Allocation of Resources · 4 question types
Past paper frequency (2018 to 2024)
This topic accounts for approximately 11% of your exam marks.
Externalities and market failure corrective policies are increasingly tested; particularly in evaluate questions since 2020.
Two intervention tools that need separate diagrams.
A maximum price is a legal price cap below the free-market equilibrium. Sellers cannot legally charge more.
Used to protect consumers in essential markets: rent controls in a housing crisis, price caps on essential medicines, fuel price caps during shortages.
| Advantages | Disadvantages |
|---|---|
| Lower prices protect low-income consumers | Shortages mean some buyers go without |
| Stabilises markets during emergencies | Black markets may emerge (illegal resale at higher prices) |
| Limits exploitation in rental and essential-goods markets | Reduces producer incentive to invest in supply |
A minimum price is set above the free-market equilibrium. Sellers cannot legally charge less.
Used to support producers (agricultural floor prices) or to discourage consumption of a demerit good (minimum unit pricing for alcohol). The national minimum wage is a minimum price in the labour market designed to protect workers from low pay.
| Advantages | Disadvantages |
|---|---|
| Producers receive a guaranteed income | Surplus output may need to be bought up by the government |
| Reduces consumption of demerit goods | Encourages over-production and waste |
| Minimum wage raises pay of the lowest paid | Higher costs may lead firms to lay off workers |