Using a diagram and the information above, explain why traffic congestion in India may be considered an example of market failure.

On Figure 2, draw the market supply curve without the indirect taxes for petrol in New Delhi.

Using Figure 2, calculate the revenue (in rupees per day) collected from the indirect taxes on petrol in New Delhi.

Using Figure 2 and your answer to part (a)(ii), calculate the loss in consumer surplus which results from the imposition of indirect taxes on petrol in New Delhi.

Using Figure 2 and your answer to part (a)(ii), show that in the absence of indirect taxes the supply of petrol in New Delhi would be price inelastic.

Using Figure 2 and the information in Table 4, calculate the total profit earned by petrol suppliers in New Delhi per day.

Define the term rational consumer choice.

With reference to the use of cars in India, explain how one limitation of the assumptions of rational consumer choice might result in the overuse of cars in New Delhi.

Using the text/data provided and your knowledge of economics, recommend a policy which could be introduced by the government of India in order to address the problem of traffic congestion in New Delhi.

Candidates who label the diagram incorrectly can be awarded a maximum of [3].

The y axis may be labelled price or P and/or costs and/or benefits, and the x axis labelled quantity or Q. A title is not necessary. S and D are not required to be part of the labelling.

Negative consumption externality

50 × 500 (million)

Any valid working should be rewarded with [1]

= (RPs) 25 billion (or 25 000 million or 25 000 000 000)

N.B. as rupees is stated in the question, it is not necessary to include it in the response.

An answer of 25 billion (or 25 000 million or 25 000 000 000) without workings is sufficient for [1]

OFR applies provided the S curve is drawn below the S + t curve (i.e. the vertical distance between the curves may be incorrect).

N.B. the symbol  may be used for the Indian rupee.

For full marks to be awarded the response must provide valid working and include correct units.

40 × 0.5 (500 + 600) (million)

Any valid working should be rewarded with [1]

= RPs 22 billion (or 22 000 million or 22 000 000 000)

An answer of RPs 22 billion (or 22 000 million or 22 000 000 000) without workings is sufficient for [1]

OFR applies provided the S curve is drawn below the S + t curve.

N.B. If a student finds the y intercept (of the demand curve, which is 270) and calculates the difference between two triangles, the working should be as follows:

0.5 (240 × 600) − 0.5 (200 × 500) = 72 000 − 50 000

For full marks to be awarded the response must provide valid working and include correct units.

3 × 500 (million)

Any valid working should be rewarded with [1].

= RPs 1.5 billion (or 1 500 million or 1 500 000 000)

An answer of RPs 1.5 billion (or 1 500 million or 1 500 000 000) without workings is sufficient for [1].

N.B. For full marks to be awarded the response must provide valid working and include correct units.

N.B. A range of valid responses is available for this question. Candidates should be fully rewarded if they provide a well-explained answer which applies other limitations of the assumptions of rational consumer choice such as:

• biases: availability, anchoring, social conformity, inertia
• bounded self-control
• any valid response.

Refer to paper 3 markbands, available under “your tests”  tab > supplemental materials.

Possible policies may include (but are not restricted to):

• Indirect taxation on vehicles
• Increased indirect taxation on petrol
• Investment in public transport
• Investment in transport infrastructure
• Subsidized ride-sharing services
• Rationing the use of motor vehicles (e.g. even/odd number plate days)
• Behavioural economic policies, such as, choice architecture e.g. Nudge theory
• Legislation
• A congestion charge
• Any other valid policy.

N.B. If more than one policy is recommended, only the best policy should be rewarded, unless the policies are shown to be complementary or if they are compared/contrasted with the student’s one chosen policy.

The question was generally well-answered although a small minority of candidates treated traffic congestion as a production externality.

Generally well-answered. A minority of candidates drew the supply curve below the S + t curve but with an incorrect vertical distance between the curves.

Generally well-answered although some candidates omitted “millions” or wrote the answer in full but with an incorrect number of zeros.

Candidates achieving full marks generally knew that the change in consumer surplus could be determined by calculating the area of the trapezium (bounded by the respective price and quantity). A significant number of candidates attempted to calculate the initial and final values and may have been confused by the difficulty of doing so. The question was not answered well even though the calculation should have been fairly straightforward.

The majority of candidates were able to identify two points on the supply curve, calculate PES and show that as the value was less than 1 supply was price inelastic. However, errors were common. Candidates calculated PED rather than PES or took final values as the denominator when calculating elasticity. Very few candidates were able to recognize and state that any linear supply curve which intersects the horizontal axis must represent price inelastic supply.

Well-answered.

Although many candidates were able to specify the concept of utility maximization, there were also a significant number of fairly vague responses which relied on the idea that costs and benefits would be assessed. A surprising number of responses simply rearranged the term, suggesting that when consumers make choices by acting rationally, this is rational consumer choice.

The majority of candidates identified a lack of information as a limitation of the assumptions of rational consumer choice. It was then possible to apply this to the context provided in a number of ways, such as:

• lack of available information is a limitation (of the assumptions of rational consumer choice). If drivers are unaware of the benefits of using other means of transport (which could result in gaining greater utility) then they will choose to drive, resulting in over-use.
• lack of available information might refer to the information about negative externalities of driving - whether it be the congestion or other negative costs of the use of cars - and therefore drivers might not take the opportunity to use alternative means of transport which would be better for them and for society, also (possibly) resulting in greater personal utility.
• biases such as the desire to conform/peer pressure (using a car as a status symbol) might lead drivers to use cars when in fact alternative methods of transport might yield greater utility.
• bounded self-control – drivers might be aware that a rational decision would be to switch from using cars to alternative means of transport but they do not have the self-discipline to abandon their use of cars.

It is argued that the theory of demand is based on rational consumer decisions and that a rational consumer will in fact ignore the externalities, resulting in over-use of cars. This approach was fully rewarded.

Generally, candidates were able to suggest an appropriate policy (or more) to address the market failure resulting from traffic congestion. However, responses often focused only on pollution, with suggestions for subsidizing e-vehicles, arguably having little impact on congestion. Stronger responses used market failure theory well to support the recommendation.