Explain why governments impose price floors in the market for agricultural products.

Evaluate the effectiveness of government regulations in achieving a reduction in the consumption of demerit goods.

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

Answers may include:

• definition of price floor
• diagram showing the imposition of a price floor leading to higher prices and higher producer revenues
• explanation that governments impose price floors in the market for agricultural products to support producers by increasing producers’ revenues and/or improving producers’ ability to plan and invest for the future 
• examples of specific agricultural markets where price floors have been imposed.

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

Answers may include:

• definition of demerit goods
• negative externalities diagram showing reduced consumption of demerit goods
• explanation that government regulations may restrict the demand for, or the supply of, demerit goods, resulting in lower equilibrium quantity
• examples of demerit goods and/or cases where government regulations on demerit goods have been imposed (e.g. ban on smoking and drinking in public places, age limits, warnings on packaging, ban on the consumption of certain drugs) 
• synthesis or evaluation.

Evaluation may include: consideration of the strengths of government regulations: do not increase tax burden; relatively simple to implement (compared to market-based policies), addressing directly the consumption of demerit goods, complete bans may be very effective in preventing the use of highly addictive demerit goods; consideration of the limitations of government regulations: difficulties/cost of enforcement and lack of government revenue, may be politically unpopular; decrease the revenues of producers of demerit goods and the income of workers in these industries; complete bans may lead to underground parallel markets; consideration of the strengths and limitations of alternative (market-based) policies.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Many candidates used generic labelling of the diagrams (just P and Q) despite the question asking specifically about an agricultural product so the diagrams, while appropriate, were not considered "effectively applied". A common weakness of many answers was that while candidates explained that by imposing a price floor the government  increases the revenues of the producers, they did not provide any explanation of why the government would want to increase the revenues of agricultural producers, resulting in somewhat incomplete answers. Surprisingly many candidates drew a price ceiling diagram to show a minimum price.   

The most common mistake was when candidates focused excessively on taxation (often incorrectly considering taxation to be regulation). Another mistake was to state that demerit goods have negative externalities in production despite the IB syllabus stating clearly that "demerit goods are goods whose consumption creates external costs". Almost all candidates were able to give an appropriate example of a demerit good (cigarettes being the most popular example by far) even if they could not precisely define it.