AQA A-Level Economics (7136) · Market Mechanism, Market Failure & Government Intervention
Specification points
- Methods of government intervention to correct market failure.
- The impact of intervention on markets and stakeholders.
- Government failure and its causes.
Methods of intervention
| Method | Targets | Effect |
|---|---|---|
| Indirect tax | Negative externalities/demerit goods | Raises cost, reduces output |
| Subsidy | Positive externalities/merit goods | Lowers cost, raises output |
| Price controls | Affordability/producer support | Max → shortage; min → surplus |
| Tradable permits | Pollution | Cap emissions; market prices them |
| State provision | Public/merit goods | Direct supply funded by tax |
| Regulation | Various | Standards, limits, bans |
| Provision of information | Information failure | Corrects poor decisions |
Key definitions
| Term | Definition |
|---|---|
| Tradable permit | A licence to emit a set amount of pollution, tradable between firms. |
| Government failure | Intervention that causes a net welfare loss. |
| Regulatory capture | When a regulator serves the interests of the firms it regulates. |
Evaluating intervention
Effectiveness depends on elasticity (an inelastic demand means a tax changes quantity little), the accuracy of information, enforcement, and the opportunity cost of spending. No single policy is a perfect fix.
Government failure
Government failure occurs when intervention makes resource allocation *worse*. Causes:
- Distortion of price signals (subsidies causing over-production).
- Unintended consequences (black markets from price controls).
- Information gaps — the true external cost is unknown.
- Administrative costs and regulatory capture.
Intervention must be judged against the risk of government failure, not an ideal outcome.
Worked example
A government sets a maximum price for rented housing below equilibrium to help tenants. Demand exceeds supply, creating a shortage, queues and black-market lettings, while landlords cut maintenance. The intervention, though well-intentioned, may worsen welfare — government failure.
Common exam mistakes
- Presenting a policy as a perfect solution.
- Ignoring elasticity when judging a tax or subsidy.
- Forgetting government failure as an evaluation point.
Exam technique
Analyse the intended effect with a diagram, then evaluate by elasticity, information, cost and the risk of government failure.
Quick revision
- Methods: taxes, subsidies, price controls, permits, provision, regulation, information.
- Effectiveness depends on elasticity and information.
- Government failure = intervention that worsens welfare.