Summary AQA A-level Economics: Crowding in and Out Effect (Fiscal Policy) Notes

Crowding Out and Crowding In Effects


Crowding Out Effect:

Crowding Out Effect: Economic theory arguing that rising public sector
spending drives down/eliminates private sector spending.
(assume economy is operating at full employment level)

- Classical Economist Idea

Crowding Out Opportunity Cost:
Crowding a good or service that a private sector could have offered.
Private sector could have offered service at:
- Better price
- More efficient due to profit motive
- Better quality
FOP employed by the government cannot be employed by the private
sector - could those workers be more effective in the private sectors.
Gov borrowing

Drawing Crowding Out Effect (PPF):
Axis: Gov spending vs Private sector spending

, Is there an opportunity cost of who would be better at employing FOP

Crowding Out Effect and Loanable Funds:
If Gov funds spending via taxation - greater marginal propensity to
withdraw from households and firms due to more disposable income/profits
going to government.

If gov funds by borrowing - How does gov source finance?