43 questions · about 8% of the marks we indexed · examined in 9 of 9 sessions.
Questions by year
2026
2026 May/June · Paper 12 · Q111 markDirect provision, buffer stocks and transfer payments
2026 May/June · Paper 12 · Q121 markDirect provision, buffer stocks and transfer payments
2026 May/June · Paper 12 · Q131 markIndirect taxes and subsidies
2026 May/June · Paper 12 · Q141 markIncome and wealth inequality
2026 May/June · Paper 12 · Q151 markDirect provision, buffer stocks and transfer payments
2026 May/June · Paper 22 · Q1 (c)4 marksIndirect taxes and subsidies
2026 May/June · Paper 22 · Q2 (a)4 marksReasons for intervention (merit, demerit and public goods)
2026 May/June · Paper 22 · Q3 (b)6 marksMaximum and minimum prices
2025
2025 Oct/Nov · Paper 12 · Q101 markDirect provision, buffer stocks and transfer payments
2025 Oct/Nov · Paper 12 · Q121 markIndirect taxes and subsidies
2025 Oct/Nov · Paper 12 · Q141 markIncome and wealth inequality
2025 Oct/Nov · Paper 22 · Q1 (c, d)10 marksDirect provision, buffer stocks and transfer payments · Maximum and minimum prices
2025 Oct/Nov · Paper 32 · Q111 markMaximum and minimum prices
2025 May/June · Paper 12 · Q111 markIndirect taxes and subsidies
2025 May/June · Paper 12 · Q121 markIncome and wealth inequality
2025 May/June · Paper 12 · Q131 markReasons for intervention (merit, demerit and public goods)
2025 May/June · Paper 12 · Q141 markMaximum and minimum prices
2025 May/June · Paper 12 · Q151 markDirect provision, buffer stocks and transfer payments
2025 May/June · Paper 22 · Q1 (e)6 marksIncome and wealth inequality
2025 May/June · Paper 22 · Q2 (b)6 marksReasons for intervention (merit, demerit and public goods)
2024
2024 Oct/Nov · Paper 12 · Q121 markDirect provision, buffer stocks and transfer payments
2024 Oct/Nov · Paper 12 · Q131 markIncome and wealth inequality
2024 Oct/Nov · Paper 12 · Q141 markIndirect taxes and subsidies
2024 Oct/Nov · Paper 22 · Q1 (c, d)8 marksIncome and wealth inequality
2024 May/June · Paper 12 · Q121 markMaximum and minimum prices
2024 May/June · Paper 12 · Q141 markDirect provision, buffer stocks and transfer payments
2024 May/June · Paper 22 · Q2 (a, b)10 marksIncome and wealth inequality
2024 May/June · Paper 22 · Q3 (a, b)10 marksMaximum and minimum prices · Reasons for intervention (merit, demerit and public goods)
2023
2023 Oct/Nov · Paper 12 · Q61 markReasons for intervention (merit, demerit and public goods)
2023 Oct/Nov · Paper 12 · Q151 markDirect provision, buffer stocks and transfer payments
2023 Oct/Nov · Paper 12 · Q161 markIndirect taxes and subsidies
2023 Oct/Nov · Paper 12 · Q271 markIncome and wealth inequality
2023 Oct/Nov · Paper 22 · Q3 (b)6 marksReasons for intervention (merit, demerit and public goods)
2023 May/June · Paper 12 · Q101 markIndirect taxes and subsidies
2023 May/June · Paper 12 · Q161 markReasons for intervention (merit, demerit and public goods)
2023 May/June · Paper 22 · Q2 (b)6 marksMaximum and minimum prices
2022
2022 Oct/Nov · Paper 12 · Q151 markMaximum and minimum prices
2022 Oct/Nov · Paper 12 · Q161 markIndirect taxes and subsidies
2022 Oct/Nov · Paper 12 · Q171 markDirect provision, buffer stocks and transfer payments
2022 Oct/Nov · Paper 12 · Q291 markIncome and wealth inequality
2022 Oct/Nov · Paper 22 · Q1 (d, e, f)13 marksIndirect taxes and subsidies · Maximum and minimum prices
2022 May/June · Paper 12 · Q151 markMaximum and minimum prices
2022 May/June · Paper 12 · Q171 markDirect provision, buffer stocks and transfer payments
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References only, not question text. Open Official paper ↗ where Cambridge publishes the paper,
or see the official Cambridge past-papers page; for other papers, ask your
school. “Paper 42” means Paper 4, variant 2.
