Alevel Economic Revision Government microeconomic intervention
Revision Material
Edition: 6 April 2020
Chapter 3 Government microeconomic intervention
Learning outcomes
Candidates should be able to:
(a) Maximum and - meaning and effect on the market
minimum prices
(b) Tax (direct and - impact and incidence of taxes
indirect) - specific and ad valorem taxes
- average and marginal rates of taxation
- proportional, progressive and regressive taxes
- the Canons of Taxation
(c) Subsidies - impact and incidence of subsidies
(d) Transfer payments - meaning and effect on the market
(e) Direct provision of - meaning and effect on the market
goods and services
(f) Nationalization and - meaning and effect on the market
privatization
,(a) Maximum and minimum prices
1. Maximum price control
is a situation where a maximum price or price ceiling is established in a market below what would have been the
equilibrium price without government intervention
maximum price, that might be made effective through buffer stocks. A price that is set by government to fixed the price.
The market price not exceed this price in order to help consumers’ purchasing. As the diagram shows the line represent
the maximum line that lower the equilibrium price. Therefore the price is decrease at the fixed value when both demand
and supply change or not to the P1 value. As a result, the price is fixed and the quantity can be increased to Q1. That will
be determined to be fixed in price, that price is legislated to help the price of chocolate to be stablished.
However, it may get some negative impact like cost and shortage for exceed of demand
a state or situation in which something needed cannot be obtained in sufficient amounts. That means when the price of
chocolate decreases the demand for the chocolate increase, that lead the supply of chocolate can not be obtained to
produce the Q1 value. The shortage may occur between Q1 and Qe, but it can be depended on whether this country have
enough capacity huge amount of stock level or not to satisfied this demand. If it is, the shortage can be solved to minimum
the negative parts.
Advantages of a maximum price control a market Disadvantages of a maximum price control a market
The price of essential products, such as important items of The maximum price control will lead to excess demand in
food, can be limited, making such items more affordable to the market and this will create some form of queue or
people. waiting list.
In the housing market, the rent of certain types of The existence of a queue or waiting list may lead to
accommodation could be prevented from becoming too bribery and corruption of those who are responsible for
expensive. regulating the queue or waiting list.
In the transport market, fares could be restricted from It is possible that a secondary or informal market, or black
going above a certain price. market, may emerge where the supply is increased
through illegal methods outside of the market. In such a
situation, the price is likely to be well above the maximum
price in the formal market.
, 2. Minimum price controls
is a situation where a minimum price or price floor is established in a market above what would have been the equilibrium
price without government intervention
Prevents producers from reducing the price below it.
Example of using the minimum prices / floor prices on demerit goods
Advantages of a minimum price control a market Disadvantages of a minimum price control a market
Will reduce overconsumption of demerit goods like alcohol A regressive measure with those on low-income paying
higher percentage of income
It makes individuals pay a price closer the social marginal Could encourage black market for demerit goods
cost – closer efficient level
May discourage young drinks who have low income to drink Increase revenue for supermarkets and demerit goods’
to excess in alcohol case producers
Could reduce costs to police / health care Tax would raise revenue for public benefit
Increase demand for ‘higher quality’ alcoholic drinks / pubs High progressive taxes / higher spending on public
and bars services. Producer can agree voluntary policies
Sample Question
[9708/21/M/J/16]
Discuss whether attempts to help poorer consumers through the introduction of a maximum price for necessities can ever
be successful. [12]
Solution
For analysis showing the impact of a maximum price below equilibrium, the consequent shortage and the likely
emergence of black markets. (Up to 8 marks)
In this case, there will need to be an alternative system of resource allocation, such as rationing.
