AQA Economics UNIT 3 - Cost-Benefit Analysis

Basic presentation for study notes on cost-benefit analysis - tailored to AQA spec. 

Please note that presentation may appear incomplete due to page references. These references always refer to diagrams you can find in copies of the AQA Economics A2/AS textbooks - I just couldn't be bothered to find the diagram for my own revision. 

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Key terms
· Government failure
­ When government intervention in the economy is
ineffective, wasteful or damaging
· Cost-benefit analysis
­ A technique assessing all the costs and benefits
likely to result from a certain economic decision…read more

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The law of unintended consequences
· When the government intervenes to correct
market failure, the policy used will result in
effects in the market that were not intended ­
these can be positive or negative.
· If positive, the intervention can be justified on
the grounds that there has been a "net
welfare gain", however if negative and social
costs > social benefits results in govt. failure…read more

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Public choice theory
· Public choice theory argues that intervention
should be minimal within the market, as many
past intervention policies used by the govt. to
correct market failure have resulted in govt.
· It states that allocative efficiency is achieved
effectively through the price mechanism and the
functions of price
· Advocates consumer sovereignty within the
market and that the government should act as a
"night watchman"…read more

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Public interest theory
· This theory supports government intervention
in the market and states that the government
can achieve a more socially desirable resource
allocation than unregulated market forces
· Governments can intervene discreetly in order
to stabilise the market economy…read more

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Cost ­ benefit analysis
· Governments use CBA to prevent any policies
resulting in government failure
· CBA is needed when making economic
decisions because of market imperfections
· The techniques used in CBA are:
­ Private sector investment appraisal
­ Discounting the future
­ Shadow Pricing…read more

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