universal basic income

Cambridge International AS & A Level Economics – Study Notes

Purpose: To provide a concise, exam‑focused revision resource that covers every required syllabus block (AS 1‑6, A‑Level 7‑11) and aligns with the three Assessment Objectives (AO1–AO3). The notes include key definitions, diagrams, formulas, examples and an in‑depth case study of Universal Basic Income (UBI) – a key policy in Topic 8.3.

Assessment Objectives (AO)

• AO1 – Knowledge & Understanding: factual recall of concepts, terminology and basic theory.
• AO2 – Application: use of theory to explain real‑world situations, calculations and diagrammatic analysis.
• AO3 – Evaluation: weighing advantages and disadvantages, assessing efficiency, equity and likely outcomes.

Each section below highlights where AO1‑AO3 are addressed, helping you plan revision and answer exam questions effectively.

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AS Level Core Topics (1‑6)

1. Economic Fundamentals

• Scarcity, choice & opportunity cost – limited resources → need to choose; opportunity cost = value of the next best alternative.
• Factors of production: land, labour, capital, entrepreneurship.
• Economic systems: market, command, mixed economies.

2. Demand and Supply

• Law of demand & supply, market equilibrium.
• Determinants of demand (price, income, tastes, prices of related goods, expectations) and supply (price, input costs, technology, expectations, number of sellers).
• Shifts vs. movements along curves.
• Elasticities (price, income, cross‑price, price elasticity of supply).
  Formula:  ε = %ΔQ / %ΔP. Use total‑revenue test to infer elasticity.
• Consumer & producer surplus – welfare analysis.

3. Market Failure & Government Intervention

• Externalities (positive & negative) – marginal social cost/benefit vs. private.
• Public goods – non‑rivalry & non‑excludability; free‑rider problem.
• Merit & demerit goods – government justification for intervention.
• Price controls (ceilings, floors) – diagrammatic impact on surplus/shortage.
• Taxes & subsidies – incidence, dead‑weight loss.
• Quotas & licences – effect on market equilibrium.

4. Macroeconomic Indicators

• GDP (nominal & real), GNP, NNP – measurement & limitations.
• Inflation – CPI, RPI, calculation of inflation rate.
• Unemployment – frictional, structural, cyclical; natural rate of unemployment.
• Labour market – wage determination, labour supply & demand curves.
• Phillips curve – short‑run trade‑off between inflation and unemployment.

5. Fiscal Policy

• Government spending & taxation – direct vs. indirect taxes.
• Budget balance: deficit, surplus, public debt.
• Multiplier effect – k = 1 / (1‑MPC); impact on aggregate demand.
• Crowding‑out: when increased government borrowing raises interest rates and reduces private investment.

6. International Trade & Balance of Payments

• Comparative advantage & gains from trade – opportunity‑cost diagram.
• Trade protection: tariffs, quotas, subsidies – welfare analysis.
• Exchange rates – fixed, floating, managed float; determinants.
• Balance of Payments – current account, capital account, financial account; the BOP identity.

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A‑Level Topics (7‑11)

7. Microeconomic Theory

• Utility & indifference curves – marginal utility, diminishing MU, convex preferences.
• Budget constraint – slope = –p_x/p_y.
• Consumer equilibrium – highest indifference curve tangent to budget line (MRS = price ratio).
• Production theory – isoquants, iso‑cost lines, returns to scale.
• Cost curves – short‑run (AVC, AFC, ATC) and long‑run (LRAC) relationships.
• Revenue & profit – MR = MC for profit maximisation.
• Market structures (with diagrams):
  • Perfect competition – price taker, horizontal MR.
  • Monopoly – price maker, dead‑weight loss.
  • Monopolistic competition – product differentiation, excess capacity.
  • Oligopoly – kinked‑demand, collusion, game theory basics.

8. Market Failure, Redistribution & Evaluation (Topic 8.2‑8.3)

8.1 Equity, Equality and Efficiency

Equality: identical treatment of all individuals, regardless of need.
Equity: fairness of outcomes; horizontal equity (similar circumstances → similar treatment) and vertical equity (different circumstances → different treatment to achieve fairness).
Efficiency: maximum possible output/welfare from given resources. Redistribution often creates a trade‑off: moving income from high‑ to low‑income groups can improve equity but may generate dead‑weight loss or alter incentives, reducing efficiency.

