Cambridge A Level Economics: Reasons for government intervention in markets (9708) – Revision Notes

These revision notes cover section 3.1 of the Cambridge International AS and A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028: Reasons for government intervention in markets (3.1.1 to 3.1.3). It is AS Level content and is assumed knowledge for the A Level papers. Full explanations and worked examples are in the study guide, and you can test yourself with the practice questions. Use the course hub, the printable checklist and the diagnostics to plan your revision. All figures are invented for illustration.

Key definitions

Term	Meaning
Public good	Non-excludable and non-rival
Non-excludable	Cannot stop non-payers using it
Non-rival	Using it does not leave less for others
Free-rider	Someone who uses a good without paying
Non-provision	The market supplies none of the good
Merit good	Under-consumed because of imperfect information
Demerit good	Over-consumed because of imperfect information
Maximum price	Legal ceiling on the price
Minimum price	Legal floor under the price

3.1.1 Public goods: the argument in six steps

1. The good is non-excludable, so non-payers cannot be kept out.
2. Because people can free-ride, no one reveals their true valuation.
3. A private firm cannot earn revenue.
4. The market therefore provides none of it (non-provision).
5. The benefit to society may exceed the cost.
6. The government provides it, paid for by taxation, which removes the free-rider option.

Worked reminder

A fictional town of 120 households values a bridge light at 25 CU each (3,000 CU in total). It costs 1,800 CU. Net benefit = 3,000 − 1,800 = 1,200 CU. Tax per household = 1,800 ÷ 120 = 15 CU, so each household is 10 CU better off.

Points to remember

• A good funded by government is not automatically a public good.
• Non-provision is the failure. Wrong quantity is a different failure.
• Almost no good is purely public. Congestion and tolls can add rivalry and excludability.
• Provision is not production. The state can pay a private firm.

3.1.2 Merit and demerit goods

	Merit good	Demerit good
Cause	Benefit underestimated	Harm underestimated
Market quantity compared with informed quantity	Too low	Too high
Informed demand curve	Right of perceived demand	Left of perceived demand
Example	Health checks	Tobacco

Method in steps

1. Draw perceived demand and supply and find the market equilibrium.
2. Draw the informed demand curve.
3. Find the new quantity where informed demand meets supply.
4. The gap between the two quantities is the under- or over-consumption.

Worked reminder (merit good)

Fictional vaccination market in thousands of doses. Perceived demand P = 30 − Q, informed demand P = 36 − Q, supply P = 6 + Q.

• Market: 30 − Q = 6 + Q, so Q = 12 and P = 18.
• Informed: 36 − Q = 6 + Q, so Q = 15 and P = 21.
• Under-consumption = 3 thousand doses.

Evaluation points

• The informed demand curve is not observable, so the gap is a judgement.
• Paternalism: who decides what is good for people?
• Effects of campaigns or habits are slow.
• Opportunity cost of the money spent.

3.1.3 Controlling prices

	Maximum price	Minimum price
Set where	Below equilibrium	Above equilibrium
Excess	Shortage (Qd > Qs)	Surplus (Qs > Qd)
Reasons	Affordability, limit price rises, protect the poor	Protect producer incomes, discourage a demerit good
Gainers	Consumers who obtain the good	Suppliers who sell
Losers	Consumers who cannot buy, suppliers	Consumers, taxpayers if government buys the surplus

A control on the wrong side of equilibrium does nothing.

Method in steps

1. Find equilibrium by setting Qd = Qs.
2. Check the control is on the binding side.
3. Substitute the controlled price into both Qd and Qs.
4. Excess = the difference.
5. Compare revenue or spending before and after, and name who gains and loses.

Worked reminder

Fictional bread market: Qd = 400 − 2P, Qs = 4P − 200. Equilibrium: 600 = 6P, so P = 100 and Q = 200. Maximum price 80: Qd = 240, Qs = 120, shortage 120. Revenue falls from 20,000 to 9,600.

Now a floor in the same market. Minimum price 110: Qd = 180, Qs = 240, surplus 60. Consumers spend 110 × 180 = 19,800. If the government buys the surplus it pays 60 × 110 = 6,600.

