Cambridge International AS and A Level Economics: Microeconomic intervention (9708) – Revision Notes

Quick recall for section 3.2 (Methods and effects of government intervention in markets) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is topic 3, AS Level content, and A Level candidates need it as assumed knowledge for Papers 3 and 4. For full explanations and longer worked examples, read the study guide. Then test yourself with the practice questions. See also the course hub, the printable checklist, the free diagnostics and the reasons for intervention in section 3.1. All figures are invented.

Definitions

Term	Meaning
Specific indirect tax (3.2.1)	A fixed amount per unit, paid by the seller to the government
Incidence (3.2.1, 3.2.2)	Who in practice bears the tax or receives the subsidy
Subsidy (3.2.2)	A payment to producers per unit, lowering their costs
Direct provision (3.2.3)	The state produces and supplies the good or service
Maximum price (3.2.4)	A legal ceiling, only effective below equilibrium
Minimum price (3.2.4)	A legal floor, only effective above equilibrium
Buffer stock (3.2.5)	An agency buys at the floor and sells at the ceiling to stabilise price
Provision of information (3.2.6)	Labels, campaigns and warnings that correct poor information

Taxes and subsidies in one table

	Specific tax	Subsidy
Curve that moves	Supply, up by the tax	Supply, down by the subsidy
Market price	Rises by less than the tax	Falls by less than the subsidy
Quantity	Falls	Rises
Government	Gains revenue	Pays out money
Used for	Demerit goods, negative externalities, revenue	Merit goods, positive externalities

Method in steps for incidence.

1. Find the equilibrium price and quantity from the two equations.
2. Replace P in supply by (P − tax) for a tax, or (P + subsidy) for a subsidy.
3. Solve for the new price and quantity.
4. Consumer share = change in price paid. Producer share = tax minus that, or the change in price received.
5. Multiply each share by the new quantity. Check they add up to the total.

Worked reminder (tax). Demand Qd = 150 − 6P and supply Qs = −30 + 6P.

• Equilibrium: 180 = 12P, so P = 15 and Q = 60.
• Tax of 4 cu: 150 − 6P = −30 + 6(P − 4) = −54 + 6P, so 204 = 12P, P = 17, Q = 48.
• Consumers pay 17, up 2. Producers keep 17 − 4 = 13, down 2.
• Burdens: 2 × 48 = 96 cu each. Revenue = 4 × 48 = 192 cu = 96 + 96.
• Welfare loss = ½ × 4 × (60 − 48) = 24 cu.
• Check elasticities: PED = −6 × 15 ÷ 60 = −1.5 and PES = 6 × 15 ÷ 60 = 1.5. Equal elasticities give an equal split.

Worked reminder (subsidy). Same market, subsidy of 3 cu: 150 − 6P = −30 + 6(P + 3) = −12 + 6P, so 162 = 12P, P = 13.5 and Q = 150 − 81 = 69.

• Consumers pay 13.5, down 1.5. Producers receive 16.5, up 1.5.
• Cost = 3 × 69 = 207 cu. Each side gets 1.5 × 69 = 103.5 cu.

Rule of thumb. The less elastic side takes the bigger share. Inelastic demand means buyers bear more of a tax and more of the revenue is raised. Inelastic supply means sellers bear more.

Evaluation checklist.

• Elasticity: does the tax change behaviour or just raise revenue?
• Fairness: a tax on a necessity falls hardest on low incomes.
• Size: is it set at the value of the externality?
• Avoidance, smuggling or black markets.
• Opportunity cost of subsidy spending and tax funding.
• Time: demand and supply usually become more elastic over time.

Direct provision (3.2.3)

Government produces the good itself, often free at the point of use. Reasons: public goods, merit goods, equity of access.

Worked reminder. A state library service (invented) costs 900,000 cu a year for 25,000 members. Cost per member = 900,000 ÷ 25,000 = 36 cu. It is worth running if the benefit per member exceeds 36 cu and if no better use of the money exists.

For	Against
Reaches those who cannot pay	Opportunity cost of tax funds
Can supply goods markets will not	Weak incentive to cut costs
Can aim at equity	Queues, over-use when free, or a poor match to what people want

Maximum and minimum prices (3.2.4)

Sketch of the two controls, with the equilibrium price marked E:

Price
  |   Minimum price  ------------  (above E: surplus)
  |   Equilibrium E  ============
  |   Maximum price  ------------  (below E: shortage)
  +---------------------------- Quantity

Worked reminder. Using the same market (Qd = 150 − 6P, Qs = −30 + 6P, equilibrium P = 15).

