Each question is introduced by stimulus material. In your answer you may refer to this material and/or to other examples that you have studied. The Indian government has declared that the country, now a major car producer, will sell only electric cars by 2030. The government wants to reduce external costs, some of which are caused by petrol and diesel cars. Demand for electric cars is currently relatively low and price-elastic. The government, however, thinks that it will not need to subsidise the production of electric cars to achieve its target.

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. [2] Harmful effects (1) on third parties (1). Social costs – private costs (1).
2. [4] Logical explanation which might include: Availability of substitutes (1) close substitutes will be likely to result in demand being price-elastic (1). Whether the product is a luxury or necessity (1) luxuries tend to have elastic demand/necessities tend to have inelastic demand (1). Proportion of income spent on the production (1) demand tends to be inelastic if a small proportion is spent on it/ elastic if a high proportion is spent on it (1) Whether the purchase can be postponed (1) if so, demand is likely to be elastic, if not inelastic. Addictiveness of the product (1) addictive products are likely to have inelastic demand (1). Time period (1) demand tends to become elastic over time (1).
3. [6] Up to 4 marks for the diagram: Axes correctly labelled - price and quantity or p and q (1). Demand and supply curves correctly labelled (1). Supply curve shifted to the right (1). Equilibriums - shown by lines P1 and P2 / Q1 and Q2 or equilibrium points E1 and E2 (1). Up to 2 marks for coherent analysis which might include: A subsidy encourages firms to produce more/equivalent to a reduction in costs (1). Price will fall/quantity traded will rise (1).
4. [8] Why cars should be produced by the private sector: • may be a more competitive market and so prices may be lower • profit incentive may raise efficiency and encourage firms to produce what consumers want and keep costs low • may be higher investment which could improve quality and lower costs • may be easier to raise finance as can sell shares • may be forced to be efficient as may not be supported by the government Why cars should be produced by the public sector: • a private sector monopoly may abuse market power and may restrict supply and raise price • public sector firm to charge low prices/prices below cost for cheap cars to help the poor • public sector firms may take into account external costs and benefits/welfare • the state may have more financial resources and be able to invest on a larger scale.