Governments can influence economic behaviour in different ways, such as through taxes and regulations.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2014). The mark or mark type is shown in brackets.

1. [6] Up to 2 marks: explanation of how resources are allocated through a price mechanism without any government intervention (1) with the market price reflecting demand and supply. Up to 3 marks: goods such as demerit goods/goods that have external costs are over-consumed (1) will have a relatively low market price (1) (compared to if there was government intervention)/consumers will not fully appreciate their harmful effects and so there will be over-consumption (1), e.g. tobacco or alcohol (1). Up to 3 marks: goods such as merit goods/goods that have external benefits are underconsumed (1), will have a relatively high market price (1) (compared to if there was government intervention)/consumers will not fully appreciate their beneficial effects and so there will be under-consumption (1), e.g. education or health care (1). Up to 3 marks: a monopoly may restrict output (1) pushing up the price (1) reducing the amount people can consume (1). Up to 3 marks: private sector firms will have no incentive (1) to provide public goods (1) so these will not be consumed (1).
2. [6] Up to 4 marks for the diagram: 1 mark for the correct labelling of D, S, P and Q. 1 mark for the shift of supply curve to the left. 1 mark for the increase in equilibrium price -shown by lines or equilibrium points e.g. E and E1. 1 mark for the decrease in equilibrium quantity - shown by lines or equilibrium points e.g. E and E1. Up to 2 marks for written analysis: Analysis of why the supply curve shifts to the left as a result of the tax imposing a cost on firms (1). Analysis of why there is an increase in equilibrium price and a reduction in equilibrium quantity based on a decrease in supply (1). Effect on price will depend on price elasticity of demand (1) as demand for tobacco is price inelastic most of the tax will be passed on to the consumer/consumer bears most of the tax (1).
3. [8] Up to 6 marks supporting the view that government regulations always achieve their intended aims: Up to 2 marks: price controls (1), through maximum and/or minimum prices (1). Up to 2 marks: competition policy (1), through action against companies with too large a market share that are acting against the public interest (1). Up to 2 marks: control of negative externalities (1), such as through regulations on air pollution or noise pollution. Up to 3 marks: consumer protection (1), such as through ensuring correct descriptions of products (1) and the quality/weight of food (1). Up to 2 marks: discourage demerit goods (1) e.g. by bans on smoking in public (1). Up to 2 marks: promote merit goods (1) e.g. by making education compulsory (1). Up to 6 marks criticising the view that government regulations always achieve their intended aims: Up to 2 marks: they do not always achieve their aims through action on prices because underground markets (1) can sometimes exist to bypass government regulations (1). Up to 2 marks: they do not always achieve their aims through action on competition because firms can join together (1) to get round such regulations by pretending that they are separate companies. Up to 3 marks: they do not always achieve their aims in relation to pollution because it is difficult to estimate the figure for this accurately (1) and the regulations are often difficult to enforce (1), pollution may be caused by firms in other countries (1). Up to 2 marks: they do not always achieve their aims in relation to consumer protection because there may not be enough inspectors (1) to enforce the regulations effectively (1). Up to 2 marks: it may be difficult to discourage the consumption of demerit goods as they are addictive/bans may be expensive to enforce (1) so people may break the law (1). Up to 2 marks: it may be difficult to promote merit goods as making consumption compulsory may be expensive to enforce (1), will involve an opportunity cost (1). Maximum of 4 marks for a list or list-like answer. Note: do not reward taxes and subsidies.