Practice questions
Original questions written by HomiLabs in the style of the exam, with answers and mark schemes. They are not
Cambridge past paper questions and have not been reviewed by Cambridge. Try each one before opening the answer.
Q1Maximum and minimum prices · Core · Paper 2 style · 6 marks
(a)A city government sets a maximum monthly rent for flats that is below the market equilibrium rent. Explain why this causes a shortage of rented flats.[3]
(b)Explain why an illegal (shadow) market may develop for rented flats.[2]
(c)State one effect of the maximum rent on the quality of rented flats.[1]
Show answer
(a) At the lower rent, quantity demanded rises and quantity supplied falls, so demand exceeds supply.
1 mark: maximum rent is below equilibrium so it is binding. 1 mark: more households want to rent at the lower price (extension of demand). 1 mark: landlords supply fewer flats as returns fall (contraction of supply), e.g. convert them to offices or sell them – excess demand.
(b) Because some tenants are willing to pay more than the legal maximum, landlords can charge extra payments secretly.
1 mark: at the quantity supplied, tenants' willingness to pay is above the legal maximum. 1 mark: so landlords ask for illegal side payments (e.g. large 'key money' deposits), and flats go to those who can pay rather than those in most need.
(c) Quality falls because landlords have less incentive and income to maintain them.
B1.
Q2Maximum and minimum prices · Core · Paper 1 style · 1 mark
(a)[1]
Show answer
(a) C no change in the price or quantity of bread
A maximum price only affects the market if it is below equilibrium. Set above equilibrium it is not binding, so price and quantity stay the same. D is wrong because the maximum is a ceiling, not a target.
Q3Maximum and minimum prices · Standard · Paper 1 style · 1 mark
(a)In a market, demand is Qd = 200 − 4P and supply is Qs = 20 + 2P, where P is the price in dollars. The government sets a maximum price of $20. What is the size of the resulting shortage?[1]
Show answer
(a) C 60 units
Equilibrium: 200 − 4P = 20 + 2P gives P = $30, Q = 80. At $20, Qd = 120 and Qs = 60, so the shortage is 60. D is the equilibrium quantity, not the shortage.
Q4Maximum and minimum prices · Standard · Paper 2 style · 8 marks
The table shows the demand and supply schedules for rice in a country (invented data).Price (Rs per kg): quantity demanded (thousand tonnes), quantity supplied (thousand tonnes)150: 900, 500175: 800, 600200: 700, 700225: 600, 800250: 500, 900
(a)State the equilibrium price and quantity.[1]
(b)The government sets a minimum price of Rs 250 per kg and buys any surplus. Calculate the surplus and the cost to the government of buying it.[3]
(c)Calculate the change in farmers' total revenue from rice as a result of the scheme.[2]
(d)Explain one disadvantage of this scheme for consumers.[2]
(d) Consumers pay a higher price (Rs 250 instead of Rs 200) and buy less, losing consumer surplus; they also pay taxes to finance the surplus.
1 mark point, 1 mark development.
Q5Maximum and minimum prices · Standard · Paper 2 style · 8 marks
(a)With the help of a diagram, explain why a maximum price set below the equilibrium price may cause a shortage, and consider whether such a policy will help low-income households.[8]
Show answer
(a) Quantity demanded exceeds quantity supplied at the controlled price; poor households may or may not benefit depending on rationing and supply response.
