Summary
Summary Microeconomics-1.4 Government intervention
- Module
- 1.4 Government intervention
- Institution
- AQA
Full exam revision notes on the Edexcel Microeconomics 'Government intervention 1.4.1 - 1.4.2
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1.4.1 Government intervention in markets• When markets fail, the government sometimes intervenes to create more e cient, socially optimal
outcomes.
Taxation:
• Reduces supply
• Increases the price of the good/ service
• Discourages production / consumption of goods with negative externalities
Ad-valorem: tax levied in increasing proportions against the price E.g VAT
Speci c tax: a set amount per unit bought E,g excise duty
Subsidy:
• Increases output/supply
• Lowers production cost, and overall price of good
• Encourages the production/ consumption of goods with positive externalities
• Positive multiplier
Minimum price: a price oor set above the market price, Discourages consumption of demerit
goods
• Firms have extended supply due to higher prices
• Consumers contract demand
• Excess supply left in the market
p
mi É
ee
n
as a as a ceiling set below the market price, encourages consumption of merit goods
Maximum price: a price
• Firms have contracted supply due to lower prices
• Consumers extend demand
• Shortage in the market
e
sa
shortage
as a as a
Trade pollution permits: regulates negative externalities through direct controls E.g permits to
pollute
• Permits are tradable for money between polluters
• If one rm is successful in reducing its emissions, is can sell its permits to other producers who
ffi
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