The Role of

Government
in Australia
15
Multiple Choice
1 B 6 C 11 D
2 B* 7 B* 12 A
3 C 8 D 13 D*
4 D 9 A 14 A
5 C* 10 A 15 B
*Indicates that an enhanced answer has been provided in the section below.

Enhanced Answers
2 B One aspect of competition policy is preserving competitive forces and consumer choice within an
industry by preventing the merger of large firms in the same industry.

5 C Fixed line broadband infrastructure has natural monopoly characteristics, because of the huge
investment involved in building underground cable connections across Australia’s vast landmass.
This constitutes a barrier to entry to firms. It is more economically efficient for one provider to deliver
fixed broadband services nationally rather than having two or more providers rolling out cable side
by side across the country (as happened with cable television infrastructure in the 1990s).

7 B Wind energy is a renewable energy source. Providing a subsidy to these producers will mean that
producers can sell wind energy at a cheaper price, and will encourage more firms to produce wind
energy.

13 D Total tax paid is calculated by multiplying the amount of money in each tax band by the rate of that
tax band:
Tax paid = 0 × ($18,200 − $0) + 0.19 × ($37,000 − $18,201) + 0.325 × ($90,000 − $37,001) + 0.37 ×
($120,000 − $90,001)
Tax paid = $0 + $3572 + $17,225 + $11,100
Tax paid = $31,897

Short Answers
Question 1

(a) Governments can affect the allocation of resources by influencing the behaviour of businesses
and consumers in the market through taxation or spending measures.
Governments can also influence the allocation of resources by producing goods and services
such as public goods or merit goods.

(b) Direct taxes are paid by the individuals or firms on which they are levied. They cannot be
passed on to someone else. Indirect taxes are also levied on individuals or firms, but they can
be passed to others, as they are attached to a good or service, rather than the individual or
firm.

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 The Market Economy Eighth Edition Workbook Chapter 15: The Role of Government in Australia

(c) A $1000 annual tax for all Australian residents would be a regressive tax, as it would represent
a higher proportion of the income of lower income earners than higher income earners. For
example, a tax of $1000 would have less impact on an individual who earns $100,000 a year
than an individual who only earns $25,000 a year (representing 1.0 per cent of the higher
income earner’s income, but 4 per cent of the lower income earner’s income). With such a tax,
the average rate of taxation (ART) will fall as income increases. Lower income individuals will
be worse off and as a result, such as tax will lead to increased income inequality.

(d) The Commonwealth Government redistributes income through the taxation system and social
welfare payments, which work together to reduce income inequality.
Australia has a progressive personal income tax system, which means that as income rises,
so does the rate of taxation. Higher income earners pay a greater proportion of their income
than lower income earners.
The Commonwealth Government redistributes taxation revenue collected from individuals and
firms to lower income earners through social welfare payments. Payments are usually means
tested, which means that they are available only to individuals below a certain income
threshold. Examples include unemployment benefits, studies assistance, family benefits, the
age pension and disability support pension. These payments are the largest category of
government expenditure.

Question 2

(a) As the figure shows, the effect of macroeconomic policy is to moderate the fluctuations in the
economy and smooth the transition between phases of boom and bust. Contractionary
macroeconomic policies reduce the extent of economic booms, while expansionary
macroeconomic policies boost the economy during a downturn.

(b) During a downturn, the progressive taxation system that is a component of fiscal policy acts
automatically to decrease an individual’s tax payments as their income falls during a period of
weaker growth. This helps to increase disposable income and boost consumer spending, thus
moderating the downturn in economic activity. At the same time, welfare payments increase
automatically as more people become unemployed. This too, acts to moderate the business
cycle by boosting disposable household income. Fiscal policy can also inject direct
government expenditure into the economy during a downturn to offset the shortfall in private
sector spending. This can help reduce the severity of a downturn, as the government is
actively stimulating demand in the economy.

(c) The Commonwealth and state governments both play a role in economic management,
although the role of state governments is much less significant than that of the Commonwealth.
The Commonwealth is mainly responsible for conducting macroeconomic policy through the
Budget and through the framework of monetary policy, which is implemented by the Reserve
Bank of Australia. State governments can play a smaller complementary support role, and are
responsible for certain areas of service delivery such as public transport and hospitals as well
as many areas of business regulation and infrastructure provision. Income taxation, excise tax
and GST are levied via the Commonwealth government, whilst states are responsible for land
taxes, licensing laws and some levies.

Question 3

(a) One way the government could reduce the negative impact of economic activity is through the
provision of a subsidy. For example, the government could provide funding to firms that use a
certain proportion of renewable energy resources within their production processes. Such a
strategy would discourage the use of non-renewable resources and encourage the take-up of
low-carbon technologies.

(b) Government business enterprises (GBEs) are businesses owned and managed by the
government. They are established to directly provide goods and services that the private
sector is unable or unwilling to supply. Examples include Australia Post (postal services),
RailCorp (rail services) and Sydney Water (water supply). Since the 1980s many GBEs have
been privatised and corporatised, such as Telstra, Sydney Airport, Medibank Private and
Qantas. This has reduced the role of GBEs in the Australian economy.

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 The Market Economy Eighth Edition Workbook Chapter 15: The Role of Government in Australia

(c) The size of the public sector increased during the second half of the 20th century, but has
remained around the same level since the beginning of the 21st century at around 40 per cent
of GDP. The growth of the public sector was related to an expansion in social welfare and the
provision of government services such as health care and education. Although some of those
costs have continued to grow, the government has reduced expenditure in some other areas
so that overall the public sector has not been growing in the past two decades. A second trend
is the privatisation of many businesses that were once owned and operated by the government,
including banks, airlines, airports, private health insurance, energy, telecommunications, roads
and ports. This has reduced the government’s influence over economic outcomes.

Skills Revision Activity 1

Top Left
Tax free threshold: $7000
Marginal rate of tax: 10% for $7001 to $15,000 and 15% for $15,001 to $25,000
Total tax paid: = 0% of (0−7000) + 10% of (15,000−7,000) + 15% of (25,000−15,000) =
0+ 0.10 (8000) + 0.15 (10,000) = 0 + 800 + 1500 = $2300
Average rate of Tax = Tax / Income = 2300 / 25,000 × 100 = 9.2%

Top Right
Marginal rate of tax: 10% for $7001 to $15,000, 15% for $15,001 to $30,000 and 20% for $30,001
to $120,000
Total tax: 0 + 800 + 0.15 (15,000) + 0.20 (120,000−30,000) = $21,050
Average rate of Tax: 17.5%

Bottom Left
Tax free threshold: $15,000
Marginal rate of tax: 20% for $15,001 to $25,000
Total tax paid: 0 + 0.2 (25,000−15,000) = $2,000
Average rate of tax: 8.0%

Bottom Right
Marginal rate of tax: 20% for $15,001 to $70,000, 40% for $70,001 to $111,000 and 50% for
$111,001 to $120,000
Total tax paid: 0 + 0.2 (70,000−15,000) + 0.4 (111,000−70,000) + 0.5 (120,000−111,000) =
$113,000 + $16,400 + $4,500 = $31,900
Average tax rate: 26.6%

Skills Revision Activity 2

(a) Progressive

(b) Regressive

(c) Regressive

(d) Progressive

(e) Progressive

(f) Proportional

(g) Progressive

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