Knowledge (3): definition of a maximum price; correctly labelled demand and supply diagram with maximum price line below equilibrium; shortage shown as Qd − Qs. Analysis (3): lower price extends demand and contracts supply; quantity actually traded falls; producers may cut quality; shortage leads to queues and shadow markets. Evaluation (2): households who obtain the good gain from the lower price; but those who cannot get it lose; benefit depends on PES and PED, rationing system (e.g. ration cards), enforcement; justified conclusion.
Q6Maximum and minimum prices · Standard · Paper 2 style · 10 marks
Invented data: in a country, the retail price of sugar rose to Rs 165 per kg after a poor sugar-cane harvest. The government then imposed a maximum retail price of Rs 140 per kg. A month later, newspapers reported that many shops had no sugar on their shelves.
(a)Calculate the percentage by which the maximum price is below the previous market price. Give your answer to 1 decimal place.[2]
(b)Explain two likely effects of the maximum price on the sugar market.[4]
(c)Consider whether a maximum price is more effective than a cash transfer to poor households for making sugar affordable.[4]
Show answer
(a) 15.2 %
(165 − 140) ÷ 165 × 100 (M1) = 15.2 % (A1).
(b) Shortage as Qd rises and Qs falls; illegal market or hoarding; supply diverted to other uses or smuggled abroad.
2 marks each for two explained effects: shortage (excess demand) with empty shelves; illegal resale at higher prices; hoarding by traders expecting the control to end; mills cut supply or export; queues and time costs.
(c) A cash transfer targets the poor and avoids shortages; a maximum price is cheaper for the budget but benefits all buyers and causes shortages.
Analysis (up to 3): maximum price helps everyone who buys, including rich households and confectionery firms; causes shortage; no budget cost. Cash transfer targets poor, keeps market price, no shortage, but costs the government and may be spent on other goods. Evaluation (1): judgement, e.g. a cash transfer is likely more effective if there is a reliable register of poor households.
Q7Maximum and minimum prices · Challenge · Paper 2 style · 8 marks
In the market for a basic medicine, demand is P = 100 − Q and supply is P = 20 + Q, where P is the price in dollars and Q is the quantity in thousands of packs per month (invented data).
(a)Calculate the equilibrium price and quantity, and the consumer surplus and producer surplus at equilibrium.[3]
(b)The government imposes a maximum price of $40. Calculate the new consumer surplus and producer surplus, assuming the units supplied go to the consumers who value them most.[3]
(c)Calculate the deadweight (welfare) loss and comment on whether consumers as a group gain from the maximum price.[2]
Quantity supplied at $40: 40 = 20 + Q so Q = 20 (M1). CS = trapezium between demand and $40 from 0 to 20 = ½ × (60 + 40) × 20 = 1000 (A1). PS = ½ × 20 × 20 = 200 (A1).
(c) Welfare loss $400 thousand; consumers who obtain the good gain (CS rises by $200 thousand) but 20 thousand units of demand are no longer met.
Total surplus 1600 − 1200 = 400 (B1). Comment (B1): consumers as a group gain only if goods reach those who value them most; queuing or illegal markets would reduce this gain.
Q8Maximum and minimum prices · Challenge · Paper 2 style · 12 marks
(a)Assess whether a guaranteed minimum price for wheat is the best way for a government to support farmers' incomes.[12]
Show answer
(a) A minimum price raises incomes of farmers who sell, but creates surpluses, higher food prices and fiscal costs; alternatives may be better.
Analysis (up to 8): diagram of minimum price above equilibrium; surplus Qs − Qd; government must buy and store the surplus; farmers' revenue rises (price × quantity sold); larger farmers with more output gain most; consumers pay more, which hurts poor households for whom wheat flour is a staple; storage costs, wastage, opportunity cost of government spending; possible over-production of wheat at the expense of other crops. Comparison with alternatives: direct cash transfers to small farmers, input subsidies, buffer stocks, crop insurance, investment in irrigation and research. Evaluation (up to 4): depends on PED and PES, budget position, how well the scheme is targeted, world prices; 'best' requires a comparison and a justified conclusion.
