Cambridge International as and a level Economics Ebook

SUMMARY
Cambridge International AS Level Economics

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Chapter 3:
Government microeconomic intervention
AS Level
Learning objectives
On completion of this chapter you should know:
■
why governments may find it necessary to intervene in 
the workings of the price mechanism
■
how maximum and minimum prices work and their eff ect 
on the market
■
why governments impose taxes
■
the 
diff erence between direct and indirect taxes, their 
impact and incidence
■
what is meant by specific and 
ad valorem
 
taxes
■
the 
diff erence between average and marginal rates of 
taxation
■
the meaning of proportional, progressive and regressive 
taxes
■
what is meant by the ‘canons of taxation’
■
how subsidies impact on the market and their incidence
■
what is meant by transfer payments and their eff ect on 
the market
■
why governments directly provide goods and services and 
their eff ect on the market
■
what is meant by nationalisation and privatisation and 
their eff ect on the market.
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a direct payment by the government to a producer, 
make the price paid by consumers less than it should be. 
Typically, subsidies are paid for goods and services that 
benefi t the community and that might not be provided 
in a free market. Th
ese payments can be in the form of 
a partial subsidy, as in the case of staple food products 
and public transport, or total, as in the case of free school 
meals for children from low-income families.
Government provision
It is possible for a government to take over the production 
of a good or service, either in whole or in part. In many 
countries state-owned industries such as electricity 
generation, coal mining, water provision and railways are 
entirely owned and managed by the state and are oft en 
referred to as nationalised industries. In some countries, 
such as the UK, this is no longer the case. Th
is follows a 
major shift towards privatisation that took place during the 
1980s and 1990s when many former state-run industries 
were sold to new private owners. It is also very common 
to fi nd that some goods and services are produced by both 
the state and the private sectors. Education and health care 
are particularly good examples in many types of economy. 
State-run hospitals function alongside private hospitals and 
independent schools operate alongside state schools.