Government Intervention | AS-Level Economics Notes

These revision notes cover everything you need to know about Government Intervention for A-Level Economics. They're designed for students studying AQA A-Level Economics, Edexcel A-Level Economics, and Edexcel International A-Level Economics. Written by Jaisul Naik, UCL Economics graduate and A-Level Economics tutor since 2017.

Indirect taxes

Definition

An indirect tax is an extra cost imposed by the government on firms (and it can be passed onto consumers). It causes supply to shift to the left.

Example

Sugar tax, fuel duty.

Diagram

Evaluation

Indirect taxes can be ineffective as they can lead to government failure.

For example, the government might have inadequate information about the price elasticity of demand of the good or service.

What is a subsidy?

Definition

A subsidy is a payment given by the government to firms. It causes supply to shift to the right.

Example

Childcare subsidies, energy bills.

Diagram

Evaluation

One downside of subsidies is the opportunity cost; the value of the next best alternative foregone.

Maximum prices

Definition

A maximum price is a price above which it is illegal to trade. It should be set below the equilibrium price to have any effect.

Example

Rent controls, maximum price on UK universities.

Diagram

Evaluation

Maximum prices can be ineffective as they can lead to government failure.

For example, a maximum price can distort price signals. A lower prices causes a contraction along the supply curve, causing excess demand.