2.7 Role of government in microeconomics HL

Governments intervene when markets fail to achieve efficiency, equity, stability or other social objectives.

Externalities, public goods, information gaps, market power and inequality can create a case, but intervention has administrative and unintended costs.

Name the market failure or objective and identify who gains, loses and bears the cost.

A pollution tax targets an external cost; a transfer payment targets income inequality.

A market outcome is not automatically a failure just because it is unequal.

The syllabus reasons are to earn government revenue, support firms, support low-income households, influence production, influence consumption, correct market failure and promote equity. Match the reason to the tool: an indirect tax may raise revenue or discourage consumption; a subsidy may support firms or encourage output; direct provision or a price policy may improve access. Do not assume one intervention serves every objective equally well.

Taxes, subsidies, price controls, regulation, public provision and information policies change incentives, costs, access or rights.

The tool must match the problem: a subsidy may increase consumption but also cost public funds; a regulation may work only if enforced.

Trace the policy through demand/supply or behaviour, then state the implementation condition.

A maximum price below equilibrium can improve affordability for some but create a shortage.

Naming a policy is not evaluating its mechanism.

Complete tool map: a binding price ceiling lies below equilibrium; a binding price floor lies above it; indirect taxes create a wedge and shift supply upward/left; subsidies lower effective producer costs and shift supply downward/right; direct provision supplies services publicly; command-and-control regulation sets required or prohibited behaviour, enforced through legislation. Label stakeholder prices and quantities on each diagram.

Intervention can change price, quantity, surplus, government revenue, inequality and deadweight loss.

Incidence depends on elasticities and enforcement; intended and unintended effects may differ across groups and time.

Map the new outcome and compare efficiency, equity and feasibility.

A per-unit tax raises buyer and seller prices differently depending on relative elasticity.

A policy can improve one objective while worsening another.

A nudge changes choice architecture without banning options or substantially changing prices, using defaults, salience or framing.

Nudges rely on predictable behavioural tendencies and should be transparent, easy to opt out of and tested for distributional effects.

Identify the default or frame, the behaviour it targets and the ethical trade-off.

Making healthy food the default side dish increases uptake while leaving alternatives available.

A nudge is not coercion and does not solve every information or income constraint.

Intervention diagrams and calculations quantify changes in price, quantity, revenue, surplus, tax receipts or welfare loss.

Correct areas and incidence require labelled axes, intercepts and the policy wedge or constraint.

Draw the policy, calculate the relevant rectangle or triangle and interpret the distribution.

A $2 tax on 1,000 units raises$2,000 gross revenue before administration costs.

A geometric result is not a complete welfare evaluation.

Calculation workflow: for a ceiling or floor, read $Q_d$ and $Q_s$ at the controlled price and compute shortage $Q_d-Q_s$ or surplus $Q_s-Q_d$. For a per-unit tax, the wedge is buyer price minus seller price; tax revenue is tax per unit $\times$ post-tax quantity. For a per-unit subsidy, government cost is subsidy per unit $\times$ post-subsidy quantity. Calculate consumer/producer surplus areas from labelled triangles or rectangles and compare with the original equilibrium.