Sales of bottled water in China doubled between 2010 and 2015. In 2013 China overtook the USA as the biggest market for water by volume, but not value as the price of a bottle was higher in the USA. The increase in global consumption of bottled water has increased the size of firms producing bottled water but has also increased pollution.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [2] It is a cost/harmful effect/external cost (1) on a third party (1) not taken into account by the market (1) will cause social costs to exceed private costs (1) may result in the inefficient use of resources (1).
2. [4] 1 mark each for each of two causes identified: ∞ a reduction in the costs of production ∞ advances in technology ∞ increase in labour productivity ∞ cuts in indirect taxes ∞ government subsidies ∞ good weather ∞ reduction in diseases affecting livestock and crops ∞ fall in price of other products produced by the firms 1 mark each for each of two explanations given: ∞ lower costs of production will make firms more willing and able to supply/raise profits ∞ advances in technology makes it cheaper to produce ∞ cuts in taxation effectively lower costs of production ∞ government subsidies provide a financial incentive to produce more ∞ good weather increases fertility of land/increases crop yields ∞ reduction in diseases increase crop yields and the number of livestock that can be sold ∞ fall in price of other products produced by firms may lower their profitability, encouraging firms to switch resources
3. [6] ∞ Demand may be higher in the USA (1) due to e.g. higher incomes (1) ∞ The product may be advertised more in the USA (1) the product may have fewer substitutes in the USA (1) ∞ Difference in markets (1) monopoly in USA (1) lower output/higher prices (1) greater competition in China (1) greater output and lower prices (1) ∞ Good may be imported from china (1) higher transportation costs raises price (1) ∞ Supply may be lower in the USA (1) due to e.g. higher costs of production (1) ∞ The tax on the product may be higher in the USA (1) ∞ The Chinese government may subsidise the product (1) ∞ Demand may be more inelastic in USA (1) hence producers can charge higher price (1) ∞ Diseconomies of scale in the USA (1) lead to higher average costs and higher prices(1) economies of scale in China (1) lead lower average costs and lower prices (1) ∞ Chinese exchange rate has fallen (1) will mean difference in the price of goods imported (1) resulting in higher costs of importing into the USA (1)
4. [8] Up to 5 marks for why larger firms* might: They may be able to benefit from economies of scale (1) example/s of economies of scale (1) lower average costs (1) lower prices for consumers (1). They may have more funds to invest (1) increase innovation / research (1) improve the quality of products (1). Large firms may offer greater variety to consumers (1). Up to 5 marks for why larger firms* might not: They may experience diseconomies of scale (1) example/s of diseconomies of scale (1) higher average costs (1) higher prices for consumers (1). They may provide less of a personal service (1) they may be less responsive to changes in consumer demand (1) as may be less in touch with consumers (1). A larger firm may be a monopolist (1) can restrict output and charge a higher price (1) lack innovation (1). Smaller firm may have monopoly power (1) in a niche market (1).