Explain why public transport, such as buses and trains, might be under-provided in a market economy.

Discuss the view that imposing an indirect tax on gasoline (petrol) is the most effective way of reducing the market failure caused by cars.

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

Answers may include:

• definition of under-provision, market economy
• diagram to show a positive externality of consumption
• explanation of how the use of public transport results in marginal social benefit exceeding marginal private benefit
• examples of under-provision of public transport.

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

Answers may include:

• definition of indirect tax, market failure
• diagram to illustrate the imposition of an indirect tax
• explanation of how taxation can be used to reduce the demand for gasoline/cars
• examples of where a government has applied such taxes
• synthesis or evaluation (discuss).

Discussion may include: the disadvantages of indirect tax on gasoline, such as: effects on the rate of inflation, equity (some stakeholders affected more than others) and the importance of price elasticity of demand (PED) in affecting the incidence of the tax. Consideration of other policies that can be used, such as: subsidies to public transport, subsidies for electric car producers, government providing infrastructure for the use of electric cars (eg charging points), advertising (eg encourage the use of public transport) and government regulations to reduce car use.

This question proved to be the most challenging tor students on the paper. The term ‘public transport’ confused many students who viewed bus, tram and train travel as public goods, which they are not. This led to many answer that focused on public good theory, which took their answers off the central theme of the question, which was to get students to consider public transport as a merit good because of the positive externalities of its provision and consumption. This was, again, quite confusing for students because the benefits of public transport can be seen as the reduced negative externalities of private transport such as the congestion and pollution associated with cars. The highest achieving responses focused on how increasing the provision and consumption of, for example, trains can reduce journey times for workers and improve overall productivity in the economy. It was good to see effective examples of countries where governments had supported public transport schemes.

Students performed better on part (b) compared to part (a) of this question where they were more comfortable explaining how indirect taxation on petrol/gasoline can be used to deal with the market failure associated with car use. Many analysed the impact indirect taxation has on the market for petrol/gasoline and in turn the use of cars. This was often supported by effective cost and benefit diagrams. The highest achieving responses went on the evaluate the issues associated with using indirect taxation such as the inequitable impact on low income households and the negative consequences on the car manufactures along with the associated consequences for employment. It was good to see some candidates using effective real-world examples of the impact of indirect tax on petrol/gasoline such as countries that have suffered protests because of their imposition.