8.2 Poverty Concepts

Concept	Definition	Key Features
Absolute poverty	Living below a fixed poverty line (e.g., cost of a basic basket of goods).	Does not change with overall income growth; measured in real terms.
Relative poverty	Living below a set proportion of median (or average) income (e.g., 60 % of median).	Reflects inequality within a society; varies with overall income distribution.
Poverty trap	Low income reduces ability to save/invest, which in turn keeps income low.	Means‑tested benefits can worsen the trap if a small earnings rise triggers a large loss of benefits.

8.3 Policy Options for Reducing Inequality (Syllabus 8.2)

Policy	How it works	Typical financing	Equity assessment	Efficiency assessment
Means‑tested benefits	Payments only to households whose income/wealth falls below a set threshold.	General taxation (often income tax).	High vertical equity (targets poorest) but may breach horizontal equity.	High administrative cost; creates work‑disincentives → possible dead‑weight loss.
Negative Income Tax (NIT)	Households earning below a set level receive a cash supplement that tapers off as income rises.	Integrated into the income‑tax system.	Improves vertical equity; smoother withdrawal reduces horizontal inequities.	Lower admin cost than means‑testing; still a marginal tax on extra earnings.
Universal benefits (e.g., child benefit)	Cash or in‑kind transfers paid to all members of a defined group, irrespective of income.	General taxation (payroll or consumption taxes).	Strong horizontal equity; modest vertical equity because high‑income families also receive the benefit.	Low admin cost; limited work‑disincentive.
Universal Basic Income (UBI)	Regular, unconditional cash payment to every individual (or adult) in the population.	Progressive income tax, wealth tax, carbon tax, or re‑allocation of existing welfare spending.	Maximum horizontal equity; vertical equity depends on financing mix (progressive taxes improve it).	Very low admin cost; potential efficiency loss if a large work‑disincentive emerges or inflation rises.

8.4 Universal Basic Income – Full Detail

Definition & Key Features

• Universality – paid to all residents (or citizens) without means‑testing.
• Unconditionality – no work‑test or behavioural conditions.
• Regularity – typically monthly (or weekly) payments.
• Cash – recipients decide how to spend it.

Rationale

1. Alleviate absolute and relative poverty.
2. Provide a safety net against automation and rapid labour‑market change.
3. Reduce administrative costs of means‑tested programmes.
4. Enhance individual freedom, dignity and consumer choice.
5. Break the poverty trap by offering income that does not withdraw as earnings rise.

Arguments in Favor (AO3)

• Poverty reduction: Direct cash lift for the lowest‑income households.
• Simplification of the welfare state: Eliminates complex eligibility checks; reduces fraud.
• Labour‑market flexibility: Enables people to take better‑matched jobs, start businesses or study without fear of losing benefits.
• Empowerment: Cash gives autonomy over consumption.
• Economic stability: Provides a steady floor of demand, supporting aggregate demand during downturns.

Arguments Against (AO3)

• Cost: Large fiscal outlay may require higher taxes or borrowing.
• Work disincentive: Guaranteed income could reduce labour supply, especially for low‑paid or part‑time work.
• Inflationary pressure: Higher aggregate demand may push up prices, eroding real purchasing power.
• Equity concerns: Paying high‑income individuals the same amount as low‑income individuals may be seen as inefficient.
• Government failure: Poor design or financing can lead to unsustainable budgets or unintended distributional outcomes.

Design Considerations (AO2)

Dimension	Options	Implications for Equity
Coverage	All residents • Adults only • Citizens only	Broader coverage improves horizontal equity but raises fiscal cost.
Payment level	Basic subsistence • Modest supplement (e.g., 30 % of median income)	Higher payments reduce absolute poverty more effectively but increase redistribution burden.
Financing	Progressive income tax • Wealth tax • Carbon tax • Re‑allocation of existing welfare spending	Progressive sources enhance vertical equity; regressive taxes would undermine it.
Interaction with existing benefits	Full replacement • Partial integration (UBI + targeted programmes)	Full replacement simplifies administration but may remove support for specific needs (e.g., disability).

Financing a UBI (AO2)

The basic fiscal requirement is:

$$\text{Total Cost}=N\times B$$

where N = number of eligible recipients and B = annual benefit per person.

