Theme 3.6.2

Question 1

Give the impact of government intervention on prices

Answer 1

Govs can prevent monopolies charging excessive prices.

Intervention (e.g. price ceilings, floors, subsidies, taxes) distorts market equilibrium.

It can lower prices (e.g. subsidies) for consumers or raise prices (e.g. indirect taxes) to discourage consumption (like cigarettes).

However, it can cause excess demand/supply if set away from equilibrium.

Question 2

Give the impact of government intervention on profit

Answer 2

Intervention often reduces profits for firms -> through : taxation, price caps, and regulation.

However, subsidies can boost profits and investment, especially in merit goods or green tech

Question 3

Give the impact of government intervention on efficiency

Answer 3

Intervention can correct market failure and improve A.E (e.g. taxing negative externalities).

But too much can create productive inefficiency (reduced incentives to cut costs) or government failure (misallocation of resources).

Question 4

Give the impact of government intervention on quality

Answer 4

Regulation may improve quality (e.g. safety standards, food regulations) and protect consumers.

However, price controls may lead firms to cut quality to maintain profit margins

Question 5

Give the impact of government intervention on choice

Answer 5

Intervention can increase choice (e.g. state provision of healthcare or education).

Conversely, overregulation and nationalisation can limit consumer choice by reducing competition and variety.

Question 6

Give the limits to government intervention

Answer 6

Regulatory capture

Assymetric info

Question 7

Explain the limit of government intervention: regulatory capture

Answer 7

Occurs when regulators act in the interest of the industry they’re supposed to oversee rather than the public.

This can weaken enforcement and lead to inefficient outcomes and persistent market failure.

Example: Financial regulators failing to prevent risky practices before the 2008 crash.

Question 8

Explain the limit of government intervention: Asymmetric information

Answer 8

Govs may lack accurate or timely info about the market, leading to poor decision-making.

This can cause gov failure if policies are based on wrong assumptions or misjudged outcomes.

Example: Misestimating the true cost or demand for a subsidised good