Economics · Oct / Nov 2020 · Paper 22 · Question 3

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The population of Hungary is the most obese in Europe. Hungarians eat fewer vegetables than most Europeans and more food types that may be considered to be demerit goods. In 2017, the Hungarian government introduced a tax on unhealthy food, known as the chips tax. The tax has had some success in moving demand to healthier foods. Some economists suggest that governments should use price controls as well as taxes to influence the food market.

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3(a)[2]
Define demerit good. A product which is more harmful to consumers than they realise / the government considers is more harmful (2). It is over-consumed / overproduced (1)
it creates external costs (1). A product that is harmful (1).
3(b)[4]
Explain the difference between an extension in demand and an increase in demand. Logical explanation which might include: An extension in demand is caused by a change in the price of the product (1)
rise in quantity demanded (1)
it is shown by a movement along the demand curve (1). An increase in demand is caused by a change in an influence on demand other than a change in the price of the product / means more is demanded at each and every price (1)
example of a cause of an increase in demand e.g. rise in incomes (1)
it is shown by a shift in the demand curve (1). 4 Up to 2 marks for diagram(s) showing the difference. Maximum of 2 marks for extension in demand and a maximum of 2 marks for an increase in demand.
3(c)[6]
Analyse the effects on income distribution and tax revenue of an increase in indirect taxes. Coherent analysis which might include: Income is likely to become less evenly distributed (1)
indirect taxes are usually regressive (1)
taking a larger percentage of income of the poor (1). Tax revenue likely to rise (1)
will rise more on goods with inelastic demand (1)
e.g. food (1)
may fall if demand falls significantly (1). If any extra tax revenue is spent on lower income groups (1)
e.g. welfare benefits (1)
the effect on income distribution is less certain / income may be more evenly distributed (1). Tax evasion and avoidance is less common in the case of indirect taxes (1)
though there may be informal markets (1).
3(d)[8]
Discuss whether or not a government should impose a maximum price on food. In assessing each answer, use the table opposite. Why it should:
may influence price and quantity purchased
if set below the equilibrium level, will reduce price
some people will be able to purchase food at a lower price
may reduce poverty – food is a basic necessity
may stop monopoly food producers setting high prices. Why it should not:
if set above the equilibrium, it will have no effect
it set below the equilibrium, will result in shortages
some additional measure will have to be introduced to ration out food
some foods may be harmful to health and their consumption should be discouraged
may result in firms making losses and so reducing quality of food or employment of workers
free market forces may result in a more efficient allocation of resources. Level Descriptors Mark 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 or 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. Guidance Example of L2 answer: Government should impose a maximum price on foods. Price is likely to fall and this will aid those in poverty. They will be able to buy basic necessities easier and allow them to spend on other things. Governments should not impose a maximum price on food as it can cause businesses to make a loss and need government subsidisation. Principal Examiner comment: Reasonable on one side and limited on the other side. The effect on price, quantity demanded and quantity supplied may be shown on a diagram.

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