Answers & Mark-Scheme Guidance

Edexcel uses levels-based marking on longer questions, so these are indicative — credit any valid, well-developed economics. The key is the structure: knowledge → application → analysis → evaluation.

Part A Knowledge checks

Model answers

1. Opportunity cost = the value of the next best alternative forgone. Govt example: money spent on the NHS cannot also be spent on defence. 2. PED = %ΔQ demanded ÷ %ΔP. Negative because price and quantity move in opposite directions (the law of demand). 3. Movement = caused by a change in the good's own price (extension/contraction). Shift = caused by a non-price determinant (income, tastes, related goods…). 4. Non-rivalry and non-excludability. 5. Any two: distorted price signals, unintended consequences, excessive admin costs, information gaps.

Q1 Calculation (4)

Worked solution

(a) %ΔQ = (360 − 400) ÷ 400 × 100 = −10%. %ΔP = (25 − 20) ÷ 20 × 100 = +25%. PED = −10 ÷ 25 = −0.4.

(b) |0.4| < 1 → demand is inelastic. Price rose and quantity fell less than proportionately, so total revenue rises (from £20×400 = £8,000 to £25×360 = £9,000).

Q2 Diagram explain (5)

What earns the marks

Draw S&D with supply shifting left (S₁→S₂). Chain: a poor harvest reduces output → supply decreases → at the old price there is excess demand → price rises (P₁→P₂) and quantity falls (Q₁→Q₂). Full marks need a labelled diagram plus the reasoning.

Q3 Examine an indirect tax (10)

KAA + evaluation

KAA: the tax shifts supply up by the tax (S→S+tax); price rises to P_c, quantity falls to Q₂; because demand for cigarettes is inelastic (addictive), most of the burden falls on consumers and consumption only falls a little; government gains revenue (tax × Q₂) — diagram required.

Evaluation: effectiveness is limited precisely because demand is inelastic; the tax is regressive (hits poorer smokers hardest); risk of smuggling / black markets; the impact depends on the size of the tax.

Q4 Discuss an EV subsidy (12)

KAA + evaluation

KAA: a subsidy lowers producers' costs → supply shifts right/down (S→S+subsidy) → price falls and quantity rises → more EVs consumed → the positive externality (lower emissions) means the market moves toward the social optimum; over time this can build economies of scale and charging infrastructure — support with a diagram.

Evaluation: the subsidy is expensive (opportunity cost of public funds); it may be captured by producers as higher profit rather than passed on; it can be regressive if mainly richer households buy EVs; the emissions benefit depends on how the electricity is generated; overall impact depends on the size of the subsidy and elasticities.

Q5 25-mark essay — model plan

How to structure top-band marks

Intro: define a demerit good and the market failure — overconsumption, negative externalities, and information gaps. Signpost that you'll weigh indirect taxes against alternatives.

KAA 1 (for): a Pigouvian tax internalises the external cost (diagram: MPC→MSC), raising price, cutting consumption toward Q*, and raising revenue that can fund healthcare.

Eval 1: demand is inelastic (addiction), so consumption falls only a little; the tax is regressive; black markets may appear.

KAA 2 (alternatives): regulation (age limits, advertising bans), information campaigns, and minimum unit pricing.

Eval 2: weigh each — information is cheap but slow; regulation can be evaded; minimum pricing targets the cheapest units.

Judgement: indirect taxes raise revenue and have some effect, but because demand is inelastic they are not the single most effective tool — a combination (tax + information + regulation) works best, and the right choice depends on the tax size and on complementary policies.