Mexico has recently experienced relatively low inflation and the Mexican government wants to maintain this price stability. Despite this its currency has fallen in value with each Mexican peso exchanging for less foreign currency. The government is also trying to reduce pollution in the country. One key cause of pollution in Mexico is car travel. Driving has both private and external costs.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [1] Private costs are costs borne by those producing the product
2. [1] consuming the product
3. [1] example of such a cost
4. [1] social costs – external costs
5. [1] Impose a tax
6. [1] to discourage production / discourage consumption / turn external into private cost
7. [1] Regulation
8. [1] ban or restrict production / ban or restrict consumption / may be enforced by fines
9. [1] Provide information
10. [1] to discourage consumption / discourage production
11. [1] Government subsidies
12. [1] to encourage cleaner production methods / the consumption of healthier food e.g. fruit instead of high fat foods
13. [1] People may not want to save money
14. [1] as it may lose value
15. [1] stop acting as a store of value
16. [1] People may not accept money as a payment
17. [1] as it may lose value / people may not know what its value is
18. [1] stop acting as a medium of exchange
19. [1] People may not be willing to lend money
20. [1] inflation rate may be higher than interest rate
21. [1] stop acting as a standard of deferred payments
22. [1] People may stop valuing products in monetary terms
23. [1] due to instability of prices
24. [1] stop acting as a unit of account / measure of value
25. Up to 5 marks for why it might:
26. [1] A lower exchange rate will reduce the price of exports
27. [1] raise the price of imports
28. [1] net exports may rise / exports may rise / imports may fall
29. [1] current account of the balance of payments may improve
30. [1] total (aggregate) demand may increase
31. [1] real GDP may increase economic growth
32. [1] employment may rise
33. Up to 5 marks for why it might not:
34. [1] Higher import prices may not reduce spending on imports if demand for imports is inelastic
35. [1] export revenue may not rise if demand for exports is inelastic
36. [1] import restrictions imposed on other countries may make it difficult to sell more exports
37. [1] Higher import prices may cause inflation
38. [1] imported raw material costs may rise
39. [1] causing cost-push inflation
40. [1] imported finished products may not be replaced by domestic products
41. [1] rise in net exports may cause demand-pull inflation
42. [1] Domestic citizens may be able to purchase fewer imports
43. [1] lower living standards
44. [1] If the country is in debt
45. [1] it may increase the cost of repaying the debt
46. [1] If the country is operating at full employment
47. [1] it may not be possible to produce more exports / substitutes for imports
48. [1] Demand for the country's exports may be low
49. [1] if quality is poor / incomes abroad are falling abroad
50. [1] If the fall is used as a way to capture markets abroad / protect domestic industries
51. [1] there may be retaliation