Q9Maximum and minimum prices · Challenge · Paper 2 style · 7 marks
A government introduces a minimum retail price of Rs 360 for a pack of cigarettes. The previous market price was Rs 300. Assume the price elasticity of demand for cigarettes is −0.4 (invented data).
(a)Calculate the percentage change in the quantity of cigarettes demanded.[2]
(b)Calculate the percentage change in total consumer spending on cigarettes.[2]
(c)Using your answers, explain why a minimum price on cigarettes may not greatly reduce smoking, and suggest one problem it could create.[3]
New spending ÷ old spending = 1.20 × 0.92 = 1.104 (M1), a rise of 10.4 % (A1).
(c) Demand is price inelastic, so consumption falls only slightly while spending rises; it may encourage illegal or smuggled cigarettes.
1 mark: PED is inelastic (addiction, few substitutes). 1 mark: quantity falls by only 8 % while smokers spend more, which may hurt poor smoking households. 1 mark: problem, e.g. smuggling/counterfeit cigarettes, extra revenue goes to sellers not the government (unlike a tax).
Q10Income and wealth inequality · Core · Paper 1 style · 1 mark
(a)[1]
Show answer
(a) B income has become less equally distributed
A higher Gini coefficient means the Lorenz curve is further from the line of equality, so distribution is less equal. It says nothing about the level of average income (C) or the absolute number in poverty (D).
Q11Income and wealth inequality · Core · Paper 2 style · 6 marks
(a)Distinguish between income and wealth, giving one example of each.[2]
(b)Explain how inequality of wealth can lead to inequality of income.[2]
(c)State two causes of income inequality other than inequality of wealth.[2]
Show answer
(a) Income is a flow of money received over a period (e.g. monthly wages); wealth is a stock of assets owned at a point in time (e.g. a house or land).
1 mark each correct distinction with example.
(b) Wealth generates income (rent, interest, dividends, profit), so those with more assets receive more income.
1 mark: assets yield income such as rent and dividends. 1 mark: wealth also allows better education and business start-up, raising future earnings, so the gap widens across generations.
(c) Differences in skills/education; discrimination; regional differences; unemployment; differences in bargaining power.
1 mark each for any two valid causes.
Q12Income and wealth inequality · Standard · Paper 2 style · 7 marks
Invented income tax bands for a country (annual income):first Rs 600,000: 0 %Rs 600,001 to Rs 1,200,000: 5 %Rs 1,200,001 to Rs 2,400,000: 15 %above Rs 2,400,000: 25 %
(a)Calculate the income tax paid by Bilal, who earns Rs 1,000,000 a year, and by Sana, who earns Rs 3,000,000 a year.[3]
(b)Calculate the average rate of tax paid by each person, and state Sana's marginal rate of tax.[2]
(c)Explain why this tax system is described as progressive.[2]
(c) The average rate of tax rises as income rises (2 % to 12 %), so higher earners pay a larger proportion of their income.
1 mark: average rate rises with income. 1 mark: use of the figures calculated.
Q13Income and wealth inequality · Standard · Paper 2 style · 8 marks
(a)Explain the causes of income inequality within a country and consider whether some degree of inequality is necessary for an economy to work well.[8]
Show answer
(a) Causes include differences in skills, education, wealth, discrimination and bargaining power; some inequality provides incentives, but too much harms growth and welfare.
Knowledge (3): meaning of income inequality; measurement by Lorenz curve or Gini coefficient; causes such as differences in education and skills, wealth/inheritance, labour market discrimination, regional differences, unemployment, tax and benefit systems. Analysis (3): explain how each cause leads to different wage or non-wage incomes, e.g. scarce skills command high wages. Evaluation (2): wage differences signal where labour is needed and reward effort, risk and training; but extreme inequality reduces social mobility, health and demand, and may cause social unrest; justified conclusion.
Q14Income and wealth inequality · Standard · Paper 2 style · 8 marks
Invented data for a country.Year: share of income of poorest 20 % of households, share of income of richest 20 %2015: 8 %, 45 %2025: 7 %, 49 %Real national income grew by 40 % between 2015 and 2025.
