Cambridge International AS and A Level Economics: Reasons for government intervention in markets (9708)

This guide follows the Cambridge International AS and A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028. It covers section 3.1, Reasons for government intervention in markets (3.1.1 to 3.1.3). This is AS Level content, which is also assumed knowledge for the A Level papers. Every number below is invented for illustration: the countries, firms and markets are fictional.

Section 3.1 asks why. Later sections of topic 3 ask how, so the methods of intervention (taxes, subsidies, direct provision and the rest) belong to section 3.2 and to topic 8 at A Level. Here you only need the case for acting, and enough about price controls to see why a government would want one. Free, private, public, merit and demerit goods are defined in section 1.6; this guide uses those definitions. Check your progress against the printable checklist and the course hub.

What you must be able to do

Syllabus reference	Outcome	Where covered
3.1.1	Addressing the non-provision of public goods	Public goods, below
3.1.2	Addressing the over-consumption of demerit goods and the under-consumption of merit goods	Merit and demerit goods, below
3.1.3	Controlling prices in markets	Price controls, below

Pair this page with the revision notes and the practice questions. The diagnostics show which areas need most work.

3.1.1 Non-provision of public goods

A public good has two features:

• Non-excludable. Once it exists, you cannot stop anyone using it, so you cannot make people pay.
• Non-rival. One person’s use does not reduce what is left for others. An extra user costs nothing extra.

The free-rider problem follows. Each person gains whether or not they pay, so each hopes others will pay. Nobody has a reason to reveal how much they value the good. A private firm cannot earn revenue, so the market provides none of the good. This is non-provision: the market fails to supply it at all, which is more severe than supplying the wrong quantity.

Governments address this by providing the good (or paying for it) and funding it from taxation. Tax is compulsory, so it removes the free-rider option.

Worked example: a flood siren

A fictional village has 400 households. Each household would get a benefit it values at 30 currency units (CU) from a warning siren. The siren costs 6,000 CU.

1. Total benefit = 400 × 30 = 12,000 CU.
2. Cost = 6,000 CU, so the net benefit is 12,000 − 6,000 = 6,000 CU. Building the siren is worth doing.
3. If everyone paid equally, each would pay 6,000 ÷ 400 = 15 CU, which is half of what the siren is worth to them.
4. A private seller cannot charge for it, because anyone nearby hears the siren. If households are asked to donate, each can reason that the siren will be built if others pay and will be heard anyway. Too few pay, and the siren is not built.
5. A local government that taxes every household 15 CU raises 6,000 CU. The siren is built and every household is better off by 15 CU.

Evaluating provision

• How much to provide. Because people do not reveal their valuation, the government must estimate the benefit. Too little or too much may be provided.
• Government provision is not government production. The state can pay a private firm to build and run the good.
• Few pure cases. Few goods are purely public. A road is non-rival until it is congested, and its owner can add tolls. The nearer a good is to the pure case, the stronger the argument for state provision.
• Opportunity cost. Tax funds taken for one good cannot be spent on another.

3.1.2 Demerit goods and merit goods

Section 1.6 defines these through imperfect information. People get the information wrong, so the amount they choose differs from the amount that would be chosen if they were fully informed.

• A merit good is under-consumed because people underestimate its benefit. Examples are health checks and education.
• A demerit good is over-consumed because people underestimate the harm. Examples are tobacco and some addictive substances.

The case for intervention is that the market quantity differs from the quantity people would choose with full information, so welfare could be higher with action. Externalities, which add social costs and benefits, are covered in topic 7 at A Level and are not needed here.

Diagram described in words

Put price up the side of the diagram and quantity along the bottom. For a merit good there are two demand curves. The lower one is the demand consumers act on, based on their perceived benefit. The higher one is demand if consumers were fully informed. Supply slopes upwards. The market settles where perceived demand meets supply. The better-informed outcome is further right. The gap between the two quantities is the under-consumption. For a demerit good the informed demand curve lies below the perceived one, and the gap is over-consumption.

Worked example: a merit good

Fictional market for health checks, with quantity in thousands of checks and price in CU.

• Perceived demand: P = 40 − 2Q
• Demand if fully informed: P = 52 − 2Q
• Supply: P = 4 + 2Q

1. Market equilibrium: 40 − 2Q = 4 + 2Q, so 36 = 4Q, so Q = 9 and P = 4 + 18 = 22.
2. Informed outcome: 52 − 2Q = 4 + 2Q, so 48 = 4Q, so Q = 12 and P = 4 + 24 = 28.
3. Under-consumption = 12 − 9 = 3 thousand checks.

