Railway reform in Belland

Read the extracts and answer the questions that follow.

Text A — Privatization

1. Belland transferred its state-owned passenger railway to private investors. This privatization was intended to create stronger profit incentives, reduce costs and improve service quality.

2. Passenger journeys subsequently increased, but fares also rose. Consumer groups argue that the railway remains a natural monopoly and that ownership transfer alone cannot create competition.

Text B — Regulation and efficiency

1. The government also introduced deregulation, simplifying rules governing new freight operators. Entry increased and delivery costs fell. However, railway unions claim that reduced safety requirements have increased risks to workers and passengers.

2. The competition authority is considering fare controls and minimum safety standards. These measures could protect consumers but might weaken incentives to invest.

Table 1 — Passenger railway data

Passenger railway data before and after privatization.

Table 2 — Operating efficiency

Passenger railway operating efficiency before and after privatization.

Innovation incentives in Darsia

Read the extracts and answer the questions that follow.

Text A — Tax reform

1. Darsia reduced its business tax rate to encourage investment. The government expects firms to retain more profit and purchase machinery, but critics claim that firms may instead distribute the additional profit to shareholders.

2. Personal income taxes were also reduced. This may increase work incentives and entrepreneurship, although some workers may choose more leisure after their disposable income rises.

Text B — Innovation policy

1. Darsia offers tax credits for research and development (R&D) because new ideas may create benefits for firms other than the original innovator. Public universities have also received research grants.

2. The tax cuts and R&D tax credits reduce government revenue, while research grants increase government expenditure. If the resulting budget deficit is financed by borrowing, future debt servicing or cuts to education and infrastructure may offset the supply-side gains.

Table 1 — Private investment

Annual private investment in Darsia before and after tax reform.

Table 2 — Firm profit and taxation

Representative firm's profit and business-tax rates

Competition reforms in Faron

Read the extracts and answer the questions that follow.

Text A — Trade reform

1. Faron reduced tariffs on machinery and consumer products. The government expects trade liberalization to lower input costs and expose domestic firms to stronger competition.

2. Some inefficient producers have closed, creating structural unemployment. Consumers have benefited from lower prices and greater choice, while exporting firms can purchase cheaper machinery.

Text B — Domestic competition

1. Three large firms dominate Faron’s food-processing industry. The government has introduced anti-monopoly regulation, investigating collusion and preventing exclusionary agreements with retailers.

2. Large firms argue that their scale permits lower average costs and that intervention may reduce investment. Consumer organizations claim that stronger competition will lower prices and encourage innovation.

Table 1 — Imported machinery

Prices of an imported machine in Faron, with the trade-model assumption for part (c).

Table 2 — Consumer market

Consumer market before and after trade liberalization.

Galena’s advanced-manufacturing strategy

Read the extracts and answer the questions that follow.

Text A — Targeted support

1. Galena has introduced an industrial policy supporting battery and medical-equipment production through grants, public procurement and concessional finance. The government expects these sectors to create skilled employment and export capacity.

2. Critics argue that ministers may select firms for political reasons. Supported firms could become dependent on subsidies and lobby against their withdrawal.

Text B — Coordinated investment

1. Technical colleges are developing courses with manufacturers, while the government is financing laboratories and reliable electricity networks. This coordination is intended to increase productive capacity and attract private investment.

2. The programme raises aggregate demand in the short run and requires additional government borrowing. Its long-run success depends on innovation, worker skills and foreign demand.

Table 1 — Public support and private investment

Annual public support and additional private investment in supported sectors.

Table 2 — Supported-sector exports

Annual exports before and after the industrial programme.

Green transport in Harvia

Read the extracts and answer the questions that follow.

Text A — Urban transport

1. Congested roads raise delivery costs and expose residents to air pollution. Harvia is constructing an electric metro and upgrading freight routes. The government expects this infrastructure to improve efficiency and crowd in private investment.

2. The metro may create positive externalities by reducing congestion and pollution. However, construction is costly, and inaccurate passenger forecasts could leave an underused system.

Text B — Macroeconomic effects

1. Harvia defines sustainable economic growth as growth that can continue without undermining future living standards or environmental resources.

2. The economy is currently operating close to full employment. Construction spending will raise aggregate demand before the transport network substantially increases aggregate supply, potentially increasing inflation and public debt.

Table 1 — Freight journey data

Freight journey data before and after the transport upgrade.

Table 2 — Government debt

Government debt and GDP in Harvia, with GDP assumed unchanged for both debt-ratio calculations.

Skills mismatch in Isola

Read the extracts and answer the questions that follow.

Text A — Unemployment

1. Isola has unemployed construction workers while software and renewable-energy firms report vacancies. This structural unemployment reflects a mismatch between workers’ skills and expanding industries’ requirements.

2. The government funds retraining and relocation grants to improve occupational mobility. Employers help design courses, but completion does not guarantee a job.

Text B — The economic slowdown

1. Isola is also experiencing a recession caused by falling consumption and investment. Some economists argue that retraining cannot by itself correct cyclical unemployment when firms face insufficient demand.

2. The government is considering combining retraining with temporary demand-side support. Its budget is limited, and unsuitable courses would waste scarce resources.

Table 1 — Workers and vacancies

Retraining completion, employment outcomes and programme cost in Isola.

Table 2 — Retraining outcomes

Retraining outcomes in Isola

Water-sector privatization in Jorvik

Read the extracts and answer the questions that follow.

Text A — Ownership reform

1. Jorvik privatized its regional water supplier to improve efficiency and finance replacement of leaking pipes. Privatization created profit incentives, but households cannot easily choose another supplier.

