce inflation and positively change US-China political relations. Although the ‘reciprocal rollbacks [they sought] from Beijing were rebuffed’, this reduces the risk of retaliatory tariffs imposed on US from China amidst the US’s Taiwan visit, allowing for financial and political stability and even potential prosperity over time.
The decision to implement a tariff exclusion requires the consideration of priorities. The US government chose to prioritize managing inflation and easing political tensions over receiving tariff revenues. Tariffs ease inflationary pressures, as ‘[easing] costs of duties imposed on Chinese imports during predecessor Donald Trump's tenure’ could ‘tamp down skyrocketing inflation’, allowing a potential positive change in US’s economic growth following reduced inflation and increased productivity, overall consumption and productive efficiency. Political tensions between China and US are eased with the alleviation of financial tensions, improving trade relations which is a priority in wake of ‘Pelosi’s visit last week to Taiwan’. However, implementing the tariff comes at the cost of ‘$370 billion’ of government revenue, as tariffs act as a source of government income, leading to a lack of spending on growing their domestic industries to compete with foreign producers.
In conclusion, tariffs bring various economic impacts to the US economy, all of which could bring a possible positive change to the overall financial and political situation of the US, however at the cost of various stakeholders such as certain domestic producers, as well as the forfeiting of government revenue.
