Cambridge International as and a level Economics Ebook

[6]
d
Discuss the extent to which the stores wars 
described above is in the best interests of the 
UK consumers. 
[6]
2
a
Analyse the factors that might lead to 
contestability in a market. 
[12]
b
Discuss the extent to which a rise in 
contestability in a market is beneficial for 
consumers as well as firms. 
[13]
3
a
Analyse the likely benefits that a car 
manufacturing firm might gain through 
expanding its scale of operations. 
[12]
b
Discuss whether gaining these benefits will 
mean that the firm is maximising its profits. 
[13]
Chapter 7: The price system and the microeconomy 
189

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Learning objectives
On completion of this chapter you should know:
■
why an eff icient allocation of resources is desirable
■
what is meant by deadweight loss
■
how fiscal policies can be used to correct market 
failure where there are production and consumption 
externalities
■
how a range of other policies can also be used to correct 
market failure
■
what is meant by equity and how governments 
can use various policies to redistribute income and 
wealth
■
how labour markets operate and why government 
intervention is invariably necessary
■
how to evaluate the eff ectiveness of government 
microeconomic intervention.
Chapter 8:
Government microeconomic 
intervention
A Level
190

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Deadweight loss can be seen to occur in a monopolistic 
market when comparing that market with a competitive 
market. Th
is is due to the market power of the monopolist 
and is shown in 
Figure 8.2.
Th
e competitive outcome 
is given in this diagram by price 
P
1
and output 
Q
1
. Th
is 
represents the optimum production and consumption 
position. Just the right amount of resources is being used 
to provide this product. Th
is is in contrast to the outcome 
under monopoly given by price 
P
2
and quantity 
Q
2
. Here, 
there is underproduction and underconsumption. Too 
few resources are used in the production of this good 
because the price is too high. A measure of the resulting 
loss of economic welfare is given by the shaded triangle in 
the diagram. Th
is indicates the loss of net consumer and 
producer surplus due to the monopoly. It is the deadweight 
loss due to the monopoly. For consumers, the reduction in 
consumer surplus amounts to a reduction in real income.