Government Intervention

What Government Intervention covers

Covers what a government can do about market failure and what goes wrong when it tries: taxes, subsidies and price controls, tradable permits, state provision and regulation, and the ways intervention makes things worse.

The 4 subtopics

Each one has its own page.

• Indirect taxes and subsidies as interventionsRecall questions on how a tax or subsidy shifts supply, how each is used to internalise an externality, and who ends up bearing the cost.Open →
• Maximum and minimum prices, and tradable pollution permitsRecall questions on the shortages and surpluses price controls create, where each is used, and how tradable permits put a price on pollution.Open →
• State provision, regulation and government failureRecall questions on direct provision, the provision of information and regulation, and on what causes government failure.Open →
• Government failureRecall questions on government failure through distorted price signals, unintended consequences, administrative costs, information gaps, conflicting objectives, regulatory capture and political short-termism, examples from labour, farm, housing and energy markets, and how it compares with market failure.Open →

What you need to know

Answer each one before you reveal it.

Take Government Intervention further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• A maximum price vs A minimum price

  A maximum price: a ceiling set below equilibrium to keep a good affordable, which creates a shortage. A minimum price: a floor set above equilibrium to support producers or deter consumption, which creates a surplus.

• Market failure vs Government failure

  Market failure: a misallocation of resources arising from how the market itself operates. Government failure: a misallocation of resources arising from the intervention meant to correct the market.

• A subsidy vs An indirect tax

  A subsidy: a payment to producers that lowers their costs and shifts supply outward. An indirect tax: a charge on production or sale that raises costs and shifts supply inward.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is the fundamental aim of government intervention in markets?

   Model answer

   To correct market failure and improve the allocation of resources.

2. 2

   Define an indirect tax.

   Model answer

   A tax levied on producers or suppliers of goods and services rather than directly on income or wealth.

3. 3

   What is a specific tax?

   Model answer

   A fixed amount of tax per unit of a good sold, regardless of the price.

4. 4

   Define an ad valorem tax.

   Model answer

   A tax set as a percentage of the selling price of a good.

5. 5

   How does a specific tax affect the supply curve on a diagram?

   Model answer

   It causes a parallel leftward shift of the supply curve by the amount of the tax.

6. 6

   Why does a specific tax cause a parallel shift rather than a pivot of the supply curve?

   Model answer

   Because the tax is a fixed amount per unit regardless of price, so the vertical distance between the old and new supply curves remains constant at all output levels.

What is inside Levo

Six ways to work the same material.

Government Intervention revision questions

What does Government Intervention cover in Edexcel A-Level Economics A?

4 subtopics: indirect taxes and subsidies as interventions, maximum and minimum prices, and tradable pollution permits, state provision, regulation and government failure and government failure. Each one has its own page with questions and model answers.

How is Government Intervention organised?

By the Edexcel 9EC0 specification, subtopic by subtopic, so it matches the order you are taught it in.