Governments intervene in markets to support firms and to promote equity. Explain one policy that could be used to support firms and one policy that could be used to promote equity.

Using real-world examples, evaluate the effects for stakeholders of a government imposing an indirect tax on a particular good.

Marks should be allocated according to the paper 1 markbands for May 2022 forward, part A.

Answers may include:

• Terminology: government intervention, market, equity
• Explanation: of any one policy to support firms, such as a subsidy, a minimum price (price floor) or trade protection and any one policy to promote equity, such as a maximum price (price ceiling), direct government provision of services or subsidy, progressive taxation (labour market)
• Diagram: any relevant diagram illustrating the particular policy being explained.

A maximum of [6] should be awarded if only one policy/objective is addressed.

Marks should be allocated according to the paper 1 markbands for May 2022 forward, part B.

Answers may include:

• Terminology: indirect tax, stakeholders
• Explanation: that the tax will shift the supply curve to the left/upwards, increase the price and reduce the quantity demanded/supplied; explanation of the possible consequences for consumers, producers, workers, the government and society as a whole
• Diagram: a demand and supply diagram showing the impact of a shift of the supply curve to the left increasing price and reducing quantity demanded/supplied
• Synthesis (evaluate): the importance of PED and PES, the impact on resource allocation and allocative efficiency, whether the tax is specific or ad valorem, the regressive nature of indirect tax and the extent of the increase in taxation
• Examples: use of real-world examples to show instances of indirect taxes being imposed on goods.

A maximum of [9] should be awarded if only one stakeholder is mentioned.

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

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.

There were many good answers to this question with effective responses focusing on government intervention through policies like trade protectionism (such as tariffs) and minimum prices to support producers and maximum prices and subsidies to promote equity. The strongest responses used economic terms effectively and had effective diagrams to support the economic theory applied to answer the question. One weakness in student responses was when they did not clearly distinguish between support for firms and the promotion of equity. It is important for students to clearly distinguish between equity and equality in their answers to questions on this topic.

This was generally well answered by students who produced effective theory-based answers that considered the impact of indirect tax on consumers, producers, government, workers and wider society. The part (b) questions on this new paper 1 have an emphasis on real-world examples and nearly all students attempted to do this. It was good to see answers that looked at the impact of indirect taxation on different markets and in different countries in the world. The strongest responses developed answers that evaluated the effects of indirect taxes on different stakeholders by, for example, considering how the impact of indirect taxation is affected by the price elasticity of demand and supply of a good.