Economic Influences (Cambridge (CIE) A Level Business): Revision Note

How government might intervene to help businesses and encourage enterprise

• Governments often intervene in the economy to:

  • Promote economic growth

  • Create jobs

  • Encourage innovation and enterprise

  • Increase international competitiveness

• By helping businesses, especially start-ups and small firms, governments aim to build a strong and stable economy

Ways governments support businesses and encourage enterprise

How government might intervene to constrain business activity

• Governments also have a duty to protect the public, the environment, and the economy

  • They may limit or control certain business activities that are seen as harmful, unfair, or against the wider interests of society

• These interventions can increase business costs, limit certain actions or block business plans altogether

Examples of government interventions

How government might deal with market failure

• Market failure happens when the free market fails to allocate resources efficiently or fairly

• This happens when the market does not produce the right amount of goods and services or does so in a way that is unfair or harmful to society

  • Some goods or services are underprovided (like healthcare or education)

  • Others are overproduced, causing harm (like pollution or drugs)

  • Not everyone can access what they need (like clean water or housing)

Ways governments correct market failure

Solutions to market failure

1. Providing public goods

• Public goods, like street lighting or national defence, wouldn’t be provided by private firms because there’s no way to make a profit

• The government funds and provides these directly using tax revenue

  • E.g. Most countries provide publicly funded defence, as private business would be able to charge individuals to stay safe from attack

2. Subsidising merit goods

• Merit goods (like education or vaccines) are under-consumed in a free market because people may not understand their full benefits

• Governments subsidise these goods or provide them for free to encourage greater use

  • E.g. Ghana's government introduced free secondary education to ensure that more young people stay in school and contribute to economic development

3. Taxing or regulating demerit goods

• Demerit goods, like tobacco or sugary drinks, are over-consumed because consumers ignore or underestimate the harm they cause

• Governments introduce taxes or regulations to reduce consumption and raise awareness

  • E.g. Mexico introduced a sugar tax in 2014 to tackle rising obesity levels; soft drink sales dropped as a result

4. Controlling negative externalities

• Negative externalities occur when businesses cause harm to others, like air or water pollution

• Governments enforce regulations, set limits or fine businesses for pollution and environmental damage

  • E.g. China has introduced stricter emissions controls and shut down high-polluting factories to reduce air pollution in major cities like Beijing

5. Providing information to consumers

• Consumers often lack full information to make good choices about, for example, health, finance or environmental impact

• Governments can launch public awareness campaigns or require businesses to label products clearly

  • E.g. In Chile, food packaging must carry clear warning labels for high sugar, salt, or fat content to help consumers make informed choices