Evaluation points

• Elasticity: the more inelastic demand is, the more a minimum price raises spending.
• Time: both demand and supply become more elastic over time, so effects grow.
• Unintended effects: black markets, queues, lower quality and over-production.
• Alternatives may reach the aim at lower cost (see section 3.2).

Chains of reasoning to practise

• Public good: non-excludable, so free-riding, so no revenue, so no private supply, so tax-funded provision.
• Merit good: benefit underestimated, so perceived demand too low, so the market quantity is too small, so the case for action.
• Demerit good: harm underestimated, so perceived demand too high, so over-consumption, so the case for action.
• Maximum price: price held below equilibrium, so Qd rises and Qs falls, so a shortage appears, so rationing by queue or black market.
• Minimum price: price held above equilibrium, so Qs rises and Qd falls, so a surplus appears, so someone must pay to store or remove it.

Price elasticity and the controlled price

The link to price elasticity of demand helps in evaluation. With a minimum price, consumer spending (the revenue of sellers) rises only if demand is inelastic over the price rise. In a fictional alcohol market the price rises from 5 to 6 CU, a 20% rise, and quantity falls from 500 to 440, a 12% fall. PED = −12 ÷ 20 = −0.6, which is inelastic, so spending rises from 2,500 to 2,640 CU. A demerit good with inelastic demand is cut back only a little by a floor price, so the policy raises revenue for sellers more than it reduces consumption.

Diagram checklist

• Label the axes: price up the side, quantity along the bottom.
• Name the curves: demand, supply, and for merit and demerit goods perceived and informed demand.
• Mark the original equilibrium and the new quantities.
• For a price control, add a flat line at the controlled price, then label the shortage or surplus where it crosses the two curves.
• Add a sentence saying what the gap shows.

Must-know distinctions

• Non-provision (public good) versus wrong quantity (merit and demerit good).
• Merit good (under-consumption) versus demerit good (over-consumption).
• Shortage (maximum price) versus surplus (minimum price).
• Reason for intervening (section 3.1) versus method of intervening (section 3.2).

Quick self-test

1. State the two features of a public good.
2. Why does the free-rider problem cause non-provision?
3. A good costs 2,000 CU and 80 households each value it at 40 CU. Find the net benefit.
4. Define a merit good using the syllabus idea.
5. Perceived demand P = 40 − Q, informed demand P = 46 − Q, supply P = 10 + Q. Find the under-consumption.
6. Which curve lies to the left of perceived demand for a demerit good?
7. Why might a government set a maximum price?
8. Qd = 300 − 2P and Qs = P. Find equilibrium and the surplus at a minimum price of 120.
9. Does a maximum price of 120 matter in question 8?
10. Give one reason that government provision may still be questioned.

Answers

1. Non-excludable and non-rival.
2. Everyone gains whether or not they pay, so no one pays and no firm can earn revenue.
3. Total benefit = 80 × 40 = 3,200 CU. Net benefit = 3,200 − 2,000 = 1,200 CU.
4. A good that is under-consumed because people have imperfect information about its benefit.
5. Market: 40 − Q = 10 + Q, so Q = 15. Informed: 46 − Q = 10 + Q, so Q = 18. Under-consumption = 3.
6. The informed demand curve.
7. To make an essential good affordable or to limit price rises.
8. 300 − 2P = P, so P = 100 and Q = 100. At 120: Qd = 60, Qs = 120, surplus = 60.
9. No. Equilibrium is 100, so a ceiling at 120 is above it and does not bind.
10. It costs taxpayers, and the government may misjudge how much to provide.

Where marks are usually lost

• Defining a public good as whatever the state happens to provide.
• Leaving out one of the two features, or confusing non-rival with non-excludable.
• Saying a merit good is simply “good for you” without under-consumption or information.
• Drawing a ceiling above equilibrium or a floor below it.
• Reading a shortage or surplus from the wrong curve.
• Not showing the substitution into both Qd and Qs.
• Analysing only consumers or only producers in a price control.
• Giving evaluation as a list of points without a judgement or a condition.

Official syllabus

Cambridge International, Cambridge International AS & A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028, Subject content, section 3.1 Reasons for government intervention in markets, with definitions from section 1.6.