Government intervention

Question 1

Government intervention

Answer 1

Used to try and overcome market failures . May also seek to improve distribution of resources - greater equality.

Question 2

Aims of government intervention

Answer 2

-Stabilise prices
-Avoid excess prices for goods with important social welfare
-Discourage demerit goods/encourage merit goods

Question 3

Forms of government intervention

Answer 3

Maximum prices
Minimum prices
Taxes
Subsidies

Question 4

Minimum prices

Answer 4

Government sets a certain price that goods may not go below legally (price floor) e.g. Alcohol has a minimum price (less affordable) in Scotland

Question 5

Minimum price notes

Answer 5

-Sometimes used to ensure workers/farmers receive a more equitable wage
-Involves guaranteed minimum price
-Can be used to discourage the use of demerit goods

Question 6

Minimum price diagram

Answer 6

-Set above equilibrium price
-Quantity demanded contracts to Q1(consumption discouraged) and quantity supplied increases to Q2 (excess supply
-Solves issue with overconsumption of demerit goods

Question 7

Minimum price disadvantages

Answer 7

-Burden could increase on the poor, widening inequalities further
-Black market could be stimulated (people might turn to cheaper alternatives, low quality and possibly more harmful)

Question 8

Maximum price

Answer 8

Involves a limit on any price increase (price ceiling). Usually helps with inequalities. e.g. price of rent has a ceiling in Berlin and New York.

Question 9

Maximum price diagram

Answer 9

-Set below equilibrium price
-Quantity demanded increases from Q to Q2 (consumption encouraged) and quantity supplied will decrease from Q to Q1(shortage of supply)
-Solves income inequality as it is more affordable to more of the population

Question 10

Maximum price disadvantages

Answer 10

-May cause shortages (as quantity supplied decreases) of a good/service
-Black market may be promoted (due to excess demand)