Edexcel International A Level Economics
Edexcel International A Level Economics Government Intervention in Markets Exam Questions
Free Edexcel International A Level Economics exam questions for Government Intervention in Markets, with a mark scheme for every pack. Covers indirect taxes, subsidies, maximum and minimum prices, tradable pollution permits, state provision, information provision, regulation and government failure.
Government Intervention in Markets exam questions
1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
About Edexcel International A Level Economics Government Intervention in Markets
Government intervention in markets is the final Unit 1 topic in Edexcel International A Level Economics and follows directly from market failure. You learn the main tools governments use to correct externalities, public goods and information gaps, and how to show their effects on supply and demand diagrams. You also learn why intervention can make things worse, a problem called government failure. The topic links to price determination and elasticity, because the impact of a tax or subsidy depends on PED. Examiners often ask you to calculate tax incidence from a diagram and then evaluate the effectiveness of a policy using a stimulus case.
What you need to know
- Indirect taxes A specific (unit) tax shifts supply up by the amount of the tax; an ad valorem tax is a percentage and makes supply pivot. The incidence on consumers is greater when demand is price inelastic.
- Subsidies A subsidy shifts supply down or right, lowering price and increasing quantity. Know how to identify the total cost to government and the gain to consumers and producers.
- Maximum and minimum prices A maximum price set below equilibrium creates excess demand and may lead to shortages and black markets. A minimum price set above equilibrium creates excess supply, as in agricultural price floors or a minimum unit price for alcohol.
- Other interventions Tradable pollution permits cap total pollution and allow firms to buy and sell permits. State provision of public goods, provision of information to close information gaps, and regulation such as bans or standards.
- Government failure Intervention leads to a net welfare loss. Causes include distortion of price signals, unintended consequences, excessive administrative costs and information gaps.
Common mistakes in Government Intervention in Markets
- Shifting demand when a tax is imposed on producers. An indirect tax raises costs, so supply shifts left (upwards); demand does not change.
- Saying consumers pay all of a tax. The incidence is shared, and the consumer share is larger when demand is more price inelastic than supply.
- Drawing a maximum price above equilibrium. To have any effect, a maximum price must be below the equilibrium price and a minimum price above it.
- Evaluating without considering government failure. Strong answers explain how the policy could fail, such as setting a tax at the wrong level due to information gaps.
- Forgetting the opportunity cost of subsidies. Money spent on a subsidy could have been spent elsewhere.
Try three Government Intervention in Markets exam-style questions
1. A specific tax of 2 dollars per unit is placed on a good. The price rises from 10 dollars to 11.50 dollars and quantity falls from 500 to 400 units. Calculate the total tax revenue and the share of the tax paid by consumers. (3 marks)
Show the mark scheme answer
Tax revenue = 2 x 400 = 800 dollars; consumer burden per unit = 11.50 - 10 = 1.50 dollars; consumers pay 1.50 x 400 = 600 dollars, which is 75% of the tax.
2. Explain why a maximum price on rented housing may lead to a shortage. (4 marks)
Show the mark scheme answer
Maximum price set below equilibrium; quantity demanded increases because rents are lower; quantity supplied falls as landlords leave the market; excess demand or shortage results; may also cause informal markets or lower quality housing.
3. Evaluate the use of tradable pollution permits to reduce carbon emissions. (12 marks)
Show the mark scheme answer
Permits cap total emissions and give firms an incentive to cut pollution because unused permits can be sold; market-based and efficient because firms with lowest abatement costs cut most; evaluation: difficult to set the right cap; too many permits issued lowers the price and weakens the incentive; monitoring costs; firms may relocate to countries without permits; compare with carbon taxes; supported judgement.
Government Intervention in Markets FAQs
What does Edexcel IAL Economics Government intervention in markets cover?
It covers indirect taxes, subsidies, maximum and minimum prices, tradable pollution permits, state provision, information provision, regulation and government failure.
Which unit is Government intervention in markets examined in?
It is part of Unit 1, Markets in action.
How do I work out tax incidence from a diagram?
The consumer share is the rise in price paid multiplied by the new quantity. The producer share is the fall in price received after tax multiplied by the new quantity. The two add up to the total tax revenue.
