(a) Explain two reasons why a government might impose an indirect tax on a good.
Answers may include:
definition of indirect tax
diagram to show the impact of an indirect tax on a good
explanation that governments impose indirect taxes on goods to raise revenue,
reduce consumption of demerit goods and reduce the negative externalities of
production
examples of situations where governments impose indirect tax.
(b) Evaluate the impact that an increase in indirect tax might have on consumers and
producers.
Answers may include:
definition of indirect tax
diagram to show the impact of an indirect tax on consumers and producers
explanation that indirect tax increases the price consumers have to pay for goods
and services and reduces the revenue producers receive from selling goods
and services
examples of how indirect taxes affect consumers and producers
synthesis or evaluation.
Evaluation may include: the relative impact may depend on PED and PES, indirect
tax might benefit consumers if it is imposed on demerit goods, tax revenue raised
can be used to benefit consumers and producers through government spending.
(c) Explain why governments provide subsidies for some goods and services.
Answers may include:
•definition of subsidies
•diagram(s) to show the application of subsidies to a market and reasons to apply a subsidy
such as merit goods
•explanation of why governments apply subsidies and a consideration of how subsidies
influence the market and society in terms of welfare, such as making goods more affordable for
low income households
•examples of the application of subsidies.
(d) Discuss the consequences of providing a subsidy for goods such as agricultural
products
Answers may include:
•definition of subsidy
•diagram(s) to show the impact of a subsidy
•explanation of the consequences that the provision of a subsidy might have in terms of price to
the consumer, price to the producer, resource allocation and cost to the government
•examples of consequences that might follow or have followed from the application of a subsidy
•synthesis or evaluation (discuss).
Discussion may include: opportunity cost to the government of paying for subsidies, how subsidies may
be applied inefficiently and how subsidies might distort markets in the long run.
(e) Discuss the view that governments should not intervene in housing markets.
Answers may include:
• definitions of government intervention, types of intervention (price ceilings, subsidies), free market
• diagrams to show a market and the impact of intervention in a market, such as through price controls
and subsidies
• explanation of different forms of intervention and their impacts. Identification of the significance of
social (community) surplus and its maximization in a free market
• examples of intervention in housing markets
• synthesis or evaluation (discuss).
N.B. Definitions, theory and examples that have already been given in part (a) and then referred to in
part (b) should be rewarded.
Discussion may include: the advantages and disadvantages of intervention, different methods of
intervention and a consideration of the case for a free market. Candidates may choose to focus on price
controls or subsidies, which should be fully rewarded if they are able to satisfy the demands of the level
descriptors.
Examiners should be aware that candidates may take a different approach which, if appropriate,
should be rewarded.
Opinions or conclusions should be presented clearly and should be supported by appropriate examples.
