Cambridge International as and a level Economics Ebook

Minimum price: 
a price that is fixed; the market price must 
not go below this price.
KEY TERM
Figure 3.1 
The eff ects of maximum price control
Price
Q
1
Q
e
Q
3
P
e
P
1
Quantity
0
Maximum
price
S
E
D
Shortage
Figure 3.2 
The eff ects of minimum price control
Price
P
e
Q
1
Q
e
Q
2
Quantity
Maximum
price
Excess supply
S
E
D
0
69
Chapter 3: Government microeconomic intervention 

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Taxes – direct and indirect
Taxes are charges that are imposed by governments on 
people and businesses. Th
eir main purpose is to raise 
fi nance for government spending. Th
is spending is typically 
on public goods, merit goods, administration, welfare 
benefi ts and subsidies. Revenue from taxation is also 
used to reduce inequalities in the distribution of income. 
Figure 3.3
shows the ways in which the UK government 
allocated its spending in 2010/2011.
Taxation is not new, nor is it just confi ned to 
developed economies. Income tax was introduced in the 
UK at the end of the eighteenth century, prompting Adam 
Smith, the leading classical economist, to set out his so-
called 
canons of taxation
. Th
ese state that a ‘good’ tax is 
one that is:
■
equitable – those who can aff ord to should pay more
■
economic – the revenue should be greater than the costs of 
collection
SELF-ASSESSMENT TASK 
3.1
Outrage in Kenya as maximum price controls are reintroduced
Kenya’s President Mwai Kibaki has signed legislation 
that will regulate the prices of essential commodities to 
protect consumers against exorbitant prices charged 
by unscrupulous traders. The latest move allows the 
government to control the prices of essential goods 
such as maize flour, wheat, rice, sugar, paraff in, diesel, 
cooking oil and petrol in order to secure their availability 
at reasonable prices. Under this law, the minister may 
from time to time declare any goods to be essential 
commodities and determine their maximum prices.
A prominent supporter of the new law, MP Ephraim 
Maina, said the prime responsibility of the government is 
to ensure basic commodities are available to the citizens 
at aff ordable prices. ‘I’m confident that, if the law is 
applied correctly, Kenyans will get reasonable prices.’ He 
said the new law would deal with large companies in the 
food, financial, fuel and utility industries, which prevent 
Kenya from operating as a free market economy. These 
companies have been charging exorbitant prices for 
their commodities to exploit consumers. He added that 
businesspeople should be prepared to cut down on their 
profits during hard economic times.
But this law has annoyed manufacturers and consumer 
organisations, which view it as a violation of the 
free market and a return to the days of a controlled 
economy. The Kenya Association of Manufacturers 
(KAM) condemned the new law, saying consumers 
would not be able to benefit from competitive prices 
associated with a competitive market environment. 
It said controlling prices is not a cure for the high cost 
of living, arguing that commodity prices could only 
be driven downwards in a free market environment. 
Meanwhile, the Consumers’ Federation of Kenya (Cofek) 
said immediate implementation of the new law is likely 
to cause a serious shortage of commodities in the 
market.
Source:
J. Anyanzwa, 
The Standard
, Kenya, 17 September 2011.
Read the feature below and then answer the questions that follow.