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EnglandEconomicsQuick questions
Theme 1: Introduction to markets and market failure
Quick questions on Government intervention: taxes, subsidies, price controls and government failure - Edexcel A-Level Economics A
4short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What are indirect taxes?Show answer
A tax on a good with a negative externality shifts the supply curve left (or up by the amount of the tax), raising price from the free-market level toward the social optimum where marginal social benefit equals marginal social cost. On a diagram, the new equilibrium quantity is lower, the welfare loss triangle shrinks, and the government collects revenue equal to the tax per unit multiplied by the new quantity. The incidence of the tax (who actually pays) depends on elasticity: when demand is more inelastic than supply, consumers bear most of the burden. The UK uses fuel duty, tobacco duty and the Soft Drinks Industry Levy (2018) in exactly this way.
What are subsidies?Show answer
A subsidy raises output toward the social optimum and lowers price to consumers, but it has a direct opportunity cost to the taxpayer, can be hard to remove once firms depend on it, and may be captured as producer profit rather than passed on.
What is q1?Show answer
Explain why a maximum price set below equilibrium causes a shortage. [3 marks]
What is q2?Show answer
Assess the case for using an indirect tax rather than regulation to reduce carbon emissions. [12 marks]
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