IBDP Economics HL - Advanced Concepts & Evaluation

Front

Distinguish between adverse selection and moral hazard in the context of market failure.

Back

Adverse selection occurs *before* a transaction due to hidden information (e.g., a high-risk driver buying insurance), while moral hazard occurs *after* a transaction due to hidden action (e.g., driving recklessly *because* one is insured). Both lead to allocative inefficiency but require different solutions (screening vs. monitoring).

Front

Explain why monopolies may lack the incentive to be productively efficient in the long run.

Back

Since a monopoly is a price-maker with no rivals, it does not face the same competitive pressure to minimize costs as firms in perfect competition. This can lead to 'organizational slack' (X-inefficiency), where the firm produces at any point on the AC curve rather than at the minimum point (productive inefficiency).

Front

Evaluate the effectiveness of a buffer stock scheme in stabilizing agricultural prices.

Back

Buffer stocks aim to stabilize income and prices by buying surpluses (floor) and selling from stocks (ceiling). However, they require significant financing for storage and management. If the equilibrium price trends upward over time (due to inflation or demand growth), the agency will accumulate losses, eventually making the scheme unsustainable.

Front

Using the Lorenz Curve, explain the difference between income inequality and wealth inequality.

Back

The Lorenz Curve for wealth is typically significantly more bowed (further from the line of equality) than the curve for income. This is because wealth is accumulated over time (stock variable), whereas income is a flow variable. Inequality in wealth leads to inequality in future income via returns on assets (interest/dividends), creating an intergenerational cycle of inequality.

Front

Explain the 'Crowding Out' effect in the context of expansionary fiscal policy.

Back

Crowding out occurs when increased government spending (G) is financed by borrowing, increasing the demand for loanable funds. This raises interest rates, which subsequently reduces private investment (I). If I falls significantly, the overall increase in Aggregate Demand may be negligible, rendering the fiscal policy ineffective.