9708 · 3.2
Methods and effects of government intervention in markets flashcards
Revision flashcards for Cambridge 9708 Methods and effects of government intervention in markets (syllabus 3.2). Flip, recall, then mark a real past-paper question.
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How does an indirect tax affect a supply curve?
Shifts supply left/up by the tax amount — raises price to consumers, lowers price received by producers.
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How does a subsidy affect a supply curve?
Shifts supply right/down — lowers consumer price, raises price received by producers.
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Effect of a maximum price below equilibrium?
Creates excess demand (shortage) — Qd > Qs at the controlled price.
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Effect of a minimum price above equilibrium?
Creates excess supply (surplus) — Qs > Qd; government may buy the surplus.
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Specific tax vs ad valorem tax?
Specific: fixed amount per unit (e.g. 50p/litre). Ad valorem: percentage of price (e.g. 20% VAT).
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What is government failure?
Intervention that makes outcomes worse — e.g. poor information, bureaucracy, unintended consequences.
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What is tax incidence?
The division of the burden of an indirect tax between consumers and producers. It is determined by the relative price elasticities of demand and supply.
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How does a subsidy affect the market equilibrium?
It shifts the supply curve vertically downwards by the amount of the subsidy per unit. This leads to a lower market price, a higher quantity traded, and a higher price received by producers.
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What is the primary consequence of an effective maximum price?
A persistent shortage (excess demand), as the quantity demanded at the ceiling price exceeds the quantity supplied.
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Why might a government need to buy up a surplus created by a minimum price?
To maintain the minimum price floor. Without government purchase, the excess supply would put downward pressure on the price, causing it to fall back towards the equilibrium level.
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Define 'deadweight loss' in the context of government intervention.
The loss of total surplus (consumer + producer surplus) to society that occurs when the market is not at the competitive equilibrium. It represents a loss of economic efficiency.