Why governments intervene
Market failure occurs when the free market allocates resources inefficiently. Governments intervene to: correct negative externalities (tax pollution); encourage positive externalities (subsidise education); curb monopoly abuse; provide public goods the private sector will not supply; and reduce inequality. Every tool has intended effects and possible unintended consequences to weigh.
Taxes, subsidies, price controls, regulation
Indirect taxes raise production costs, shifting supply LEFT — price up, quantity down. Subsidies lower costs, shifting supply RIGHT — price down, output up. Price controls fix prices: a maximum (ceiling) BELOW equilibrium causes shortages; a minimum (floor) ABOVE equilibrium causes surpluses. Regulation sets rules — licensing, competition law, environmental standards — without changing prices directly.
Government failure and evaluation
Government failure arises when the cure is worse than the disease: a tax set at the wrong level, a maximum price causing black markets, a subsidy propping up inefficient firms, or regulation costing more than its benefit. When evaluating a policy, weigh the elasticity of demand and supply, whether the government has accurate information about the true market failure, and whether the cost of intervention exceeds the welfare gain.
Drawn from real examiner reports.
Max price below, min price above
A maximum price (ceiling) only bites when set BELOW equilibrium — above it, it has no effect. A minimum price (floor) only bites ABOVE equilibrium. Drawing them on the wrong side gives the wrong conclusion — that a ceiling causes a surplus or a floor a shortage. Always check: is it above or below equilibrium?
A recurring error across multiple sittings: candidates place maximum prices above equilibrium in diagram questions, losing all marks for the mechanism explanation.
Subsidies are not costless
A subsidy shifts supply right, cutting price and raising quantity — helpful if the good is underprovided. But two counter-arguments are often missed: (1) it must be funded by taxation, which distorts elsewhere; (2) a permanent subsidy can weaken firms' incentive to cut costs or innovate (productive inefficiency). In Assess or Evaluate, weigh these against the benefits.
November 2024 Paper 1, Q2(g): candidates who only listed advantages and disadvantages without a developed, evidence-linked chain of reasoning did not reach the top level descriptor.
Use the extract, do not copy it
Restating figures or passages from the extract without a chain of reasoning is penalised. Quoting "a tax of £2 per unit" without saying what it does to supply, price and quantity earns only basic marks. Application (AO2) marks need you to USE the evidence — what the figure implies about the size of the effect. Copying alone cannot reach Level 2 or 3.
November 2024 Paper 1, Q2(g): examiner noted that candidates who simply repeated the information in the extract rather than using it failed to answer the question.
Regulation is not free to implement
Regulation is not costless. It creates compliance costs for firms (meeting standards, paperwork) and enforcement and monitoring costs for the government. A licence or environmental rule may correct a market failure, but an Evaluate answer must weigh those costs — and the risk of over-regulation — against the benefit, not treat regulation as a free fix.
Match the tool to the externality
Get the externality direction right. A good with a negative externality (e.g. pollution) is OVERproduced, so the fix is a tax to cut output. A good with a positive externality (e.g. education, vaccination) is UNDERprovided, so the fix is a subsidy to raise output. Reversing these — subsidising a polluter or taxing education — is a classic error.
Market failure vs government failure
Market failure is when the FREE MARKET misallocates resources — externalities, monopoly, missing public goods. Government failure is when the INTERVENTION itself makes things worse — a black market from a price ceiling, or propping up inefficient firms. They are opposite sources of inefficiency, so do not use "market failure" to describe a policy that has backfired.
Assess/Evaluate: four-stage scaffold
For a 12-mark Assess or Evaluate: know the tool (AO1), apply it to the context or data (AO2), develop a chain for the mechanism (AO3), then a counter-argument weakening the conclusion (AO4). One side caps at Level 2; Evaluate also needs a supported judgement.
Analyse is one-sided
Analyse carries no AO4 (evaluation) marks, so counter-arguments waste time. Build two or three sustained chains on ONE side — cause, effect, further effect — each applied to the data. Save the two-sided balance and judgement for Assess and Evaluate.
Explain = one developed chain
For an Explain, give ONE reason and develop it as a chain: reason, applied to context, then consequence. For example, licensing reduces monopoly power, so competition rises, so fares fall. The marks come from one developed chain, not from three separate undeveloped reasons.
Tax/subsidy shift supply; controls are lines
On a supply-and-demand diagram, an indirect tax shifts SUPPLY LEFT and a subsidy shifts SUPPLY RIGHT — never the demand curve. Price controls are HORIZONTAL lines: a ceiling below equilibrium, a floor above. Label the axes and equilibria, then refer to it in your answer.
A free market may fail to allocate resources efficiently. Market failure arises when:
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