(a)Calculate the ratio of the income share of the richest 20 % to that of the poorest 20 % in 2015 and in 2025. Give your answers to 1 decimal place.[2]
(b)Explain what the change in the ratio suggests about the distribution of income.[2]
(c)Consider whether the data prove that the poorest 20 % of households were worse off in 2025 than in 2015.[4]
Show answer
(a) 2015: 5.6 (5.625); 2025: 7.0
45 ÷ 8 = 5.625 ≈ 5.6 (B1); 49 ÷ 7 = 7.0 (B1).
(b) Income has become less equally distributed, as the richest group's share rose while the poorest group's share fell.
1 mark: less equal. 1 mark: use of data (ratio rose from 5.6 to 7.0).
(c) No: the data are shares, not amounts; if total real income grew enough, the poorest may have had higher real incomes despite a smaller share.
Analysis (up to 3): shares vs absolute incomes; real GDP growth of 40 % (invented) means the poorest 20 %'s real income changed by 1.4 × 7/8 − 1 = +22.5 %; but price changes for basic goods, household size and non-income factors (services, wealth) also matter. Evaluation (1): a judgement, e.g. relatively worse off but probably not absolutely.
Q15Income and wealth inequality · Challenge · Paper 2 style · 7 marks
Invented data: the share of national income received by each fifth (quintile) of households in a country, from poorest to richest, is 6 %, 10 %, 15 %, 22 % and 47 %.
(a)Calculate the cumulative share of income received by the poorest 60 % of households.[1]
(b)Treating the Lorenz curve as straight lines joining the cumulative points, calculate the area under the Lorenz curve and the Gini coefficient. Give the Gini coefficient to 2 decimal places.[4]
(c)Explain what would happen to the Lorenz curve and the Gini coefficient if a new tax and transfer scheme took income from the richest 20 % and gave it to the poorest 20 %.[2]
Show answer
(a) 31 %
6 + 10 + 15 = 31 % (B1).
(b) Area under Lorenz curve = 0.312; Gini coefficient = 0.38
(c) The Lorenz curve moves closer to the line of equality and the Gini coefficient falls.
1 mark: the cumulative shares at each point rise, so the curve moves towards the 45° line. 1 mark: the area between the curve and the line of equality falls, so the Gini coefficient falls.
Q16Income and wealth inequality · Challenge · Paper 2 style · 12 marks
(a)Assess whether a progressive income tax is the best way to reduce income inequality in a lower-middle-income country.[12]
Show answer
(a) It can narrow post-tax income gaps, but its effect is limited where few people pay income tax and the informal sector is large; spending and other taxes may matter more.
Analysis (up to 8): how a progressive tax works (rising average rate) and narrows post-tax incomes; revenue can fund transfers, health and education. Limits: small tax base, large informal sector, tax avoidance and evasion, disincentive effects on work and enterprise, capital flight; poorest households are below the threshold so gain nothing directly. Alternatives: cash transfers, free education and health (raise human capital), wealth or property taxes, minimum wages, land reform. Evaluation (up to 4): effectiveness depends on tax collection capacity and how revenue is spent; long-term inequality is better reduced by education; a judgement on 'best'.
Q17Reasons for intervention (merit, demerit and public goods) · Core · Paper 1 style · 1 mark
(a)Why would a free market fail to provide a public good such as a flood defence wall?[1]
Show answer
(a) C people can benefit without paying, so firms cannot earn revenue
Because a public good is non-excludable, people can be free riders, so firms cannot charge and will not supply it. A is wrong: public goods are non-rival.
Q18Reasons for intervention (merit, demerit and public goods) · Core · Paper 2 style · 5 marks
(a)Many people in rural areas do not have regular dental check-ups, even when they can afford them. Explain how information failure can lead to the under-consumption of dental check-ups.[3]
(b)State two policies the government could use to increase consumption of dental check-ups.[2]
Show answer
(a) People underestimate the long-term benefits (preventing serious disease), so their demand is below the level that would maximise their welfare.
