Consequences of Government Intervention

You are expected to evaluate/examine (AO3) the forms of government intervention's consequences for markets and stakeholders (SL+HL)

<-- Back to Micro

<- Back to 2.7

Reasons for Intervention

Forms of Intervention

Consequences

Positive consequences of any government intervention includes:

It usually promotes general economic wellbeing
It can maximize social welfare (as it reduces negative externalities and promotes positive ones)

However, government intervention is not always successful, leading to not market failure but government failure.

Below are the consequences of the main ways the government can intervene in markets. You are expected to know both the consequences for the markets as well as for the stakeholders.

Blue = Intended effect (why the government intervened in the first place)
Green = 'Good' consequences
Red = 'Bad' consequences

Consequences of Price Ceilings (AO3):

Impact on markets:
- - Price: Will be lower than in a free market
  - Quantity: A shortage (supply) will arise
Impact on stakeholders:
- - Consumer surplus: Increases
  - Producer surplus: Decreases
  - Government: May have to supply the product itself to decrease the shortage

Consequences of Price Floors (AO3):

Impact on markets:
- - Price: Will be higher than in a free market
  - Quantity: A surplus (supply) will arise
Impact on stakeholders:
- - Consumer surplus: Decreases
  - Producer surplus: Increases
  - Government: May have to buy the product to decrease the surplus

Consequences of Indirect Taxation (AO3):

Impact on markets:
- - Price: Will be higher than in a free market
  - Quantity: Quantity demanded will decrease
Impact on stakeholders:
- - Consumer surplus: Decreases
  - Producer surplus: Decreases
  - Government: Increases its tax revenue

Consequences of Subsidies (AO3):

Impact on markets:
- - Price: Will be lower than in a free market
  - Quantity: Quantity demanded will increase
Impact on stakeholders:
- - Consumer surplus: Increases
  - Producer surplus: Increases
  - Government: Has to spend more to finance the subsidy

Google Sites

Report abuse