Intervention to Address Market Failure
- Four of the most commonly used methods to address market failure in markets are indirect taxation, subsidies, maximum prices, & minimum prices
- Additional methods of intervention include regulation, nationalisation, privatisation, & State provision of public goods
Exam Tip
The material on this page is frequently examined in the Paper 2 structured questions. You will be asked to evaluate the effectiveness of taxes, subsidies, maximum & minimum prices. To do so:
1. Consider the advantages & disadvantages of each method of intervention
2. Explain that several methods of intervention are likely to be more effective than a single method e.g. smoking is taxed & highly regulated (age restrictions, packaging restrictions, display restrictions)
3. Consider different market segments & their responsiveness e.g. wealthy consumers will less responsive (inelastic demand) to tax increases than poorer consumers (elastic demand)