Skip to content
MarkSchemeMarkScheme
Sign up — no card

9708 · 3.2

Methods and effects of government intervention in markets — practice questions

Practice and worked examples for 9708 Methods and effects of government intervention in markets. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

The market for petrol is in equilibrium at P = £1.40/litre, Q = 500 million litres/month. The government imposes a specific tax of £0.20 per litre. After the tax, consumer price rises to £1.52 and quantity falls to 460 million litres.

(a) What price do producers receive per litre after tax? (b) How is the £0.20 tax burden shared?

Show solution outline

(a) Producer price = consumer price − tax = £1.52 − £0.20 = £1.32 per litre.

(b) Tax burden sharing Consumers pay £0.12 more (£1.52 − £1.40). Producers receive £0.08 less (£1.40 − £1.32).

Check: £0.12 + £0.08 = £0.20 ✓

Incidence: Consumers bear 60% of the tax; producers bear 40% — the side with more inelastic demand/supply pays more (link to 2.2 PED and 2.3 PES).

Welfare: Draw supply shifting left by £0.20. Shade reduced consumer surplus, reduced producer surplus, tax revenue rectangle, and deadweight loss triangle (→ 2.5).

Worked example 2

The market for solar panel installations is in equilibrium with a price of $2,000 and a quantity of 10,000 units per year. To encourage renewable energy, the government introduces a subsidy of $400 per installation. The new market price for consumers falls to $1,700, and quantity rises to 12,000 units.

(a) What is the price per unit received by producers after the subsidy? (b) Calculate the total annual cost of the subsidy to the government. (c) How is the benefit of the $400 subsidy shared between consumers and producers?

Show solution outline

(a) Price received by producers: The price producers receive is the new market price paid by consumers plus the per-unit subsidy.

  • Price received by producers = New consumer price + Subsidy
  • Price received by producers = 1,700+1,700 + 400 = **2,100∗∗2,100**

(b) Total cost to the government: The total cost is the subsidy per unit multiplied by the new quantity sold.

  • Total Cost = Subsidy per unit × New quantity
  • Total Cost = 400×12,000=∗∗400 \times 12,000 = **4,800,000 per year**

(c) Sharing of the subsidy benefit: We compare the new prices for consumers and producers to the original equilibrium price of 2,000.2,000.

  • Consumer benefit per unit: Original price - New consumer price = 2,000−2,000 - 1,700 = **300∗∗300**
  • Producer benefit per unit: New producer price - Original price = 2,100−2,100 - 2,000 = **100∗∗100**

Check: $300 (consumer benefit) + $100 (producer benefit) = $400 (total subsidy per unit) ✓

Incidence: Consumers receive 75% (300/300/400) of the benefit, while producers receive 25% (100/100/400). This implies that demand is more price elastic than supply over this range.

Mark a 9708 question on this topicFull lessonOpen in course studio