Economics · Oct / Nov 2023 · Paper 21 · Question 3
0455
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Digital money, such as cryptocurrencies, is increasingly being used. Digital money transactions take place on electronic devices such as computers and smartphones. However, there can be market failure due to external costs arising from high energy usage of non‑renewable sources. One way of reducing external costs is to tax the product.
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3(a)[2]
Identify two types of tax. Direct (1)
Indirect (1)
Progressive (1)
Proportional (1)
Regressive (1)
2 Accept any relevant examples of taxes e.g. income tax, tariffs. Accept, but do not expect, specific and ad valorem taxes.
3(b)[4]
Explain two functions of money. Logical explanation which might include:
a medium of exchange (1)to buy goods and services / to trade (1)
a measure of value / unit of account (1)to measure how much a product is worth (1)
a store of value (1)to allow people to save (1)
a method of deferred payment (1)for borrowing and lending (1). 4 One mark each for each of two functions identified and one mark each for each of two explanations.
3(c)[6]
Analyse the consequences of market failure. Coherent analysis which might include:
market failure exists when the production or consumption of goods and services in a market is not efficient (1)overconsumption of demerit goods (1)and goods with external costs (1)
leading to an overall misallocation of resources (1)
e.g. overconsumption of cigarettes, fossil fuels (1)
underconsumption of merit goods (1)and goods with external benefits (1)
e.g. education, healthcare (1)
non-supply (1)of public goods (1)
e.g. defence (1)
abuse of monopoly power (1)resulting in higher prices (1)
reducing affordability / choice (1)
factor immobility (1)resulting in shortages and surpluses (1)
causing unemployment (1)
resulting in lower income / poverty (1). 6 i.e. labour market failure.
3(d)[8]
Discuss whether or not a tax on a product can reduce external costs. In assessing each answer, use the table opposite. Why it might:
tax will increase price, reducing the quantity demandedif demand for the product is elastic, quantity demanded will be responsive to the price increase, quantity demanded will change significantlytax will increase the cost of production, therefore decreasing supplytax will decrease the profits of firmstax will provide governments additional revenue to help with subsidising less-polluting products. Why it might not:tax is insignificant compared to the final price of the producttax avoidance / evasion / unofficial or illegal marketsif demand for the product is inelastic, quantity demanded will be unresponsive to the price increase, quantity demanded will not change significantly, e.g. addictive products. 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 Guidance Level Description 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.
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