Cambridge International as and a level Economics Ebook

Regulations
Governments use diff erent methods of 
regulation 
as a means 
of controlling the free market. Legal and other methods are 
used to control the prices, quality and quantity of goods 
and services that are produced and consumed. Regulations 
have been important in combating environmental problems. 
For example, excessive levels of pollution are prohibited by 
regulations that apply to the manufacture of vehicles and the 
production of chemicals. Regulation may also refer to prices. 
Examples of price controls include minimum wage legislation 
and maximum price controls.
Financial intervention: use of taxes and 
subsidies
Financial tools, such as 
taxes
and subsidies, are frequently 
used by governments to infl uence production and the 
prices of a wide range of goods and services in the market. 
For example, demerit goods are usually subject to high 
rates of indirect taxation. By contrast, subsidies, involving 
Market failure: 
where the free market does not make the 
best use of scarce resources.
Regulation: 
various means by which governments seeks to 
control production and consumption.
Taxes: 
charges imposed by governments on
 
incomes, 
profits and some types of consumer goods and services to 
fund their expenditure.
KEY TERMS
Maximum price: 
a price that is fixed; the market price must 
not exceed this price.
KEY TERM
68
Cambridge International AS Level Economics

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by sellers must not be any higher. Governments use 
legislation to enforce maximum prices for:
■
staple 
foodstuff s, such as bread, rice and cooking oil
■
rents in certain types of housing
■
services provided by utilities, such as water, gas and electricity
■
transport fares especially where a subsidy is being paid.
Figure 3.1
indicates that at the price ceiling of 
P
1
, 
production is not suffi
cient to satisfy everyone who 
wishes to buy the product. Too few resources are 
being allocated. Consequently, as price cannot rise, 
the available supply has to be allocated on some other 
basis. Th
e most likely way is by means of queuing; a 
much-evidenced form of control in the former planned 
economies of Central and Eastern Europe. Rationing is 
another means of restricting demand – but this inevitably 
leads to an informal or underground market for the 
products involved, with consumers then having to pay 
infl ated prices well above the ceiling price. Such markets 
inevitably arise when there are dissatisfi ed people who 
have not been able to buy the goods they want because 
not enough has been produced.
In contrast, there are diff erent circumstances 
where the government may fi nd it necessary to impose