Economics · Oct / Nov 2021 · Paper 21 · Question 2

0455

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In 2019, the government of France proposed a 3% tax on the revenue of large firms that advertise and sell products online. This tax may lead to a redistribution of income. There are concerns that this tax may also lead to a reduction in France’s export of services as firms affected may leave France. However, the government hopes that supply-side policy measures will encourage such firms to stay in France.

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2(a)[2]
Define redistribution of income.
Transfer of income from some individuals (1) to others (1).
Tax taken from the rich (1) is spent on the poor (1).
Progressive / regressive taxation (1)
2(b)[4]
Explain two reasons why governments redistribute income. Logical explanation which might include:
Reduce poverty (1) higher purchasing power (1) afford basic necessities (1) e.g. healthcare / education / proper housing (1).
Reduction in poverty reduces social problems / waste of resources (1) as poverty may create e.g. poor health / reduce productivity (1).
To promote equity / greater equality of income (1) reducing the gap between rich and poor (1)
To increase incentives if redistribute from poor to rich (1) may increase effort / enterprise (1)
2(c)[6]
Analyse the economic effects of a reduction in a country’s export of services.
Coherent analysis which might include:
As export of services decreases, total exports will decrease (1) total demand decreases (1) less inflation (1) lower economic growth / lower GDP (1).
Less export of services, less demand for service workers (1) less job opportunities / higher unemployment (1). Higher current account deficit / less current account surplus (1) reduces ability to buy imports (1) lower standards of living (1).
2(d)[8]
Discuss whether or not supply-side policy measures encourage firms to operate in an economy.
In assessing each answer, use the table opposite.
Why they might encourage firms:
Makes it easier to hire and fire workers might lower costs of employing workers to firms.
Better skills could increase productivity.
Encouraging more workers into the labour market could increase the supply of workers.
Reduction in trade union power can reduce cost / make it easier to start a business.
Lower direct taxes will encourage more firms to start up.
Deregulation will reduce barriers to operate in an economy.
Privatisation will allow private firms to invest in the economy.
Subsidies will give firms an incentive to stay in the country. Why they might not encourage firms:
Less job security could decrease productivity, increasing cost of production for firms.
Costs of hiring workers might still be lower elsewhere.
Supply side measures (e.g. labour market reforms) may take a long time before the effects on the economy are apparent
Lower direct taxes may reduce the government’s ability to spend on education / training which will increase firms’ cost of production
Deregulation may enable other firms to engage in unfair practices
There may be a fear that subsidies might be withdrawn and if there is a fall in demand MNCs will not want to stay in the country anyway
Other governments may be giving larger subsidies

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