Explain how government spending might promote greater equity in an economy.

Evaluate the view that government policies to promote greater equity will always have a negative effect on efficiency.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of government spending, equity
• Lorenz curve diagram showing a Lorenz curve shifting closer to the line of perfect income equality because of government spending to promote equity (or a subsidy diagram or an AD/AS diagram showing increasing AD and real GDP and therefore implying increased employment)
• explanation of the linkages between government spending (eg on merit and public goods, transfer payments and subsidies), taxation and equity
• examples of actual government spending measures (eg healthcare services, education, sanitation, water supplies, public parks, public transportation, old age pensions, unemployment benefits, child allowances) that have promoted equity.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definitions of efficiency, equity
• an AD/AS diagram to show LRAS shifting to the left (less efficiency) or to the right (greater efficiency), an externalities diagram to show government policies improving allocative efficiency, a supply and demand diagram to show welfare loss due to government policies to promote equity
• explanation of how government spending and taxation might adversely impact efficiency (eg through the disincentive effects of progressive taxation, transfer payments, subsidized goods and services, through the decrease in social surplus due to taxes and price ceilings)
• examples of government policies having either a negative or positive impact on efficiency
• synthesis and evaluation (evaluate).

Evaluation may include: consideration of the hypothetical trade-off between equity and efficiency, consideration of how government spending on socially desirable goods and services (eg health care services, education, sanitation, clean water supplies) might positively impact efficiency in the utilization of the economy’s resources in the long run (eg through poverty reduction and human capital formation) and in the short run (eg through the positive impact of government spending on AD), consideration of how automatic stabilizers might improve efficiency in the utilization of the economy’s resources in the short run (eg through the positive impact on AD during recessions), consideration of how certain kinds of government spending and taxation may increase allocative efficiency (eg through the increased consumption of merit goods and decreased consumption of demerit goods), government provision of merit goods may be less efficient than private provision, consideration of the word “always”, consideration of the meaning of the word “equity” (eg the difference between equity in the distribution of income and equality in the distribution of income, equity as equality of opportunity), consideration of the meaning of the word “efficiency” (eg productive and allocative efficiency in microeconomics, efficiency in the utilization of the economy’s factors of production in macroeconomics).

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

NB It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.

Surprisingly, many candidates focused completely on government spending and its effect on gross domestic product (and the economy at large) while ignoring the “equity” component of the question. Since there are different possible valid interpretations of the meaning of equity, a very specific and particular definition of the term was not expected. However, candidates were expected to provide some working definition at the beginning of their answers and to use this definition consistently to answer the question. With that being said, there were some interpretations of the meaning of equity which were considered unacceptable in the context of the IB economics syllabus. For example, some candidates made references to equity in the sense of “owner’s equity” in a business and this particular interpretation of the meaning of equity led those candidates astray. Quite a few candidates considered “government spending to promote equity” in the economy to be the same as “government subsidies to help small firms (without economies of scale) compete with larger firms (with considerable economies of scale)”, and this approach was also deemed unacceptable.

This was a rather broad question and allowed for various valid approaches. There are different possible valid interpretations of the meaning of equity and efficiency in the context of the IB economics syllabus. There are also many government policies and all of them may be reasonably considered to affect equity and/or efficiency in one way or another. Therefore, neither particular definitions of the relevant economic terms nor a particular example of government policy (or set of policies) were required for top marks. However, it was expected that candidates should provide acceptable working definitions of equity and efficiency in the beginning of their responses, then use these definitions to link equity and efficiency to particular government policies and to evaluate these policies. Candidates who ignored efficiency and equity (or only mentioned them in a vague manner) and proceeded to evaluate government policies in general got little credit for their responses to this question item. The best candidates were able to give acceptable definitions of efficiency and equity at the beginning, to use these definitions consistently throughout the response, to identify appropriate government policies to promote equity, and to evaluate both the positive and negative effects of those policies on efficiency.