Economics · May / June 2020 · Paper 22 · Question 2

0455

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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.

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2(a)[2]
Define external costs. Harmful effects (1)
on third parties (1). Social costs – private costs (1).
2(b)[4]
Explain two influences on whether demand for a product is price- elastic or price-inelastic. 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).
2(c)[6]
Analyse, using a demand and supply diagram, how a subsidy given to producers could affect the market for electric cars. 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). O S2 P2 Q2 Q1 P1 S1 D1 price of electric cars quantity of electric cars
2(d)[8]
Discuss whether cars should be produced by the private sector or the public sector. In assessing each answer, use the table below. Level Description A reasoned discussion which accurately examines both sides of the economic argument, making use of economic information and clear and logical analysis to evaluate economic issues and situations. One side of the argument may have more depth than the other but, overall, both sides of the argument are considered and developed. There is thoughtful evaluation of economic concepts, terminology, information and/or data appropriate to the question. The discussion may also point out the possible uncertainties of alternative decisions and outcomes. 6–8 A reasoned discussion which makes use of economic information and clear analysis to evaluate economic issues and situations. The answer may lack some depth and development may be one-sided. There is relevant use of economic concepts, terminology, information and data appropriate to the question. 3–5 There is a simple attempt at using economic definitions and terminology. Some reference may be made to economic theory, with occasional understanding. 1–2 A mark of zero should be awarded for no creditable content. 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.

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