QUESTION 1

The Global Financial Crisis created a case for regulating the salaries of banking sector executives. In 2009, US President Barack Obama and the US Congress introduced a $500,000 bonus payment cap on designated executives of companies seeking a bailout. In response, Reed Hastings (CEO of Netflix) wrote an opinion piece in The New York Times. Unless otherwise specified, assume that labour markets in the US are perfectly competitive, and initially in autarky equilibria.

(a) Explain the impact of the bonus payment cap on the labour market of US banking sector executives. Substantiate your answers with a diagram depicting the demand/supply in the labour market.

(b) Instead of the bonus payment cap, consider instead Reed Hasting's proposal of an income tax hike. Explain the impact of an income tax hike on the labour market of US banking sector executives. Substantiate your answers with a diagram depicting the demand/supply in the labour market.

(c) According to the article, "Some will tell you [that an income tax hike] would reduce the incentive to earn but I don't see that as likely. Besides, [...] most of our motivation is the sheer challenge of the job anyway." What do these statements imply in terms of who might bear most of the (proposed) tax burden? Substantiate your answers with a diagram depicting the demand/supply in the labour market. In light of public concerns regarding overpaid banking sector executives, do your answers make the tax hike proposal more or less appealing? [2 marks]

(d) Suppose we were to compare the two policy options - a bonus payment cap and an income tax hike - where in both cases the same equilibrium labour quantity of banking sector executives is achieved. In which case is the society better off? Substantiate your answers with a diagram depicting the demand/supply in the labour market.

(e) Suppose that labour markets in the US are open to international trade and there is perfect labour mobility across national boundaries. Given that there are many foreign banking

sector executives who are unemployed after the Global Financial Crisis, how might your answers to part (a) change? Substantiate your answers with appropriate diagrams.

QUESTION 2

Most countries use a combination of markets and government intervention to solve the economic problem of how much to produce and consume. For a country of your choice, explain with an example, where, why, and how markets and government interventions work well or poorly in making decisions to maximise society's net benefit.

Suggested answer format:

(a) Explain how competitive markets solve the economic problem that you have identified.

(b) Set out the key assumptions required for the market solution to maximise society's net benefits. In this context, explain why government intervention in this market is likely to cause an efficiency loss.

(c) Consider a possible market failure in your example, and then describe the reasons for, and the magnitude of, the market failure.

(d) For the market failure that you have identified, discuss government policy options to correct the market failure and how they might improve society's net benefit.

Attachment:- Please Raise My Taxes.rar