Economic Theory and Policy

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You are recommended to write the essay using subsections. Your essay must have an introduction and a conclusion. If you use any reference, you must list them in reference section at the end of the essay.

 

Scenario

In an economy, the working class households with average weekly disposable income of £500:00 comprises of households of couples and households of families (with children). A survey of their expenditure pattern indicates that they spend their disposable income on two baskets of goods, food, and others. A representative couple spends 45% of their disposable income on food. A representative family for which the head of the family is male spends 65% of their disposable income on food. However, a representative family for which the head of the family is female spends 55% of their disposable income on food. A basket of food costs £15:00, while a unit of all other goods costs £20:00. The share of expenditure is fixed for couples and families.

The government is considering two policy options under its welfare program in order to encourage the consumption of other goods. This is because the government believes that by encouraging the consumption of other goods, it can improve the standard of living for the families, which will in turns encourage the couples to start families. Under policy option 1, the government is thinking to increase the child benefit, which will add £80:00 per week to the disposable income of families with children. In addition to this, the government will allow an income tax credit to all households, which will add £40:00 per week to the disposable income of all households. Under policy option 2 the government is considering to tax the price of food. The government is considering to introduce a tax of 20% on the per unit purchase price of food. The government will only implement any one of these two policies.

The governments aim is to implement these policies without changing the welfare of the couples or the families, i.e. keeping them equally happy as they were without these policies. This in turns implies that the government aims to keep the welfare of both couples and families fixed at some particular level, which is their best welfare level.

 

Essay Question

Write an essay discussing the impact of policy option 1 and policy option 2 (as described in the scenario) on the consumption pattern of couples, families with male head and families with female head. Discuss which policy option is more effective in achieving the governments targets. In your essay, you may propose other policies that may be required to make policy option 1 or policy option 2 more effective. If you do so, you must discuss in detail why your proposed policy can perform better. Your analysis of the scenario in the essay must be based on a technical approach involving scientific methods (e.g. optimization, consumer theory, Slutsky decompositions, income and price consumption curves, and other graphs) that are applied to accurately examine the impacts of the policies.

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