Potential revenue sources (illustrative formulas):

• Progressive income tax: $$T=\sum_{i=1}^{n} t(y_i),\; t(y)=t_0+t_1\frac{y_i}{\bar Y}$$
• Wealth tax: $$W=\tau\sum_{i=1}^{n} w_i$$
• Carbon tax: $$C=\kappa \times \text{CO}_2\text{ emissions}$$
• Savings from eliminating means‑tested programmes (administrative‑cost reduction).

Impact on Income Inequality (AO2)

The Gini coefficient before and after a UBI can be compared using:

$$G=\frac{\displaystyle\sum_{i=1}^{n}\sum_{j=1}^{n}\bigl|y_i-y_j\bigr|}{2n^{2}\bar y}$$

where $y_i$ is the post‑UBI income of individual $i$, $n$ the population and $\bar y$ the mean income. A lower $G$ after implementation signals a more equal distribution.

Case Studies (AO2)

1. Finland pilot (2017‑2018): €560 /month to 2,000 unemployed adults for two years.
   Findings – modest improvements in mental‑well‑being and life satisfaction; limited impact on employment rates.
2. Alaska Permanent Fund (since 1982): Annual dividend (~US$2,000) to all residents funded by oil royalties.
   Evidence – negligible labour‑supply effects; positive impact on household consumption.
3. Ontario Basic Income Pilot (2017‑2018, cancelled): $17,000 /yr for single adults, $24,000 for couples.
   Early results – reductions in poverty, health‑care utilisation and stress; small rise in part‑time work.
4. Spain’s Minimum Living Income (2020): Means‑tested but universal‑in‑principle cash transfer to low‑income households.
   Illustrates a hybrid approach combining universal intent with targeting.

Policy Evaluation Framework (AO3)

• Efficiency – Does the policy achieve the desired redistribution at the lowest possible cost? Consider administrative expenses and any dead‑weight loss from behavioural responses.
• Equity – How does the scheme affect horizontal equity (treating similar people alike) and vertical equity (fairness between rich and poor)?
• Administrative simplicity – Ease of registration, payment, monitoring and reduction of fraud.
• Behavioural effects – Impact on labour supply, savings, investment, consumption and the possibility of creating a new poverty trap.
• Macroeconomic impact – Effects on aggregate demand, inflation, fiscal sustainability and the broader business cycle.
• Government failure – Risks of poor information, implementation errors, political capture, or unintended distributional consequences.

Suggested Diagram

Two Lorenz curves (pre‑ and post‑UBI) illustrating a reduction in the Gini coefficient and an improvement in vertical equity.

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9. Macroeconomic Policy (Topic 9)

• Aggregate Demand (AD) components: C, I, G, (X‑M). AD curve – inverse relationship with price level.
• Aggregate Supply (AS): Short‑run upward‑sloping (SRAS) vs. Long‑run vertical (LRAS). Shifts explained by changes in input prices, technology, expectations.
• Fiscal policy – expansionary vs. contractionary; multiplier effects; crowding‑out.
• Monetary policy – tools (open‑market operations, reserve ratio, discount rate), transmission mechanism, liquidity trap.
• Policy mix – coordination of fiscal and monetary policy to stabilise output and control inflation.

10. Money, Banking and Financial Markets (Topic 10)

• Functions of money – medium of exchange, store of value, unit of account.
• Money supply – M0, M1, M2, M3 definitions.
• Central bank operations – setting policy interest rate, controlling money supply, lender of last resort.
• Interest‑rate determination – liquidity preference (LM curve) and loanable‑funds (supply‑demand) models.
• Financial markets – role of banks, stock market, bond market in allocating capital.

11. Development & Globalisation (Topic 11)

• Development indicators – GDP per capita, HDI, Gini, poverty headcount ratios.
• Poverty reduction strategies – micro‑finance, conditional cash transfers, education & health investment.
• Trade policies – tariffs, quotas, subsidies, trade agreements; impact on developing economies.
• Foreign Direct Investment (FDI) – benefits (technology transfer, employment) and costs (profit repatriation).
• External debt and aid – sustainability analysis, debt‑relief programmes.
• Globalisation – effects on income distribution, labour markets, environmental standards.

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Conclusion

These notes provide a complete, syllabus‑aligned overview of Cambridge International AS & A Level Economics. They combine concise factual recall (AO1), clear application of theory with formulas and diagrams (AO2), and a balanced evaluation of policies – highlighted by an in‑depth treatment of Universal Basic Income (AO3). Use the evaluation framework and case studies to structure essay answers, and refer to the tables and formulas for quick recall during exams.