3. Government Microeconomic Intervention

explain why governments intervene in markets

governments intervene to correct market failure, improve economic efficiency, protect consumers and producers, promote equity, and achieve social and economic objectives

explain why the non-provision of public goods leads to government intervention

public goods are underprovided because they are non-excludable and non-rival, creating the free rider problem and reducing the incentive for private firms to supply them

explain why information failure causes the underconsumption of merit goods

consumers may underestimate the benefits of merit goods because they lack full information, leading to consumption below the socially desirable level

explain why information failure causes the overconsumption of demerit goods

consumers may underestimate the costs of demerit goods because they lack full information, leading to consumption above the socially desirable level

explain why governments control prices in markets

governments use price controls to make essential goods more affordable, protect producers’ incomes, or prevent prices from falling or rising to undesirable levels

distinguish between maximum prices and minimum prices

a maximum price is set below the equilibrium price to prevent prices from becoming too high, while a minimum price is set above the equilibrium price to prevent prices from becoming too low

explain the effects of a maximum price on a market

a maximum price below equilibrium increases quantity demanded and reduces quantity supplied, creating excess demand and shortages

explain the effects of a minimum price on a market

a minimum price above equilibrium reduces quantity demanded and increases quantity supplied, creating excess supply and surpluses

explain the impact and incidence of specific indirect taxes

a specific indirect tax increases production costs, shifts the supply curve to the left, raises market price, reduces equilibrium quantity, and the burden of the tax is shared between consumers and producers depending on the elasticities of demand and supply

explain the impact and incidence of subsidies

a subsidy reduces production costs, shifts the supply curve to the right, lowers market price, increases equilibrium quantity, and the benefit of the subsidy is shared between consumers and producers depending on the elasticities of demand and supply

explain how direct provision of goods and services affects a market

government provision increases the availability of goods and services, improves access, and can correct the underprovision of merit and public goods

explain how buffer stock schemes affect a market

buffer stock schemes stabilise prices by buying goods when prices are low and selling goods when prices are high

explain how the provision of information affects a market

providing information helps consumers and producers make better decisions, reducing information failure and encouraging more socially desirable consumption and production

explain the advantages and disadvantages of indirect taxes

indirect taxes discourage the consumption of demerit goods and raise government revenue, but they increase prices, reduce consumer welfare, and may be regressive

explain the advantages and disadvantages of subsidies

subsidies encourage the consumption and production of desirable goods and reduce prices, but they are costly for governments and may lead to overproduction or inefficient resource allocation

explain the advantages and disadvantages of maximum prices

maximum prices improve affordability for consumers but may create shortages, queues, black markets and reduced quality

explain the advantages and disadvantages of minimum prices

minimum prices protect producers’ incomes but may create surpluses, encourage overproduction and reduce consumer welfare

explain the advantages and disadvantages of direct provision of goods and services

direct provision improves access and promotes equity but places pressure on government finances and may reduce efficiency because of a lack of competition

explain the advantages and disadvantages of buffer stock schemes

buffer stock schemes reduce price fluctuations and provide greater market stability but are expensive to operate and may be difficult to manage effectively

explain the advantages and disadvantages of the provision of information

providing information improves consumer awareness and encourages informed decision-making but campaigns may be expensive and not all consumers will change their behaviour

distinguish between income and wealth

income is the money received over a period of time from sources such as wages, rent, interest and profit, while wealth is the total value of assets owned at a particular point in time

distinguish between income as a flow concept and wealth as a stock concept

income is a flow concept because it is earned over time, while wealth is a stock concept because it is measured at a specific point in time

explain how income and wealth inequality are measured using the Gini coefficient

the Gini coefficient measures the degree of inequality in the distribution of income or wealth, with a value closer to 0 indicating greater equality and a value closer to 1 indicating greater inequality

explain the economic reasons for income and wealth inequality

income and wealth inequality may result from differences in education, skills, ownership of assets, employment opportunities, inheritance, and unequal access to resources

explain how minimum wages redistribute income and wealth

minimum wages increase the earnings of low-paid workers, reducing income inequality, although they may reduce employment if set above the equilibrium wage

explain how transfer payments redistribute income and wealth

transfer payments provide financial support to lower-income households, increasing their disposable income and reducing income inequality

explain how progressive income taxes, inheritance taxes and capital taxes redistribute income and wealth

progressive income taxes charge higher-income earners a higher proportion of their income, while inheritance and capital taxes reduce the concentration of wealth by taxing assets and wealth transfers

explain how state provision of essential goods and services redistributes income and wealth

providing goods and services such as education and healthcare improves access for lower-income households, reducing inequality by increasing opportunities and living standards

explain the advantages and disadvantages of policies to redistribute income and wealth

redistribution policies can reduce poverty, improve equity and increase access to essential goods and services, but they may reduce incentives to work, save and invest, and can increase government expenditure