For evaluative comment making a judgement about whether this can ever be successful. (Up to 4 marks)
[9708/22/F/M/17]
Discuss why merit goods may be under-consumed in a mixed economy. Consider whether maximum prices or education
campaigns would be more effective in ensuring that these goods are supplied in appropriate quantities. [12]
Revision Material
Edition: 6 April 2020
Chapter 3 Government microeconomic intervention
Learning outcomes
Candidates should be able to:
(a) Maximum and - meaning and effect on the market
minimum prices
(b) Tax (direct and - impact and incidence of taxes
indirect) - specific and ad valorem taxes
- average and marginal rates of taxation
- proportional, progressive and regressive taxes
- the Canons of Taxation
(c) Subsidies - impact and incidence of subsidies
(d) Transfer payments - meaning and effect on the market
(e) Direct provision of - meaning and effect on the market
goods and services
(f) Nationalization and - meaning and effect on the market
privatization
,(a) Maximum and minimum prices
1. Maximum price control
is a situation where a maximum price or price ceiling is established in a market below what would have been the
equilibrium price without government intervention
maximum price, that might be made effective through buffer stocks. A price that is set by government to fixed the price.
The market price not exceed this price in order to help consumers’ purchasing. As the diagram shows the line represent
the maximum line that lower the equilibrium price. Therefore the price is decrease at the fixed value when both demand
and supply change or not to the P1 value. As a result, the price is fixed and the quantity can be increased to Q1. That will
be determined to be fixed in price, that price is legislated to help the price of chocolate to be stablished.
However, it may get some negative impact like cost and shortage for exceed of demand
a state or situation in which something needed cannot be obtained in sufficient amounts. That means when the price of
chocolate decreases the demand for the chocolate increase, that lead the supply of chocolate can not be obtained to
produce the Q1 value. The shortage may occur between Q1 and Qe, but it can be depended on whether this country have
enough capacity huge amount of stock level or not to satisfied this demand. If it is, the shortage can be solved to minimum
the negative parts.
Advantages of a maximum price control a market Disadvantages of a maximum price control a market
The price of essential products, such as important items of The maximum price control will lead to excess demand in
food, can be limited, making such items more affordable to the market and this will create some form of queue or
people. waiting list.
In the housing market, the rent of certain types of The existence of a queue or waiting list may lead to
accommodation could be prevented from becoming too bribery and corruption of those who are responsible for
expensive. regulating the queue or waiting list.
In the transport market, fares could be restricted from It is possible that a secondary or informal market, or black
going above a certain price. market, may emerge where the supply is increased
through illegal methods outside of the market. In such a
situation, the price is likely to be well above the maximum
price in the formal market.
, 2. Minimum price controls
is a situation where a minimum price or price floor is established in a market above what would have been the equilibrium
price without government intervention
Prevents producers from reducing the price below it.
Example of using the minimum prices / floor prices on demerit goods
Advantages of a minimum price control a market Disadvantages of a minimum price control a market
Will reduce overconsumption of demerit goods like alcohol A regressive measure with those on low-income paying
higher percentage of income
It makes individuals pay a price closer the social marginal Could encourage black market for demerit goods
cost – closer efficient level
May discourage young drinks who have low income to drink Increase revenue for supermarkets and demerit goods’
to excess in alcohol case producers
Could reduce costs to police / health care Tax would raise revenue for public benefit
Increase demand for ‘higher quality’ alcoholic drinks / pubs High progressive taxes / higher spending on public
and bars services. Producer can agree voluntary policies
Sample Question
[9708/21/M/J/16]
Discuss whether attempts to help poorer consumers through the introduction of a maximum price for necessities can ever
be successful. [12]
Solution
For analysis showing the impact of a maximum price below equilibrium, the consequent shortage and the likely
emergence of black markets. (Up to 8 marks)
In this case, there will need to be an alternative system of resource allocation, such as rationing.
For evaluative comment making a judgement about whether this can ever be successful. (Up to 4 marks)
[9708/22/F/M/17]
Discuss why merit goods may be under-consumed in a mixed economy. Consider whether maximum prices or education
campaigns would be more effective in ensuring that these goods are supplied in appropriate quantities. [12]
