Urban Economics (16235) Tutorial 5: Informal Economies Assignment

This assignment provides answers to tutorial questions on urban economics, specifically focusing on informal economies. The solution addresses key concepts such as the definition of the informal sector, its relationship with the formal economy, and the implications of tax evasion. It explores the inefficiency of informal production, the concept of multiple equilibria, and the employment advantages of the informal sector. The document also examines the interconnectedness between formal and informal economies, the appropriateness of terminology used to describe the informal sector, and the role of informal activities as survival strategies. The assignment references Dijkstra (2011) and Ojong (2011), and discusses the MML model, providing a clear assessment of the informal and formal livelihoods individuals and households. The solution highlights the importance of recognizing and integrating informal income sources for better economic control and expansion, with a detailed overview of the arguments and supporting evidence from the provided references.

Tutorial 5: Tutorial Questions for Urban Economics (16235) –Informal Economies
Answer the following questions based on Dijkstra (2011)
1.
Primarily, the informal sectors refers to the non –taxable sources of income in a given
economy. Sometimes the informal sector is called black, underground, unofficial economy (Dijkista,
2006). Usually, informal workers don’t declare income returns due to the fact that there income are not
subjected to taxation. Informal employment could be from legal and illegal employment sources
(Market business news, 2018).Unlike formal sources of employment where workers are required to pay
taxes as an employment requirement, such measures are not implemented in the informal economy thus
making it possible to employ more workers. Informal activities might be legal or illegal. In most
economies, there is both types of formal and informal economies.
2.
Usually, the informal sector production is inefficient due to the fact that they tend to avoid
legal ways of doing things. The inefficiency in the production of goods and services in the informal
sector is not ideal for the economy according to economists due to the possibility of low quality,
wastage and inefficient pricing. Under inefficient production, there is no balance between output and
prices which is not good for the economy. The inability to openly enforce contracts and penetrate a
customer base .In addition, the informal sector is an effective way of tax evasion thereby implying that
the burden of taxation falls solely on the formal economy as opposed to the informal economy. The
fact that informal income sources are not taxed implies that the formal sector of the economy solely
supports the public expenditure.
3.
Essentially, multiple equilibria is a co-existing informal and formal economies. There is a
supposed interrelationship between the formal and informal economical sector. Under this type of
equilibrium, it is assumed that there is an interconnectedness between formal and informal income
sources at the same time.
4.
Due to the tax evasion advantages of the informal activities, many workers prefer this sector
because they get to ignore the tax burden that comes with formal employment opportunities. Informal
sector provides more employment opportunities as compared to formal system of most economies.

5.
In the event that the informal income sources are legally recognised and included in the
taxation bracket, it would be easy to control the system and reduce the formal sector taxation burden. In
the event that the informal income sources are formalised, then it would be easy to expand the
economy in urban areas.
Answer the following questions based on Ojong (2011)
6.
Essentially, the formal and informal economies are connected due to their economic
relationship. The economic relations, to produce, distribute, employment activities all come together at
one point or the other .In addition, workers could be employed in both formal and informal economies
hence there is no clear distinction between the two sectors (Ojong, 2011).
7.
The fact that not all informal income sources are illegal makes it offensive and unrealistic to
call it any of the abovementioned names. The fact that some informal income sources are legal and
formal makes the above names not proper to use. Typically, ’black” implies something sinister or bad
to which not all informal activities fall under this definition.
8.
Primarily, informal economy was brought about as a survival strategy for individuals and
household due to the economic challenges. The informal sector exists due to the need for economic
empowerment due to the failure of the formal sector to absorb all workers.
9.
Some of the notable informal activities include: Containers Shipping enterprises, urban agriculture.
10.
The importance of the MML model is that it provides a clear assessment of the informal and
formal livelihoods individuals and households. It focuses on diversified ways of earning extra
revenue .The MML model is better due to its ability to evaluate real situations and overcome binaries.

References
Dijikstra, R.B. (2006).Good and Bad Equilibria with the informal sector. Retrieved from
https://www.researchgate.net/publication/5199993_Good_and_bad_equilibria_with_the_informal_sect
or
Market Business News. (2018).Informal sector-definition and Meaning. Retrieved from
https://marketbusinessnews.com/financial-glossary/informal-sector-definition-meaning/
Ojong, N. (2011).Livelihood strategies in African Cities: The case of residents in Bamenda, Cameroon. African
Review of Economics and Finance, Vol.3, No.1.
Sibhat, E.E. (2014).Cause and effect of informal sector: The case of street vendors in Addis Ababa, Ethiopia.
Retrieved from https://brage.bibsys.no/xmlui/bitstream/id/247783/Sibhat.pdf