Explain two reasons why a government might impose indirect taxes.

Discuss the view that price floors are more effective than subsidies in providing assistance to producers in the agricultural sector.

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

Answers may include:

• definition of indirect taxes
• diagram to illustrate the imposition of an indirect tax, with the supply curve shifting left, price increasing and quantity demanded decreasing
• explanation that indirect taxes may be imposed to raise tax revenue, to discourage the consumption of demerit goods, to correct negative externalities in production, trade protection, to redistribute income, e.g. excise taxes on luxury goods
• examples of goods on which indirect taxes are imposed.

A maximum of [6] should be awarded if only one reason is explained.

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

Answers may include:

• definitions of price floors, subsidies
• diagrams to illustrate the use of a price floor and a subsidy
• explanation of how price floors and subsidies can both provide assistance to producers in the agricultural sector
• examples of the use of price floors and/or subsidies in practice
• synthesis or evaluation (discuss).

Discussion may include: the possible consequences of price floors, e.g. surpluses, inefficient allocation of resources and welfare impacts; the possible consequences of subsidies, e.g. on consumers, producers or the government; consideration of “more effective”.

A maximum of [12] should be awarded if there is evaluation but no consideration of “more effective”.

This was the more popular of the two Section A questions and it was encouraging to see how any candidates were able to explain two reasons why a government might impose indirect taxes and to diagram the imposition of a tax as a shift leftwards of the supply curve. The reasons given were mostly to raise revenue and to lower the quantity consumed of demerit goods. Almost all candidates were able to give examples of goods on which indirect taxes are imposed, cigarettes being the example that was overwhelmingly provided. Often, however, candidates failed to score very high marks here as the reasons were not developed in sufficient detail and/or they were presented in far too general a manner with a lack of reference to economic theory. For example, the raising revenue argument was usually not supported with reference to the rectangle representing government revenue on the supply and demand diagram. 

This question required an explanation of how price floors could provide assistance to agricultural producers and how subsidies also could, with an evaluation of one against the other. Often candidates explained one policy fully and not the other or went straight into evaluating the view without providing the necessary underpinning explanation, and so this question was generally not very well answered. The question was problematic for candidates who were not able to diagram price floors or who confused price floors with price ceilings, as several candidates did. Often a guaranteed higher price for producers was explained but without showing how this could provide greater revenues. Most did not mention the purchasing of excess supply by the government. The concept of subsidies seemed to be reasonably well understood by candidates and, while most were able to diagram a rightward shift of the supply curve, again the impact on producers' revenues was not always shown. Definitions of subsidies and price floors were usually fairly accurate. Many candidates were able to evaluate the consequences of subsidies on the different stakeholder but were often less effective in evaluating the consequences of price floors.