theme 1 case studies

Question 1

Free Market Economy case study

Answer 1

• Hong Kong: ranked as the most economically free market in the world (index of economic freedom) - due to low tax rates, relaxed regulations on businesses, & highly capitalist economic system
• UK is the 7th most free economy in the world (2021)
• Despite high levels of inequality, free economies
  benefit from wider variety & better quality of goods, higher incomes & lower unemployment

Question 2

Command Economy case study

Answer 2

• North Korea & Cuba have the most command-based economy in the world
• These countries benefit from low levels of inequality (government controls wages & employment) - suffers from food shortages, high inflation, corruption & unemployment
• In North Korea 20% of children are affected by malnutrition

Question 3

Negative production externality case study

Answer 3

• BP Gulf Oil Spill (2010)
• Event: BP’s underwater well spilled over 35,000 barrels of oil into the Gulf of Mexico, the largest accidental ocean oil spill
• Private Costs: BP spent $4 billion on cleanup and $5 billion in penalties.

External Costs:
- Economic: $700 million lost in fishing & tourism revenue, 3,000 jobs lost.
- Environmental: Damage to shorelines across 4 states (Louisiana, Alabama, Mississippi, Florida).
- Wildlife Impact: Over 1,700 stranded sea turtles (vs. 240/year) & 930 stranded dolphins/whales (vs. 20/year)

Question 4

Negative consumption externality case study

Answer 4

• Passive smoking
• Health Impact: Passive smoking is linked to serious illnesses such as lung cancer and heart disease.
• Economic Burden: Smoking-related healthcare costs totaled $422 billion (5.7% of global health expenditure) in 2012 - tobacco epidemic most advanced in Europe/ USA
• Global GDP Impact: The total economic cost of smoking was 1.8% of global GDP, with nearly 40% of this burden falling on developing countries

Question 5

Positive production externality case study

Answer 5

• Spending on public transport
• Economic Benefits: Every £1 spent on public transport generates £4 for the wider economy.
• Business Impact: Lower transport costs help firms access better suppliers (high quality, low cost inputs), reach more customers, and attract skilled workers.
• Labour Market Benefits: Improved transport reduces geographical immobility, helping individuals find jobs that match their skills

Question 6

Positive consumption externality case study

Answer 6

• Education
• Government Investment: In 2018, the UK spent £90bn (4.3% of GDP) on education.
• Economic Benefits: Each additional year of education is linked to 18% higher GDP per capita.
• Wider Impact: Education promotes innovation, technological adoption, and economic growth, while also reducing inequality.

Question 7

Example tax on demerit goods (excise duty)

Answer 7

• Example: Excise duties on tobacco, petrol, and alcohol to reduce consumption due to negative externalities.
• Impact on Demand: A 1% price increase leads to a 0.5% fall in demand (inelastic PED).
• Variation in Elasticity:
  Occasional consumers: More responsive to price changes (elastic)
  Heavy consumers: Less responsive (inelastic)

Question 8

Example tax on demerit goods (sugar tax)

Answer 8

• Tax Details: 20p per litre on soft drinks with high sugar content.
• Revenue: Expected to raise £240m per year, funding school sports and breakfast clubs.
• Impact: 30% reduction in sugary drink consumption since its introduction

Question 9

Subsidies case study

Answer 9

• EU Farming Subsidies – Common Agricultural Policy (CAP)
• Overview: Launched in 1962, CAP costs the EU £50bn per year to support farmers, boost incomes, & maintain rural landscapes
• Economic Impact:
  Direct payments reduce farming costs & encourage production - 11 million farms & 22 million agricultural workers benefit
• Criticism: overproduction leads to surplus waste or dumping in developing nations, harming local farmers.
• Inefficiency: Farming generates 6% of EU GDP but receives 30% of the EU budget + high admin costs (6.7%–9.3% of CAP payments).
• CAP ensures food security, reducing reliance on unstable imports & providing stable food prices

Question 10

Minimum price case study

Answer 10

• Minimum Price on Alcohol (Scotland, 2018)
• Policy: 50p per unit minimum price to reduce excessive alcohol consumption
• Target: Increase the cost of cheap lager, cider, and spirits sold in supermarkets and off-licences
• Impact: 3% drop in alcohol sales within the first year +
  projected to save 392 lives by 2023 if trends continue

Question 11

Maximum price case study example

Answer 11

Maximum Wage – Proposed CEO Pay Cap

• Current Inequality: FTSE 100 CEOs earn 144 times the UK average salary (£4m per year or £1,000/hour vs. £29,500/year in 2018).
• Proposed Policy (labour government) A 20:1 maximum pay ratio for firms with government contracts (e.g., if a cleaner earns £50/day, the CEO cannot exceed £1,000/day).

Potential Impact:
- Reduces income inequality.
- May deter top CEOs, as they might seek roles in firms without pay caps

Question 12

Government regulation/awareness campaigns case study

Answer 12

• THINK! Road Safety Campaign
• Background: The UK has run road safety campaigns for 75+ years, with THINK! officially launched in 2000
• Key Focus Areas: Encouraging seat belt use, tackling speeding, drink/drug driving, & mobile phone use
• Impact: UK road deaths fell by 46% in the decade after THINK! began.
• Recent Efforts (2019): Adverts in cinemas & social media targeting young drivers with safety tips on different driving conditions

Question 13

Give a stat on the negatives of incomplete information (under-consumption)?

Answer 13

• 40% of young adults without GCSEs are unemployed
• Incomplete info -> not informed of benefits of education -> misallocate resources (e.g. time spent revising) -> underconsume education -> market failure

Question 14

Example government campaigns to fix incomplete info.

Answer 14

• Change 4 life exercise campaign
• 5 a day your way
• Healthy foods, gyms etc are underconsumed

Question 15

Example gov intervention to fix asymmetric info?

Answer 15

• If you find a fault in your car 6 months after buying it, the seller is required to give a full refund, replacement, or repair
• ## Asymmetric info in private healthcare (patients pay more than they should) -> regulators prevent exploitation

Question 16

Public Good example (flood defences)

Answer 16

• The UK Environment Agency spent £5.2bn (2021–2027) on flood defence schemes
  📍 Includes the Thames Barrier, protecting London from tidal surge
• Flood damage in 2015 cost the UK £1.3bn