The table below shows selected data collected by the finance ministry in Norvale. Norvale is a mixed economy: private firms produce most food and manufactur...
Question 1 Report
The table below shows selected data collected by the finance ministry in Norvale. Norvale is a mixed economy: private firms produce most food and manufactured goods, but the government supplies healthcare and pays benefits. A fall in tax revenue has led ministers to examine whether more services should be contracted to private firms. The figures are estimates for one financial year and show that government activity can affect both economic growth and the distribution of income.
| Item | Previous year | Current year |
|---|---|---|
| Government spending on healthcare ($bn) | 18 | 21 |
| Government spending on unemployment benefits ($bn) | 6 | 9 |
| Revenue from income tax ($bn) | 31 | 29 |
| Private-sector investment ($bn) | 44 | 47 |
| Unemployment rate (%) | 5.2 | 6.8 |
(a) Identify the change in the unemployment rate shown in Table 1. [2]
(b) Define income tax in the context of Norvale. [2]
(c) Which item in Table 1 is a transfer payment? Explain your answer. [2]
(d) Explain two reasons why a government in a mixed economy may provide healthcare rather than leave all healthcare to the market. [4]
Answer Details
(a) Unemployment increased from 5.2% to 6.8%. [2] This is an increase of 1.6 percentage points, not 1.6%.
(b) Income tax is a compulsory payment to government based on an individual's income or earnings. [2]
(c) Unemployment benefits are a transfer payment. [2] They transfer income to unemployed people without payment being made for current production of a good or service.
(d) Government may provide healthcare because it creates positive external benefits. [4] A healthier workforce is more productive and treatment can reduce the spread of disease, so a market may provide less healthcare than is socially efficient. Private treatment prices or insurance may exclude low-income households, whereas public provision improves access and equity. Public provision can also ensure emergency treatment is available where it would not be profitable and may use government purchasing power to control costs.
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