Date | May 2017 | Marks available | 10 | Reference code | 17M.1.SL.TZ2.02 |
Level | Standard level | Paper | Paper 1 | Time zone | Time zone 2 |
Command term | Explain | Question number | 02 | Adapted from | N/A |
Question
Explain why demerit goods are an example of market failure.
Evaluate the effectiveness of using indirect taxation to correct market failure.
Markscheme
Answers may include:
- definitions of demerit goods, market failure, externalities, negative externalities
- diagram(s) to show market failure with negative externalities in consumption
- explanation of how negative externalities of consumption of demerit goods lead to an over-allocation of resources
- examples of demerit goods.
Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of indirect taxation and market failure
- diagram(s) to show the application of indirect taxation to correct market failure
- explanation of how indirect taxation may correct market failure where output is reduced towards the socially efficient output
- examples of where indirect taxation has been used to address market failure
- synthesis or evaluation.
Evaluation may include: the impact on different stakeholders in terms of price, consumption, production, employment, welfare and the wider economy; the problems of determining the level of tax to achieve the socially efficient output.
Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.