Government Intervention (Taxes, Subsidies, Price Controls)

    OCR
    GCSE

    Rigorous analysis of state mechanisms deployed to correct market failure and optimize allocative efficiency. The study necessitates precise diagrammatic modelling of indirect taxation (specific and ad valorem), subsidies, and price controls (maximum and minimum prices). Candidates must evaluate the impact on economic agents through changes in consumer and producer surplus, deadweight welfare loss, and government fiscal positions, while critically assessing the potential for government failure and unintended consequences.

    5
    Objectives
    4
    Exam Tips
    3
    Pitfalls
    3
    Key Terms
    4
    Mark Points

    Learning Objectives

    What you need to know and understand

    • Indirect Taxes (Specific vs Ad Valorem) increase production costs, shifting Supply left
    • Subsidies reduce production costs, shifting Supply right, lowering price, increasing quantity
    • Maximum Prices (Price Ceilings) must be set below equilibrium to be effective, causing excess demand
    • Minimum Prices (Price Floors) must be set above equilibrium to be effective, causing excess supply
    • Opportunity Cost represents the alternative use of government funds spent on subsidies or enforcement

    Marking Points

    Key points examiners look for in your answers

    • Construct accurate supply and demand diagrams showing shifts (tax/subsidy) or price ceilings/floors relative to equilibrium
    • Analyse the chain of reasoning: Intervention -> Cost/Price change -> Incentive/Signal -> Behavioural change -> Market outcome
    • Evaluate the effectiveness of intervention based on price elasticity of demand (PED) and price elasticity of supply (PES)
    • Calculate specific financial impacts (e.g., total tax revenue, subsidy cost) from provided data tables

    Examiner Tips

    Expert advice for maximising your marks

    • 💡Integrate quantitative data from the case study to support arguments (e.g., 'The 20% tax increase caused demand to fall by...')
    • 💡When evaluating, consider the magnitude of the intervention and the time lag for effectiveness
    • 💡Use the phrase 'ceteris paribus' implicitly; isolate the variable being changed
    • 💡Ensure diagrams are fully labelled (Price, Quantity, P1, P2, Q1, Q2, Equilibrium) to access AO2 marks

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Shifting the Demand curve instead of the Supply curve when analysing indirect taxes or subsidies
    • Confusing the effects of a Maximum Price (shortage) with a Minimum Price (surplus)
    • Asserting that taxes 'solve' market failure without acknowledging the potential for government failure or black markets

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    Key Terminology

    Essential terms to know

    Likely Command Words

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