1 mark: information failure = consumers lack full/accurate information. 1 mark: they do not realise that problems can be prevented cheaply / focus on short-term cost. 1 mark: so demand and consumption are lower than they would choose with full information – a merit good is under-consumed.
(b) Free or subsidised check-ups; information campaigns in schools; direct provision through clinics.
1 mark each.
Q19Reasons for intervention (merit, demerit and public goods) · Standard · Paper 2 style · 7 marks
(a)Explain why smokeless tobacco products are regarded as demerit goods.[3]
(b)Explain one advantage and one disadvantage of banning the sale of such products.[4]
Show answer
(a) Consumers underestimate the harm (e.g. oral cancer), and may be addicted, so consumption is higher than is in their own interest.
1 mark: demerit good = over-consumed in a free market. 1 mark: information failure – users underestimate health risks. 1 mark: addiction / habit, so the good's harm to the user is not fully reflected in demand.
(b) Advantage: consumption should fall sharply, improving health. Disadvantage: an illegal market may develop, with no quality control and no tax revenue.
2 marks each: advantage explained (removes legal supply, clear signal); disadvantage explained (illegal markets, enforcement costs, loss of jobs/tax revenue, consumers may switch to other harmful products).
Q20Reasons for intervention (merit, demerit and public goods) · Standard · Paper 2 style · 8 marks
(a)Explain why public goods would not be provided in a free market, and consider whether the government should provide all public goods itself.[8]
Show answer
(a) Non-excludability causes free riding, so there is a missing market; the government must ensure provision, but it may contract private firms to produce them.
Knowledge (3): definitions of non-rival and non-excludable; examples (national defence, street lighting, lighthouses, flood defences). Analysis (3): firms cannot charge non-payers, so consumers do not reveal willingness to pay; free-rider problem; zero marginal cost of an extra user means charging would be inefficient; so the market is missing. Evaluation (2): government must finance them through taxation but need not produce them – private firms can build and maintain under contract, possibly more efficiently; deciding the right quantity is difficult without prices; justified conclusion.
Q21Reasons for intervention (merit, demerit and public goods) · Challenge · Paper 2 style · 12 marks
(a)Assess whether a ban is a better policy than an indirect tax for reducing the consumption of a demerit good.[12]
Show answer
(a) A ban gives the biggest reduction in theory but causes illegal markets; a tax keeps the market legal and raises revenue but has small effect when demand is price inelastic.
Analysis (up to 8): a ban removes legal supply, sends a clear signal, but creates illegal markets, enforcement costs, loss of tax revenue and possible harm from unregulated products; indirect tax shifts supply left, raises price and reduces quantity, generates revenue to fund health care or education, but if PED is inelastic consumption falls little and the tax is regressive. Discuss the role of information (education campaigns), the nature of the good (addictive or not, how harmful), enforcement capacity. Evaluation (up to 4): depends on the good and the country – a ban may suit very harmful goods with easy enforcement; a tax suits goods where moderate consumption is accepted; a judgement.
Q22Reasons for intervention (merit, demerit and public goods) · Challenge · Paper 2 style · 12 marks
Invented data on the percentage of children fully vaccinated in a country.Year: urban districts, rural districts2020: 88 %, 62 %2025: 88 %, 71 %Free mobile vaccination clinics began visiting rural villages in 2021.
(a)Calculate the difference in vaccination rates between urban and rural districts in 2025, and state whether it was larger or smaller than in 2020.[2]
(b)Explain why vaccinations may be under-consumed in rural districts if left to the market.[4]
(c)Assess whether the data show that free mobile vaccination clinics are the best policy to raise vaccination rates.[6]
Show answer
(a) 17 percentage points in 2025, smaller than 26 percentage points in 2020
88 − 71 = 17 (B1); 2020: 88 − 62 = 26, so the gap narrowed (B1).
(b) Information failure (parents underestimate benefits), cost and travel time, low incomes, myths and mistrust.
Up to 4 marks: merit good definition (1); information failure explained (1); low incomes and distance raise the effective price (1); result – consumption below the socially desirable level (1).