• Maximum price 12: Qd = 150 − 72 = 78, Qs = −30 + 72 = 42. Shortage = 78 − 42 = 36. Only 42 trade.
• Black market price: at 42 units demand price = (150 − 42) ÷ 6 = 18.
• Minimum price 18: Qd = 150 − 108 = 42, Qs = −30 + 108 = 78. Surplus = 78 − 42 = 36.

	Maximum price	Minimum price
Aim	Keep a good affordable	Raise or protect incomes
Problem	Shortage, rationing, black market, lower quality	Surplus, waste, cost of buying it up
Who gains	Buyers who get a unit	Sellers who sell
Who loses	Buyers who do not, and sellers	Buyers who pay more, taxpayers

A price control set on the wrong side of equilibrium has no effect. State this to show you have read the diagram.

Buffer stocks (3.2.5)

Work for storable goods with variable harvests. The agency sets a floor and ceiling.

Worked reminder. Demand Qd = 800 − 4P. Harvests: poor 320, normal 400, good 480 (fixed supply in the year).

• Free prices: poor (800 − 320) ÷ 4 = 120; normal 100; good 80.
• Floor 90: demand at 90 = 800 − 360 = 440, so the agency buys 480 − 440 = 40, spending 40 × 90 = 3,600 cu.
• Ceiling 110: demand at 110 = 800 − 440 = 360, so the agency sells 360 − 320 = 40, receiving 40 × 110 = 4,400 cu.
• Net = 4,400 − 3,600 = 800 cu before storage costs.

Weaknesses: stock runs out after consecutive poor years; storage is costly; a band set away from the long run price drifts into a permanent surplus or shortage.

Information (3.2.6)

Targets imperfect information and so under-consumption of merit goods or over-consumption of demerit goods.

Worked reminder. A health campaign (invented) costs 48,000 cu. Users of a screening service rise from 12,000 to 15,200 out of 40,000 people.

• Share before = 12,000 ÷ 40,000 = 30%. After = 15,200 ÷ 40,000 = 38%. Rise = 8 percentage points.
• Percentage rise in users = 3,200 ÷ 12,000 × 100 = 26.7%.
• Cost per extra user = 48,000 ÷ 3,200 = 15 cu.

Strengths: cheap, keeps choice, no price rise. Limits: slow, uncertain, may be ignored, and weak against habits and addiction.

Must-know distinctions

• Tax shifts supply upward. A subsidy shifts it downward. Neither shifts demand.
• Incidence is not the same as who pays the cash. Sellers pay the tax but buyers may bear most of it.
• Maximum price gives a shortage. Minimum price gives a surplus.
• Buffer stock stabilises price within a band. It does not set a single fixed price.
• Percentage change and percentage points are different measures.

Quick self-test

1. In the tax example with Qd = 150 − 6P and Qs = −30 + 6P, what is the equilibrium price?
2. A tax of 6 cu is placed on this market. By how much would supply shift, and in which direction?
3. Why does less elastic demand raise the consumer share of a tax?
4. A subsidy of 2 cu is added. State the effect on the price paid by consumers, in direction only.
5. State one reason why a minimum price needs government spending.
6. A maximum price is set at 20 cu when equilibrium is 15 cu. What happens?
7. In the buffer stock example, how much does the agency buy at floor 90?
8. A campaign costs 6,000 cu and 400 people change behaviour. Cost per person?
9. Give one drawback of direct provision.
10. Give one reason why demand for a taxed demerit good may limit the policy.

Answers

1. 15 cu (180 ÷ 12).
2. Upward by 6 cu, since a tax raises the cost of every unit.
3. Buyers cannot cut back much, so they stay in the market and absorb most of the price rise.
4. The price paid falls, though by less than 2 cu.
5. Producers supply more than consumers buy, so the surplus has to be bought or stored.
6. Nothing: the cap is above equilibrium, so it is not binding.
7. 40 units.
8. 6,000 ÷ 400 = 15 cu.
9. Opportunity cost, or inefficiency without competition, or over-use when free.
10. If demand is inelastic, quantity falls little and the tax mainly raises revenue.

Where marks are usually lost

• Drawing the tax shift on the demand curve.
• Giving the new price but not splitting it into consumer and producer parts.
• Ignoring the vertical gap equal to the tax between the two prices.
• Saying a price control works when it is set on the wrong side of equilibrium.
• Listing effects without linking them to elasticity.
• One-sided answers with no judgement on size, time or fairness.
• Confusing percentage and percentage-point changes.

Official syllabus

Cambridge International AS & A Level Economics (9708), syllabus for examination in 2026, 2027 and 2028, published by Cambridge International, topic 3, section 3.2.