Explain why a government might decide to impose a price ceiling on goods and services such as essential foods or rented housing.

Evaluate the view that the most effective way in which the government can encourage the consumption of merit goods is through direct provision.

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

Answers may include:

• definition of price ceiling
• diagram to show a price ceiling
• explanation of why a government might place a maximum price below equilibrium price in a particular market eg market power, political considerations, equity issues (making essential goods and services available to those on low incomes),
  externality issues
• examples of maximum prices being imposed on goods or services in practice in relation to particular economies, or in relation to particular goods/services.

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

Answers may include:

• definition of merit goods, direct provision
• diagram: use of any relevant diagram, set in context, such as MSB/C, maximum price or a subsidy diagram
• explanation that direct provision could encourage greater consumption of merit goods
• examples of direct provision of merit goods eg education, healthcare, public transport
• synthesis and evaluation.

Evaluation may include: advantages and disadvantages of direct provision; consideration of alternatives such as maximum prices, subsidies, legislation, advertising, required private insurance in the case of health care.

NB A maximum of Level 3 should be awarded for responses that do not consider any alternatives to direct provision.

It was encouraging to see how many candidates were able to discuss price ceilings and provide a diagram to illustrate the concept. Usually one reason (for example, to help those earning low incomes) was given but often it was not well-developed. Too many just used the example of “essential foods” or “rented housing” without providing specific and realistic examples. A common mistake was to spend too little time on why price ceilings may be imposed, which was the question, and to spend too much time on the effects of price ceilings, which was not the question. Some confused price ceilings with price floors.

This question proved to be very problematic for several candidates who attempted it without having any clear understanding of the term “direct provision”. Most could not specifically explain what the term means. The term “merit goods” was widely understood, however, and examples of merit goods were readily provided. Several candidates were able to consider alternatives to direct provision, but the term was often confused with subsidies with the subsidy diagram being provided. It was not uncommon for candidates to devote lengthy, but largely irrelevant, discussion to demerit goods.