(c) The data suggest the clinics helped, but other factors may have contributed and the cost is not shown.
Analysis (up to 4): rural rate rose 9 points after clinics began while the urban rate stayed at 88 %, which supports the policy; but correlation is not causation – information campaigns, rising incomes or school requirements might also explain it; no data on cost per extra child vaccinated; rate still 71 %, so barriers remain (information, trust). Alternatives: conditional cash transfers, school-entry requirements, community health workers. Evaluation (up to 2): a justified judgement.
Q23Indirect taxes and subsidies · Standard · Paper 1 style · 1 mark
(a)Before a specific tax is imposed on a good, its price is $50 and 100 units are sold. After a specific tax of $10 per unit, the price paid by consumers is $56 and 90 units are sold. What is the government's tax revenue?[1]
Show answer
(a) C $900
Revenue = tax per unit × quantity sold after the tax = $10 × 90 = $900. D wrongly uses the original quantity; A is the producers' share ($4 × 90) and B the consumers' share ($6 × 90).
Q24Indirect taxes and subsidies · Standard · Paper 2 style · 6 marks
(a)Distinguish between a specific tax and an ad valorem tax.[2]
(b)With the help of a diagram described in words, explain why the burden (incidence) of an indirect tax falls mainly on consumers when demand is price inelastic.[4]
Show answer
(a) A specific tax is a fixed amount per unit; an ad valorem tax is a percentage of the price.
1 mark each. Specific: supply curve shifts up in parallel. Ad valorem: the vertical gap widens as price rises (curve pivots).
(b) Supply shifts up by the tax; with steep demand the price rises by most of the tax and quantity falls little.
Diagram: original D and S, S shifts vertically up by the tax (1). With inelastic (steep) demand, price paid by consumers rises by most of the tax (1). Price received by producers (new price minus tax) falls only a little (1). Consumers' share = rise in price × new quantity, larger than producers' share; quantity falls little (1).
Q25Indirect taxes and subsidies · Challenge · Paper 2 style · 8 marks
In the market for solar water heaters, demand is Qd = 120 − 2P and supply is Qs = −30 + 3P, where P is the price in dollars and Q is in thousands per year (invented data).
(a)Calculate the equilibrium price and quantity before the subsidy.[2]
(b)The government pays producers a subsidy of $10 per unit. The supply equation becomes Qs = −30 + 3(P + 10). Calculate the new equilibrium price and quantity.[2]
(c)Calculate the total cost of the subsidy to the government, and the share of the subsidy per unit received by consumers and by producers.[3]
(d)Explain why consumers receive the larger share of the subsidy in this market.[1]
Show answer
(a) P = $30, Q = 60 thousand
120 − 2P = −30 + 3P, so 5P = 150 (M1); P = 30, Q = 60 (A1).
(b) P = $24, Q = 72 thousand
Qs = 3P; 120 − 2P = 3P (M1), so P = 24, Q = 72 (A1).
(c) Cost $720 thousand; consumers $6 per unit; producers $4 per unit
Cost = 10 × 72 = $720 thousand (B1). Consumers' price falls from $30 to $24, so they gain $6 per unit (B1). Producers receive $24 + $10 = $34, a gain of $4 per unit (B1).
(d) Demand is less price elastic than supply at the original equilibrium, so more of the benefit passes to consumers.
B1: at P = 30, Q = 60 the PED is 2 × 30/60 = 1.0 and the PES is 3 × 30/60 = 1.5; the less elastic side receives the larger share.
Q26Indirect taxes and subsidies · Challenge · Paper 2 style · 12 marks
(a)Assess whether an indirect tax on sugary drinks is likely to reduce their consumption significantly.[12]
Show answer
(a) It raises price and reduces quantity, but the effect depends on PED, the size of the tax, pass-through to consumers and the availability of untaxed substitutes.
