Summary Cambridge International AS Level and A Level Economics Coursebook with CD-ROM, ISBN: 9780521126656 Unit 3 - Government intervention in the price system

Government microeconomic intervention


Governments intervene in markets because of market failure.

Governments intervene by:

1. Regulations
2. Taxes and subsidies
3. Government provision


Regulations

Maximum price: A price below the market equilibrium that is imposed to increase the
quantity demanded of a good.


S
Price




P1



P2




D


0 Qs Q1 Qd

As the price is now lower, quantity supplied has decreased as suppliers are less
willing to produce as much and consumers now demand more at the price.

Minimum price: A price which is placed above the equilibrium to decrease the
quantity demanded, consequently increasing the quantity supplied.

, S
Price


P2


P1




D

Qd Q1 Qs

Quantity


Buffer stock schemes: A type of commodity agreement to limit price fluctuations by
buying and selling goods.

Taxes and subsidies

Taxation: A fee charged by the government on a product, income or activity.

Direct taxes: Tax that is levied on income and cannot be avoided. eg. income tax,
corporation tax, national insurance contributions

Indirect taxes: Tax levied on goods and services. eg. VAT, council tax, local
government tax

Incidence: The extent to which an individual or organisation suffers from the
imposition of a tax. This may be by a producer or consumer or both.