OCR A Level Economics: Government intervention, CBA and government failure (H460) – Revision Notes

These notes condense the OCR A Level Economics (H460) topics “Alternative methods of government intervention” and “Government failure” (Version 3.0, June 2026, first assessment 2021). Read the full study guide for the explanations, then test yourself with the practice questions. Other links: OCR economics hub, printable checklist and free 10-minute diagnostics. All figures below are invented.

Why governments intervene

• To correct market failure: externalities, public goods, information failure, market power.
• To reduce inequity in income, wealth and access to resources.
• Every method has a cost, so always weigh benefit against cost and side effects.

The methods at a glance

Method	What it does	Diagram in words	Main strength	Main weakness
Indirect tax	Raises cost per unit	Supply shifts up by the tax	Cuts output of a negative-externality good; raises revenue	Needs the size of the externality; regressive
Subsidy	Lowers cost per unit	Supply shifts down by the subsidy	Raises output of a positive-externality good	Budget cost; producers may keep much of it
State provision, government expenditure	Government pays and supplies	Supply becomes vertical at the quantity provided, price paid zero	Universal access; covers public goods	Opportunity cost; weak cost control
Buffer stock	Buys at floor, sells at ceiling	Horizontal lines at floor and ceiling prices	Steadier prices and incomes	Storage cost; stocks can run out
Maximum price	Price held below equilibrium	Line below equilibrium price	Affordability	Shortage, black market
Minimum price	Price held above equilibrium	Line above equilibrium price	Supports producers’ income	Surplus
Public/private partnership	Private firm builds and runs; government pays	None needed	Private finance and expertise; risk transfer	Long-run cost; complex contracts
Legislation, regulation	Rules, standards, bans	Output limited at a set level	Certain; targeted	Enforcement cost; no incentive beyond rule
Tradable permits	Cap on pollution, permits traded	Fixed (vertical) supply of permits	Meets the cap at lowest cost	Cap and monitoring problems
Information provision	Labels, campaigns	Demand shifts (down for demerit, up for merit)	Cheap; keeps choice	Weak where behaviour is habitual
Competition policy	Controls collusion, abuse, mergers	Price falls, output rises with more competition	Lower prices, more choice	Slow, costly, evidence needed

Key calculations

Tax incidence. Consumers’ burden = new price minus old price. Producers’ burden = tax minus that rise. Revenue = tax x new quantity. Deadweight loss = 0.5 x tax x fall in quantity (for a tax on a good with no externality).

Worked reminder. Demand Qd = 180 - 3P, supply Qs = 2P - 20, so P = 40 cu and Q = 60. A tax of 10 cu gives Qs = 2(P - 10) - 20 = 2P - 40, so 180 - 3P = 2P - 40, P = 44 cu and Q = 48.

• Consumers pay 4 cu more (40% of the tax); producers bear 6 cu (60%).
• Revenue = 10 x 48 = 480 cu: 192 cu from consumers, 288 cu from producers.
• Deadweight loss = 0.5 x 10 x 12 = 60 cu.

Subsidy. Cost = subsidy per unit x new quantity. Demand Qd = 120 - 2P, supply Qs = 4P - 30: P = 25 cu, Q = 70. A subsidy of 3 cu gives Qs = 4(P + 3) - 30 = 4P - 18, so 120 - 2P = 4P - 18, P = 23 cu and Q = 74. Cost = 3 x 74 = 222 cu. Consumers pay 2 cu less (two thirds of the subsidy); producers receive 26 cu, up 1 cu.

Maximum price. Demand Qd = 300 - 2P, supply Qs = 3P - 100: P = 80 cu, Q = 140. A cap of 60 cu gives Qd = 180 and Qs = 80, a shortage of 100. Consumers would pay (300 - 80)/2 = 110 cu for the last unit supplied, which is the black-market incentive.

Minimum price. Demand Qd = 250 - 3P, supply Qs = 2P: P = 50 cu, Q = 100. A floor of 60 cu gives Qd = 70 and Qs = 120, a surplus of 50. If the government buys it, the cost is 50 x 60 = 3,000 cu.

Buffer stock method. (1) Find the free-market price. (2) If it breaches the band, set the price at the floor or ceiling. (3) Read off demand and supply at that price. (4) Surplus = purchase; shortage = release. (5) Cost or revenue = quantity x price.

Tradable permits. Two firms each emit 80 tonnes. The cap is 100, so each gets 50 permits. Abatement costs 6 cu per tonne for firm A and 10 cu for firm B, each able to abate all 80.

• No trading: each abates 30 tonnes, 30 x 6 + 30 x 10 = 480 cu.
• Trading: 60 tonnes must be abated, all by firm A at 6 cu: 360 cu. Saving 120 cu.
• Permit price lies between 6 and 10 cu. Below 6, A will not sell; above 10, B abates instead of buying.

Cost Benefit Analysis (CBA)

Meaning: valuing all social costs and benefits of a project, private and external, in money, and comparing them.

