Reasons for government intervention in markets

CAIE Alevel Economics (AS)

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Provision of public goods: Governments can directly provide public goods, such as parks, roads, and bridges, by financing them through taxes and other revenue sources.
Regulation: Governments can regulate the provision of public goods by setting standards for quality and safety.
Subsidies: Governments can provide subsidies to producers of public goods to encourage their production and increase their supply.
Taxes: Governments can impose taxes on the production or consumption of goods that generate negative externalities, such as pollution, and use the revenue to finance public goods.
Public-private partnerships: Governments can partner with private firms to provide public goods, such as through the use of concessions or franchises.

Government intervention in markets addresses the over-consumption of demerit goods
- Taxes: Governments can impose taxes on the production or consumption of demerit goods to internalize the negative externalities and raise the price, thereby reducing the demand for these goods.
- Regulation: Governments can regulate the production and sale of demerit goods, such as by setting safety standards, to reduce their harmful effects on society.
- Education: Governments can use educational programs to raise awareness about the negative effects of demerit goods and encourage consumers to make more informed choices.
- Minimum price: This raises the price of the good, reducing the demand for it and, in turn, the negative externalities it generates.
Government intervention in markets addresses the under-consumption of merit goods
- Subsidies: Governments can provide subsidies to producers of merit goods to reduce their price and increase their demand.
- Public provision: Governments can directly provide merit goods, such as health care, through publicly funded programs.
- Education: Governments can use educational programs to raise awareness about the benefits of merit goods and encourage consumers to make more informed choices.
- Maximum price: This reduces the price of the good, increasing the demand for it and, in turn, the positive externalities it generates.

Price floors are minimum prices set by the government for a good or service.
- They are used to raise the market price above the equilibrium price
- Their purpose is to increase the income of producers and to ensure that a good or service is produced and consumed at a socially desirable level.
- For example, the government may set a minimum wage, which acts as a price floor for labor.
Price ceilings are maximum prices set by the government for a good or service.
- They are used to lower the market price below the equilibrium price
- Their purpose is to make goods and services more affordable for consumers and to reduce inequality.
- For example, the government may impose a rent control policy, which sets a maximum price for rent on certain properties.

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