Explain two reasons why a government might want to subsidize a good or service.

Discuss the view that governments should tax the consumption of gasoline (petroleum).

Answers may include:

• definition of subsidy
• diagram to show the effect of a subsidy on a good or service
• explanation that governments might introduce a subsidy for different reasons, to correct externalities, to protect domestic industry
• example(s) of goods and services that governments subsidize and the reasons for doing so.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of indirect tax if not given in part (a)
• diagram of negative externalities in the consumption of gasoline
• explanation that governments have a number of reasons why they might use indirect taxes on gasoline, such as revenue, the correction of negative externalities of consumption
• example(s) of where governments have taxed (or subsidized) gasoline
• synthesis or evaluation (discuss).

Discussion may include: consideration of reasons against (impact on business costs, impact on low income car owners), for example, some governments could subsidize it.

N.B.: It should be noted that definitions, theory, and examples that have already been given in part (a), and then referred to in part (b) should be rewarded.

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.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.