Worked example: a demerit good

Fictional market for a harmful additive snack, again in thousands of units and CU.

• Perceived demand: P = 50 − 2Q
• Demand if fully informed: P = 38 − 2Q
• Supply: P = 6 + 2Q

1. Market equilibrium: 50 − 2Q = 6 + 2Q, so 44 = 4Q, so Q = 11 and P = 6 + 22 = 28.
2. Informed outcome: 38 − 2Q = 6 + 2Q, so 32 = 4Q, so Q = 8 and P = 6 + 16 = 22.
3. Over-consumption = 11 − 8 = 3 thousand units.

Evaluating the case

• Measuring the gap. The informed demand curve cannot be observed, so the size of the gap is a judgement.
• Paternalism. Intervention says the government knows better than the consumer. Some people value freedom of choice for its own sake.
• Fit between aim and tool. Information campaigns tackle the cause (poor information), while pushing price up or down tackles the symptom. The tools are assessed in section 3.2.
• Time. Habits and awareness change slowly, so effects may take years.

3.1.3 Controlling prices in markets

A free market finds an equilibrium price, but a government may find that price unacceptable. It may then set a maximum price (a ceiling) or a minimum price (a floor). This guide covers the reasons for doing so, and the main consequences you must weigh. Section 3.2.4 treats the tools in more detail.

Reasons for a maximum price

• Make essentials affordable to low-income households.
• Limit price rises in a market with few sellers.
• Limit the cost of living or slow price rises during a shortage.

Reasons for a minimum price

• Protect producer incomes, for example in farming where supply is uncertain.
• Raise the price of a demerit good, so that people buy less of it.
• Raise earnings where the price is the wage, which links to labour markets in topic 8.

A control only matters if it is set on the right side of equilibrium. A ceiling set higher than equilibrium, or a floor set lower than it, has no effect.

Worked example: a maximum price on rented rooms

A fictional town has demand Qd = 600 − 4P and supply Qs = 3P − 100, with quantity in rooms and P in CU per week.

1. Equilibrium: 600 − 4P = 3P − 100, so 700 = 7P, so P = 100 and Q = 200 rooms.
2. The government sets a maximum rent of 80 CU.
3. At 80: Qd = 600 − 320 = 280 and Qs = 240 − 100 = 140.
4. Shortage = 280 − 140 = 140 rooms.
5. Rent bill: before, 100 × 200 = 20,000 CU a week. After, 80 × 140 = 11,200 CU a week.

Tenants who find a room pay less. 60 rooms are withdrawn from the market, and 140 people who want a room at 80 CU cannot get one. Landlords may sell the rooms to those willing to pay more in a black market, or let quality fall.

Worked example: a minimum price on a farm product

A fictional country grows dried fruit with demand Qd = 500 − 5P and supply Qs = 4P − 130, in tonnes and CU per tonne.

1. Equilibrium: 500 − 5P = 4P − 130, so 630 = 9P, so P = 70 and Q = 150 tonnes.
2. The government sets a minimum price of 80.
3. At 80: Qd = 500 − 400 = 100 and Qs = 320 − 130 = 190.
4. Surplus = 190 − 100 = 90 tonnes.
5. If the government buys the surplus, it pays 90 × 80 = 7,200 CU.
6. Producer revenue before: 70 × 150 = 10,500 CU. After, if all 190 tonnes are sold at 80: 190 × 80 = 15,200 CU.

Farmers gain on paper, but consumers pay more and buy less, and taxpayers fund the surplus. Higher prices also encourage more output next year.

Evaluating price control

Control	Gains	Costs and risks
Maximum price	Lower price for those who obtain the good	Shortage, queues, black market, lower quality, fewer suppliers
Minimum price	Higher income for suppliers, less demand for a demerit good	Surplus, cost of storing or buying it, higher prices for consumers, encourages inefficient producers

How big the effects are depends on elasticity. If demand is inelastic, a minimum price raises consumer spending on the good. If supply is inelastic, a maximum price removes few suppliers, so the shortage is small. The longer the control lasts, the more elastic supply and demand become, so effects grow with time.

Common errors

• Treating state provision as the definition of a public good. Provision is the response, not the definition.
• Saying the market produces too little of a public good. The usual point is that it produces none.
• Describing a merit good as one that is good for you. Without the idea of under-consumption caused by imperfect information, the answer misses the point.
• Placing a price control on the non-binding side of equilibrium and then describing a shortage or surplus that would not appear.
• Treating a control as only good or only bad. Always name who gains and who loses.

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.