In 2013 the Mexican Government was considering imposing a sales tax of one peso per litre on the price of fizzy drinks. The Government wanted to discourage people from consuming too many fizzy drinks – 40% more fizzy drinks per person are consumed than in the United States of America. A number of multinational fizzy drinks companies have threatened to leave the country if taxes are increased.

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

1. [2] • A tax on spending/an indirect tax/ a tax on goods and services/ a tax on consumers (1) e.g. VAT, GST, a tax on a specific product e.g. petrol (1).
2. [4] Up to 2 marks for private costs:
3. • Private costs are costs borne by those consuming the product (1) producing the product (1) example of such a cost (1) Social costs – external costs (1).
4. Up to 2 marks for social costs:
5. • Social costs are private costs plus external costs (2) total costs to society/total cost (1)
6. [6] Up to 4 marks for the diagram:
7. • axes correctly labelled – price and quantity or P and Q (1)
8. • demand and supply curves correctly labelled (1)
9. • supply curve shifted to the left (1)
10. • correct equilibriums identified either by lines drawn to both axes or equilibrium prices clearly identified e.g. E and E1 (1)
11. • the tax per unit shown (1).
12. Up to 2 marks for written comments:
13. • an indirect tax is an extra cost on firms (1)
14. • a decrease in supply will raise the price of fizzy drinks (1).
15. [8] Up to 5 marks for why it might:
16. • Employment may fall (1) and output/income/GDP/economic growth may decline (1).
17. • The current account position may worsen (1) as the MNC may have contributed to exports (1).
18. • Wages may fall (1) if the MNC was paying above wages paid by domestic employers (1).
19. • Government tax revenues may fall (1) reducing its ability to spend on e.g. education (1).
20. • Less variety of products may be available to consumers (1).
21. • Discourage other MNCs setting up (1).
22. Up to 5 marks for why it might not:
23. • The MNC may have been depleting the country's resources (1) reducing its ability to grow in the future (1).
24. • More domestic firms may set up/expand (1) to meet the demand that had previously been supplied by the MNC (1).
25. • The MNC have been sending profits home (1) and so tax revenue may not fall significantly (1).
26. • The MNC may have been putting pressure on the government to follow policies not in the country's interest (1).
27. • The MNC may have not have created much employment (1) keeping top jobs for workers from own country (1).
28. • MNCs may have been subsidised (1) can use tax revenue for other purposes (1)