2. Economists describe the network as a natural monopoly because duplicating reservoirs and pipes would be costly. Following privatization, operating efficiency improved but household charges increased.

Text B — Regulation and investment

1. The government created an independent regulator that limits charges and sets water-quality standards. The firm argues that strict price controls reduce funds available for infrastructure investment.

2. Low-income households spend a relatively large share of income on water. Environmental groups also warn that weak regulation could encourage excessive extraction from rivers.

Table 1 — Operating efficiency

Annual operating cost and water supplied before and after privatization.

Table 2 — Household water affordability

Monthly income and water charges for a low-income household.

Productivity and inflation in Kintara

Read the extracts and answer the questions that follow.

Text A — Rising costs

1. Kintara has experienced persistent inflation as nominal wages have risen faster than labour productivity. Firms report increasing unit labour costs, weakening export competitiveness.

2. The government proposes vocational training, automation grants and reduced business taxes. These supply-side policies aim to raise productivity, reduce costs and expand productive capacity.

Text B — Timing and demand

1. Training and automation may take years to affect output. Tax reductions and grants may increase consumption and investment immediately, raising aggregate demand.

2. The central bank warns that if demand expands before productive capacity, inflation may initially accelerate. Critics also question whether tax reductions will generate enough additional investment to justify lost revenue.

Table 1 — Wages and productivity

Average annual labour cost and output per worker in Kintara.

Table 2 — Consumer price index

Consumer price index in Kintara

Vocational training in Darsenia

Darsenia has experienced rapid technological change. Employers report shortages of technicians, while many workers formerly employed in traditional manufacturing remain unemployed. The government introduced a vocational training programme designed jointly by technical colleges and employers.

Table 1 presents selected labour-market and output data before the programme and three years after its introduction.

Selected labour-market and output data for Darsenia.

The programme costs the government 1.8 billion dinars annually. An independent review found that most graduates obtained qualifications relevant to expanding industries, although participation was lower in rural areas.

Business taxation and research in Montara

Montara’s government reduced the business profit tax and introduced a tax credit for research and development (R&D). It expects the reforms to increase private investment, innovation and productive capacity. Critics argue that some firms may distribute their additional retained profit to shareholders rather than invest it.

Table 1 shows information for Orion Technologies, a representative domestic firm, before and after the reforms.

Orion Technologies before and after Montara’s business tax and R&D reforms.

The economy is currently operating close to its potential output. The tax reductions are expected to increase investment expenditure immediately, but successful innovations may take several years to affect production.

Minimum-wage reform in Belland

Belland has a legally established minimum wage of 15 crowns per hour. The government argues that reducing the minimum wage to the competitive equilibrium level would increase labour-market flexibility, reduce firms’ costs and improve international competitiveness. Labour unions argue that the reform would increase in-work poverty.

Table 1 presents estimates for Belland’s competitive labour market.

Table 1: Estimated labour-market quantities in Belland

The estimates assume other factors affecting labour demand and supply remain unchanged. Around 40% of minimum-wage workers live in households in the lowest income quintile.

Freight infrastructure in Estavia

Estavia’s government is considering constructing an electrified freight-rail link between its industrial region and its main port. Exporters currently rely mainly on congested roads. The rail project is intended to reduce transport costs, improve reliability and attract private investment.

Table 1 gives selected estimates for the project.

Selected estimates for Estavia’s proposed freight-rail project, including total construction expenditure over the four-year construction period.

The project would be financed through government borrowing. Estavia is close to full employment, and the railway would take four years to construct. Environmental groups support lower road congestion but oppose the proposed route through a wetland.

Telecommunications privatization in Lydora

Lydora privatized its state-owned telecommunications provider, LydoraTel, and permitted private competitors to enter the market. The government expected profit incentives and competition to improve productive efficiency. Consumer groups remain concerned that LydoraTel owns the national network and could restrict competitors’ access.

Table 1 compares LydoraTel’s performance immediately before privatization and four years afterwards.

Table 1: LydoraTel performance before privatization and four years afterwards.

Rural network coverage has remained at 72% of households, while urban coverage has increased. The competition authority is considering requiring LydoraTel to provide rival firms with network access at regulated prices.

Choosing supply-side policies in Lumera

Read the extracts and answer the questions that follow.

Text A — Competing approaches

1. Lumera’s government is considering market-based supply-side policies, including business-tax cuts, deregulation and weaker employment protection. Supporters expect stronger incentives and more flexible resource allocation.

2. An alternative package of interventionist supply-side policies would expand vocational education, public research and electricity infrastructure. Supporters argue that markets underprovide these activities because they create widespread external benefits.

Text B — Policy constraints

1. Market-based reforms may have a smaller direct budget cost, but could increase inequality, job insecurity and environmental damage. Their effects depend on firms and workers responding to incentives.

2. Interventionist policies can directly target growth constraints but involve taxation, borrowing, government failure and long implementation lags. Lumera is close to full employment, so expenditure may increase inflation before productive capacity expands.

Table 1 — Productivity comparison

Output per worker in Lumera and comparable economies.

Table 2 — Interventionist programme

Annual fiscal figures for the proposed interventionist programme.

Supply-side reform in Norland

Norland’s manufacturers import advanced machinery subject to a tariff. At the same time, firms report substantial production losses caused by preventable worker illness. The government can afford either to eliminate the machinery tariff or to use an equivalent amount of revenue to expand preventative health care, but it cannot initially finance both policies.

Table 1 presents information about imported machinery.

Norland’s current annual advanced-machinery imports

Table 2 presents workforce and health information.

Norland workforce and preventative health programme data.

Domestic machinery producers employ 8 000 workers and oppose tariff removal. Health clinics are concentrated in cities, although illness-related absence is highest in rural regions.