Skip to content
Marlbridge
Free trial

Flashcards · 9708 · AS Topic 3

Government microeconomic intervention (AS Level) flashcards

17 cards on AS Topic 3, subtopics 3.1 to 3.3. Pick a subtopic or study them all.

Study mode needs JavaScript. Every card is listed below, so you can still cover the answers and test yourself.

All 17 cards

For a quick read-through or printing. Cover the right-hand side to test yourself.

3.1 Reasons for government intervention in markets

Why does a market fail to provide a public good? (the chain)
Non-excludable, so non-payers cannot be kept out → people free-ride and hide their true valuation → a private firm cannot earn revenue → non-provision. Government provides it, funded by tax, which removes the free-rider option.
Non-provision versus wrong quantity
Public goods suffer non-provision: the market supplies none. Merit and demerit goods are supplied, but in the wrong quantity (too little or too much) because of imperfect information.
Merit good: perceived demand P = 30 − Q, informed demand P = 36 − Q, supply P = 6 + Q. Find the under-consumption.
Market: 30 − Q = 6 + Q, so Q = 12 (P = 18). Informed: 36 − Q = 6 + Q, so Q = 15 (P = 21). Under-consumption = 3 units. The informed curve is not observable, so the gap is a judgement.
Maximum price and minimum price: where each must be set, and the result
Maximum price (legal ceiling): only effective below equilibrium; gives a shortage. Reason: affordability. Minimum price (legal floor): only effective above equilibrium; gives a surplus. Reason: protect producer incomes or discourage a demerit good.
Bread: Qd = 400 − 2P, Qs = 4P − 200. A maximum price of 80 is set. Find the shortage.
Equilibrium: 600 = 6P, so P = 100 and Q = 200. At 80: Qd = 240, Qs = 120, a shortage of 120. Only 120 are traded, so revenue falls from 20,000 to 9,600.

3.2 Methods and effects of government intervention in markets

Specific indirect tax and tax incidence
A specific tax is a fixed amount per unit, paid by the seller to the government; it shifts supply up by the tax. Incidence is who in practice bears it: the price rises by less than the tax, and the less elastic side bears the larger share.
Qd = 150 − 6P, Qs = −30 + 6P. A tax of 4 per unit is imposed. Find the new price, quantity and revenue.
Before: P = 15, Q = 60. After: 150 − 6P = −54 + 6P, so P = 17 and Q = 48. Buyers pay 2 more, sellers keep 13 (2 less). Revenue = 4 × 48 = 192, split 96 and 96. Welfare loss = ½ × 4 × 12 = 24.
Subsidy: effect on supply, price and quantity
A per-unit payment to producers that lowers their costs, shifting supply down by the subsidy. The market price falls by less than the subsidy, quantity rises and the government pays subsidy × new quantity. Used for merit goods and positive externalities.
Buffer stock scheme: how it works and its weaknesses
An agency buys at a floor price in good harvests and sells at a ceiling in poor ones, keeping price within a band. Weaknesses: stock runs out after consecutive poor years, storage is costly, and a band away from the long-run price drifts into permanent surplus or shortage.
Direct provision: case for and against
For: reaches those who cannot pay, supplies goods markets will not, can aim at equity. Against: opportunity cost of tax funds, weak incentive to cut costs, queues or over-use when free, a poor match to what people want.
Provision of information: strengths and limits
Labels, campaigns and warnings correct imperfect information about merit and demerit goods. Strengths: cheap, keeps choice, no price rise. Limits: slow, uncertain, may be ignored, and weak against habit and addiction.

3.3 Addressing income and wealth inequality

Income versus wealth
Income is a flow: money received per period (wages, rent, interest, dividends, benefits). Wealth is a stock: the value of assets owned minus debts, at one date. Saving turns income into wealth; wealth earns income.
Gini coefficient: what it measures and its limits
0 is perfect equality, 1 means one household has everything; higher means more unequal. It is the area between the line of equality and the Lorenz curve as a share of the area under the line. Limits: one number hides the shape, says nothing about absolute living standards or fairness.
Main causes of income and wealth inequality
Differences in skills and education, shifts in demand for occupations, compensating differences, discrimination and barriers, unemployment or part-time work, ownership of capital, market power, saving and compounding, inheritance, and rising asset prices.
Labour demand L = 700 − 20w, supply L = −100 + 30w. A minimum wage of 18 is set. Find the effect.
Free market: 800 = 50w, so w = 16 and L = 380. At 18: demand 340, supply 440, so employment falls to 340 and unemployment is 100. Elasticity of labour demand ≈ −10.5% ÷ 12.5% = −0.84; the wage bill rises from 6,080 to 6,120.
Tax is 0% up to 9,000 and 30% above. Find the average and marginal rates on an income of 24,000.
Tax = 15,000 × 0.30 = 4,500. Average rate = 4,500 ÷ 24,000 = 18.75%; marginal rate = 30%. At 60,000 the average rate is 25.5%, so the tax is progressive.
Universal versus means-tested benefits
Universal: simple and reach everyone, but cost more and give money to the well off. Means-tested: targeted and cheaper, but cost more to administer, may not be taken up, and may discourage extra earnings.

Revise Government microeconomic intervention further