Cambridge International as and a level Economics Ebook

Regulation and equity: 
There is a trade-off between, 
on the one hand, freedom for firms and individuals in 
unregulated markets and, on the other hand, greater 
social equality and equity through the government 
regulation of individuals and markets. The previous 
chapter concentrated on the workings of unregulated 
markets. In this chapter, as a consequence of market 
failure, it will be shown how government regulation can 
enhance social equality and equity.
KEY CONCEPT LINK
Maximum and minimum price 
controls
Maximum price 
controls or price ceilings are only valid in 
markets where the maximum price imposed is 
below
the 
normal equilibrium price as determined in a free market. 
Th
is means that the price that can be legally charged 
Government intervention: 
introduction
You have only to glance at a newspaper or listen to the 
news or a political debate for a few minutes to realise 
that one of the more controversial areas of Economics is 
concerned with the extent and reasons for government 
intervention in markets. Governments throughout the 
world intervene in markets to diff erent extents and the 
reasons for intervention vary enormously between them.
Th
e justifi cation for intervention is usually where there 
is 
market failure
. We have already seen some examples of 
market failure at the end of 
Chapter 1
 where it was shown 
that it was necessary for governments to provide public 
goods and merit goods as these will be underprovided by the 
free market mechanism. Demerit goods in contrast would be 
overprovided. In simple terms, market failure is as the name 
suggests – a situation where the market fails to make the best 
use of scarce resources, prompting government intervention. 
Th
is intervention can take a variety of forms.