25 mark plans

To what extent should governments intervene in markets?

Government intervention are actions by the state to influence market outcomes

Market failure is when the free market fails to achieve allocative efficiency

Point 1 - should intervene

Negative externalities like pollution cause overproduction and over consumption → social costs exceed private costs → indirect taxes or regulation → output on socially optimum level

Eval

• tax may be set too high or low

• Firms may pass costs onto customers, reducing effectiveness

• Taxes / subsidies highly dependent on PED

Point 2 - monopolies

Monopolies charge higher prices and restrict output → government intervention = increase competition + lower barriers to entry → dynamic efficiency

Eval

• Economies of scale allows lower prices for consumers

• Reduces effecicncy to break up a monopoly

Point 3 - intervention cause government failure

Worsened resource allocation

Maximum price → shortages

Minimum price → surpluses

Eval

• government failure may be smaller than market failure

Likelihood of a train ticket being price elastic or inelastic. 10

PED measures responsiveness of quantity demanded to a change in price

Point 1 - availability of substitutes

Inelastic if no other option

Point 2 - nature of journey

Work related travel → necessity → inelastic

Leisure activity → more elastic

Explain whether the supply of new housing is likely to be price elastic or price inelastic. 10

PES measures the responsiveness of quantity supplied to a change in price

Point 1 - spare capacity

Many raw materials + labour

Point 2 - land availability limited

Inelastic

Point 3 - perishability

Materials don’t perish very much → elastic

Assess whether taxation is the best way to correct market failure.

market failure: when the free market fails to allocate resources efficiently, leading to welfare loss

Point 1

Negative externalities when social costs exceed private costs

Indirect taxes → increase firms costs and raises prices → quantity demanded and supplied fall → output moves closer to the socially optimum level

Eval

• demand may be price inelastic

• Taxes set too high or too low

Point 2 - tax raises government revenue

Revenue funds healthcare, education etc.

Eval

• may create other objectives rather than correcting market failure

• Government may become dependent on revenue

Point 3 - regulation more effective

Ban or impose legal limits on demerit goods

Better as does not rely on PED

Eval

• monitoring and enforcement can be costly )opportunity cost)

• May reduce competitiveness or innovation

Point 4 - subsidies are better

Subsidies reduce costs and increase consumption → encourage socially beneficial activities

Eval

• opportunity cost

• Difficult to determine optimal subsidy