Government intervention in markets: key terms
15 terms. Say the definition out loud, tap to check, then say whether you knew it. Back to the topic
These cards were written by the site from the specification, mark schemes and examiners' reports and are being checked by our Economics tutor; tell us if you spot an error.
Indirect tax
A tax on spending on goods and services, collected from the seller, which raises the cost of supply and shifts the supply curve upwards.
Examiners say The one-mark definition was answered well; marks went later on diagrams where the supply curve shifted the wrong way or by the wrong amount.
Specific (unit) tax
An indirect tax set as a fixed amount per unit sold, such as duty per litre of fuel, which shifts the supply curve vertically upwards by the same amount at every quantity.
Examiners say The 'why specific taxes' question wanted the per-unit point and a reason, such as targeting the harmful quantity regardless of price. Many answers described VAT instead.
Ad valorem tax
An indirect tax set as a percentage of the price, such as VAT, which pivots the supply curve so that the gap widens as price rises.
Examiners say Draw the pivot, not a parallel shift; the mark scheme's diagram shows diverging supply curves.
Incidence of a tax
How the burden of a tax is shared between consumers (through a higher price) and producers (through a lower net revenue per unit), which depends on the relative elasticities of demand and supply.
Examiners say Label the two rectangles on the diagram and say which is larger and why. 'The consumer pays most because demand is inelastic' is the sentence that earns the analysis mark.
Subsidy
A payment by the government to producers (or consumers) that lowers the cost of supply, shifting the supply curve downwards and increasing output and consumption.
Examiners say Subsidy diagrams were the most frequently drawn in the bank. The common error is labelling the subsidy as the fall in price rather than the vertical distance between the supply curves.
Maximum price (price ceiling)
A legal upper limit on the price of a good, set below the equilibrium price to make it affordable, which creates excess demand.
Examiners say To have any effect it must be below equilibrium: students who drew it above equilibrium, or confused it with a minimum price, scored nothing for the diagram.
Minimum price (price floor)
A legal lower limit on the price of a good, set above the equilibrium price to raise producers' incomes or discourage consumption, which creates excess supply.
Examiners say The define-it question was answered well; the confusion with maximum price appeared in a minority. Alcohol minimum unit pricing is the live example in the extracts.
Excess demand (shortage)
The amount by which quantity demanded exceeds quantity supplied at a price below equilibrium, such as under a maximum price or a tuition-fee cap.
Examiners say The tuition-fee question rewarded a definition, a labelled diagram showing the gap, and one sentence of explanation. All three in three marks.
Excess supply (surplus)
The amount by which quantity supplied exceeds quantity demanded at a price above equilibrium, such as under a minimum price.
Examiners say Say what happens to the surplus: stockpiles, government purchase or waste are the evaluation points.
Tradable pollution permits
Licences allowing a firm to emit a set amount of pollution, which can be bought and sold, so that the total is capped and firms with low abatement costs cut emissions and sell their spare permits.
Examiners say Reducing the number of permits shifts their supply left and raises their price; most students drew this well. Weaker answers forgot that the permit market, not the product market, is the diagram.
State provision
The government producing or paying for a good directly and supplying it free or below cost at the point of use, such as NHS dental care or flood defences.
Examiners say The flood-defence question was really about public goods (non-excludable, free-rider problem); the NHS question was about equity and merit. Pick the right reason for the good in the question.
Provision of information
Government action to correct an information gap, such as labelling, advertising campaigns or compulsory disclosure, so that consumers can make rational choices.
Examiners say Cheap and quick but weak against habit and addiction: a standard evaluation pair.
Regulation
Rules set and enforced by the government that restrict or require behaviour, such as emission limits, bans or minimum standards, backed by penalties.
Examiners say Analyse through the cost of enforcement and the risk of firms relocating; both appear in the examiners' indicative content.
Government failure
A situation in which government intervention leads to a net loss of welfare, because of distorted incentives, poor information, administrative cost or unintended consequences.
Examiners say The essay evaluations with the top marks used a specific unintended consequence from the extract rather than the generic phrase 'government failure may occur'.
Unintended consequences
Effects of a policy that were not meant by the policymaker, such as a black market under a maximum price or smuggling under a high indirect tax.
Examiners say Name the consequence and show the mechanism; the term alone earns nothing.
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