Analysis (up to 8): diagram showing supply shifting up by the tax; new higher price and lower quantity; incidence depends on PED/PES; if demand is price inelastic (habit, brand loyalty, low share of income for richer groups) consumption falls little; producers may absorb part of the tax or reformulate recipes with less sugar (a desired effect); consumers may switch to untaxed sugary foods; tax is regressive; revenue could fund health education. Evaluation (up to 4): significance depends on the tax rate, the price sensitivity of young and low-income consumers (more elastic), complementary policies (labelling, school bans); a justified conclusion.
Q27Direct provision, buffer stocks and transfer payments · Core · Paper 2 style · 5 marks
A government's cash-transfer programme pays Rs 10,500 every quarter (three months) to each of 9 million low-income families. The country's GDP is Rs 105 trillion (invented data).
(a)Calculate the annual cost of the cash-transfer programme. Give your answer in Rs billion.[2]
(b)Calculate the cost of the programme as a percentage of GDP. Give your answer to 2 decimal places.[1]
(c)Explain what is meant by a transfer payment and why it is not counted as part of GDP.[2]
(c) A payment from the government for which no good or service is provided in return; it redistributes existing income rather than paying for new output.
1 mark definition. 1 mark: no production takes place in return, so counting it would double-count income.
Q28Direct provision, buffer stocks and transfer payments · Standard · Paper 2 style · 8 marks
A buffer stock agency for coffee beans aims to keep the price between a floor of $1.80 per kg and a ceiling of $2.20 per kg. After a very good harvest, the free-market price would fall to $1.50 per kg, so the agency buys 300,000 tonnes of coffee beans at $1.80 per kg (invented data).
(a)Calculate the cost to the agency of the purchases it makes after the good harvest. Give your answer in $ million.[2]
(b)Explain what the agency would do if a poor harvest caused the free-market price to rise to $2.50 per kg.[2]
(c)Explain two reasons why such a scheme might fail in the long run.[4]
Show answer
(a) $540 million
300,000 tonnes × 1000 kg × $1.80 (M1) = $540,000,000 = $540 million (A1).
(b) Sell coffee from its stock to increase supply and bring the price down to the ceiling of $2.20.
1 mark: sell from the stock. 1 mark: the extra supply shifts the supply curve right and keeps the price at or below $2.20.
(c) Floor set too high (persistent surpluses and rising costs); storage costs and perishability; stocks run out after several poor harvests; producers expand output; funding problems.
2 marks each for two explained reasons.
Q29Direct provision, buffer stocks and transfer payments · Standard · Paper 2 style · 8 marks
(a)Explain how the direct provision of health care by the government can increase the consumption of a merit good, and consider the problems that direct provision may cause.[8]
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(a) Free provision removes the price barrier and raises consumption towards the desired level; but it is costly, may cause excess demand and can be inefficient.
Knowledge (3): meaning of direct provision (government produces and supplies, often free at the point of use); health care as a merit good under-consumed due to information failure and low incomes. Analysis (3): zero price means quantity demanded rises (movement along demand to where price = 0); access no longer depends on income; equity improves. Evaluation (2): high opportunity cost for the budget; excess demand leads to waiting lists; lack of profit motive may reduce efficiency and quality; information failure remains if people still do not use services; justified conclusion.
Q30Direct provision, buffer stocks and transfer payments · Challenge · Paper 2 style · 12 marks
(a)Assess whether buffer stock schemes are an effective way to stabilise the prices of agricultural products.[12]
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(a) They can smooth short-term fluctuations, but often fail because of wrongly set price bands, storage costs, perishability and lack of funds.
Analysis (up to 8): agricultural prices are unstable because supply varies with weather and both demand and supply are price inelastic in the short run; diagram of a price band, buying in good harvests and selling in poor ones; benefits: stable farm incomes, planning, investment, stable food prices for consumers. Problems: setting the band correctly (if too high, permanent surpluses); storage and wastage costs; perishable goods cannot be stored; a run of poor harvests empties the stock; political pressure; large funds needed; for exported crops, other countries' output matters. Evaluation (up to 4): more effective for storable goods (grains, metals) with a band near the long-run average price; judgement.
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