Item	Definition or formula
Present value	amount / (1 + r)^n
Net present value (NPV)	present value of benefits minus present value of costs
Decision rule	go ahead if NPV is above zero (and compare alternatives)

Worked reminder. A training centre costs 300 million cu now. For four years its net benefit (benefits minus running and external costs) is 90 million cu a year.

• At 4%: 90/1.04 + 90/1.04^2 + 90/1.04^3 + 90/1.04^4 = 326.69 million. NPV = 326.69 - 300 = +26.69 million.
• At 10%: present value 285.29 million. NPV = -14.71 million.
• A single 500 million cu benefit received in year 3, discounted at 6%: 500/1.06^3 = 419.81 million.

Uses: schools and colleges, environmental schemes, hospitals, transport.

Value in decisions.

• For: includes external effects, common basis for comparison, makes trade-offs explicit.
• Against: money values for intangibles are contestable, forecasts uncertain, result sensitive to the discount rate, ignores distribution, can be used to justify decisions already made.

Government failure

Definition. Intervention that fails to improve, or worsens, resource allocation, leaving welfare lower than it could be.

Cause	Example
Imperfect information	Tax set above or below the true external cost
Distorted incentives	Short-term, vote-winning policy
Regulatory capture	Industry shapes its regulator
Unintended consequences	Rent cap shrinks housing supply
Cost of administration	Enforcing rules uses resources
Time lags	Policy takes effect after conditions change

Consequences. Resources misallocated, taxpayers’ money wasted, new inequity, loss of confidence in policy. A failed intervention can still beat doing nothing: always compare the outcome with the original market failure.

Must-know distinctions

• Floor price (buffer stock buys) versus ceiling price (buffer stock sells).
• Maximum price (below equilibrium, shortage) versus minimum price (above equilibrium, surplus).
• Tax revenue versus deadweight loss: revenue is a transfer, the triangle is the welfare loss.
• Market failure (the market gets it wrong) versus government failure (the intervention gets it wrong).
• Regulation (fixed rule) versus permits (fixed total, price decided by trading).

Evaluation checklist

1. Does the method suit this failure (externality, public good, information, market power, inequity)?
2. How elastic are demand and supply? Short run or long run?
3. Who gains and who pays?
4. What does it cost to run and enforce?
5. What are the side effects?
6. Is there a better alternative, and is the outcome still better than doing nothing?

Quick self-test

1. Define government failure.
2. Demand Qd = 180 - 3P and supply Qs = 2P - 20. A tax of 10 cu is imposed. Find the new price and quantity.
3. Demand Qd = 300 - 2P and supply Qs = 3P - 100. A maximum price of 60 cu is set. Find the shortage.
4. Demand Qd = 250 - 3P and supply Qs = 2P. A minimum price of 60 cu is set. Find the surplus and the cost of buying it.
5. Two firms emit 80 tonnes each, the cap is 100, abatement costs 6 cu and 10 cu per tonne. How much does trading save?
6. What is the present value of 500 million cu received in three years at 6%?
7. A project has an NPV of -14.71 million cu at a 10% discount rate. What does that suggest?
8. Give two causes of government failure.
9. Why might a subsidy be an inefficient use of public money even if it raises output to the optimum?
10. State one limitation of Cost Benefit Analysis.
11. Why might a public/private partnership cost more in the long run than public borrowing?
12. Which method suits a public good, and why?

Answers

1. Intervention that fails to improve, or makes worse, the allocation of resources.
2. New price 44 cu, quantity 48.
3. At 60 cu, Qd = 180 and Qs = 80, so the shortage is 100.
4. Qd = 70, Qs = 120, surplus 50; cost 50 x 60 = 3,000 cu.
5. No trading 480 cu, trading 360 cu, saving 120 cu.
6. 500/1.06^3 = 419.81 million cu.
7. Costs exceed benefits at that rate, so the project fails; check how the result changes at lower rates.
8. Any two of: imperfect information, distorted incentives, regulatory capture, unintended consequences, administrative costs, time lags.
9. The gain in welfare can be small next to the budget cost, because much of the subsidy pays for units that would have been bought anyway; the funding has an opportunity cost.
10. For example: intangibles are hard to value, or the result depends on the discount rate.
11. The private partner needs a profit and bears financing costs, and the contract may be hard to monitor, so payments over many years can exceed the cost of direct public borrowing.
12. State provision, financed by tax, because a public good will not be supplied by the market (non-excludable, so no one pays).

Where marks are usually lost

• Describing a method without saying which market failure it corrects.
• Shifting the wrong curve: taxes and subsidies move supply, information provision moves demand.
• Reporting the tax as the price rise instead of finding the new equilibrium.
• Forgetting to name the shortage or surplus as a quantity.
• Discounting benefits but not costs in a CBA, or ignoring external costs.
• Listing advantages and disadvantages with no judgement on which dominates.
• Writing “government failure” for any policy that has side effects, without comparing to the original failure.
• Leaving out units or the label for the diagram axes.

Official syllabus

OCR A Level in Economics (H460), Version 3.0 (June 2026), for first assessment in 2021, published by OCR. Topics: “Alternative methods of government intervention” and “Government failure”.