Unit 3 - Government intervention in the price system (9708)
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Summary Cambridge International AS & A Level Eco, ISBN: 9781107679511 Unit 3 - Government intervention in the price system (9708)
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Unit 3 - Government intervention in the price system (9708)
Institution
CIE
Book
Cambridge International AS and A Level Economics Coursebook with CD-ROM
These documents include the whole summary for Topic 3:Government microeconomic intervention of Economics (CIE). The summary includes the most important key terms and concepts needed for sitting the exam. Also, there is a big range of brief, detailed information that will help you understand the top...
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Unit 3 - Government intervention in the price system (9708)
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Economics notes
Topic 3
Government microeconomic intervention
How do the governments intervene?
Governments intervene in markets and the justification is the market failure.
➔ Regulations
◆ Max price
◆ Min price
➔ Taxes
◆ Direct
◆ Indirect
● Ad valorem
● Specific taxes
➔ Subsidies
➔ Government provision
◆ Transfer payments
◆ Direct provision of goods + services
◆ Nationalisation + Privatisation
Regulations
➢ Maximum price : set by govt so that a good doesn't become too expensive to
produce/consume.
○ Below the free
market price
■ Prevent being
ineffective
1
, ○ As price is lower, supply decreases
■ Suppliers - less willing to produce as much
■ Consumers now demand more at the price level
■ Producers receive less profit
➢ Minimum price: set by the govt so that a good never falls
below a certain price.
○ Also called Price floors
○ Price increases
■ Causes oversupply
● Govt will have to buy surplus
○ Causes: deadweight welfare loss
■ Occurs when there is difference
between the price the marginal
demander is willing to pay + the
equilibrium price
■ The loss of consumer + producer
surplus
Taxes
➔ Direct :
◆ Paid directly to the govt (cannot be
avoided)
➔ Indirect :
◆ Imposed by the govt to increase
production costs for producers
◆ Producers supply less
● Increases market price
● Demand contracts
◆ Specific taxes: tax per unit
● Demand is perfectly inelastic
● Supply perfectly elastic
● Shaded area : size of the tax paid by the consumer
2
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