CCEA A Level Economics
CCEA A Level Economics AS 1 Government Intervention in Markets Exam Questions
Free CCEA A Level Economics revision for AS 1 Government Intervention in Markets: what you need to know, common mistakes and exam-style questions with answers. Covers state provision, regulation, indirect taxes, subsidies, information provision, tradable pollution permits, maximum and minimum prices and government failure.
Practise AS 1 Government Intervention in Markets with past papers
Once you have learnt this topic, find the AS 1 Government Intervention in Markets questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics AS 1 Government Intervention in Markets
Government intervention in markets follows directly from market failure in Unit AS 1: Markets and Market Failure. You need to analyse the main ways the government corrects market failure: direct provision, regulation and legislation, indirect taxes, subsidies, provision of information, tradable pollution permits and price controls (maximum and minimum prices). For each method you should be able to draw the diagram, explain how it works and evaluate its strengths and weaknesses. The topic ends with government failure, when intervention makes things worse. Extended response questions in CCEA papers often ask you to evaluate one or two policies for a specific market such as alcohol, plastic or housing.
What you need to know
- Indirect taxes A tax equal to the external cost internalises the externality, shifting supply to the social cost curve and reducing output to the optimum. Effectiveness depends on PED and on measuring the external cost accurately.
- Subsidies Lower costs, shift supply right and increase consumption of goods with positive externalities, such as public transport or vaccinations. They have an opportunity cost for government spending.
- Regulation and information Bans, limits, minimum standards and age restrictions directly control behaviour. Information campaigns and labelling tackle information failure, but results may be slow.
- Pollution permits The government caps total emissions and issues permits that firms can trade. Firms that cut pollution cheaply sell spare permits, so pollution is reduced at lowest total cost.
- Price controls A maximum price set below equilibrium (e.g. rent control) creates excess demand and may lead to black markets. A minimum price above equilibrium (e.g. minimum unit pricing for alcohol) creates excess supply.
- Government failure Intervention that leads to a net welfare loss, caused by poor information, unintended consequences, administrative costs, regulatory capture or political short-termism.
Common mistakes in AS 1 Government Intervention in Markets
- Drawing a maximum price above the equilibrium price; to have any effect it must be set below equilibrium.
- Evaluating a tax without mentioning price elasticity of demand.
- Assuming every intervention works; good evaluation considers government failure and unintended consequences.
- Forgetting the opportunity cost of subsidies and state provision.
- Explaining pollution permits without mentioning that the total cap is fixed by the government.
Try three AS 1 Government Intervention in Markets exam-style questions
1. Using a diagram, explain the effect of a maximum price for rented housing set below equilibrium. (6 marks)
Show the mark scheme answer
Maximum price line below equilibrium; quantity demanded rises and quantity supplied falls; excess demand (shortage); landlords may withdraw properties or let quality fall; possible black market or rationing by waiting lists.
2. Explain two advantages of tradable pollution permits compared with regulation. (4 marks)
Show the mark scheme answer
Market-based so firms that can cut emissions cheaply do so and sell permits, reducing pollution at least cost; firms have an incentive to invest in cleaner technology to sell spare permits; the government can tighten the cap over time; revenue may be raised if permits are auctioned.
3. Evaluate the use of an indirect tax to reduce consumption of sugary drinks. (8 marks)
Show the mark scheme answer
Tax raises price and shifts supply up; quantity falls towards the social optimum; revenue can fund health spending; but demand may be price inelastic so consumption falls little; regressive effect on low-income households; difficulty valuing the external cost; may encourage reformulation by firms; conclusion weighing effectiveness, e.g. better combined with information campaigns.
AS 1 Government Intervention in Markets FAQs
What does CCEA A Level Economics AS 1 Government Intervention in Markets cover?
State provision, regulation, indirect taxes, subsidies, provision of information, tradable pollution permits, maximum and minimum prices, and government failure.
Which unit is this topic examined in?
It is in Unit AS 1: Markets and Market Failure, a 1 hour 30 minute paper with short-answer questions, a case study and an extended response question.
How do I structure an evaluation of a government policy?
Explain how the policy works with a diagram, then weigh up factors such as elasticity, cost, information problems, unintended consequences and equity, and finish with a justified judgement about when it would work best.
