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Economics · Oct / Nov 2025 · Paper 21 · Question 5

0455

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The question as text

Street vendors mostly operate outside of the formal economy to avoid government regulation. However, many are now entering the formal economy. This has led to more government revenue, increased productivity and higher economic growth. Some governments plan to take measures to increase the number of firms in the economy.

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  • 5(a)[2]

    Identify two reasons why workers may choose to work in the formal economy. Two from:

    higher incomes in the formal economy
    may have access to employment protection
    may be covered by a national minimum wage
    may be able to join a trade union
    may be entitled to receive unemployment benefit
    may be entitled to retirement benefits / pensions
    will have a formal income record needed for e.g. bank loans
    formal economy may be regulated by government. 2 Accept any relevant reason. If more than two suggested measures are given, consider the first three.

  • 5(b)[4]

    Explain two effects of economic growth on a country’s population. Logical explanation which might include:

    more goods and services available / greater ability to purchase health care (1)

    higher living standards / life expectancy (1)

    less poverty (1)

    higher employment / more job opportunities (1)

    more income (1)

    more choice (1)

    due to more firms starting up / expanding (1)

    lower inflation (1)

    if due to higher productivity / lower costs / more competition (1)

    higher tax revenue (1)

    allows more government spending on e.g. education / health (1)

    higher prices (1)

    due to increasing total demand (1)

    more pollution / external costs (1)

    due to higher output of manufactured goods (1)

    depletion of non-renewable resources (1)

    reducing future economic growth (1)

    attracts immigrants / deters emigrants (1)

    due to benefits from high living standards e.g. job opportunities (1). 4 One mark each for effects identified and one mark each for explanations. If more than two effects are given, consider the first three.

  • 5(c)[6]

    Analyse how government regulation can reduce market failure. Coherent analysis which might include: market failure occurs when there is an inefficient allocation of resources in a free market (1). laws / rules can be used (1):

    to promote the use of merit goods (1)

    that are under- consumed (1)

    e.g. making it compulsory to wear seat belts in a car (1)

    to reduce the consumption of demerit goods (1)

    that are over-consumed (1)

    e.g. banning smoking in public places (1)

    to ensure minimum standards for goods and services (1)

    e.g. making it compulsory for restaurants to reach certain standards of cleanliness (1)

    can overcome the problem of sellers having more information than buyers (1).

    to prevent abuse of monopoly power (1)

    by imposing maximum prices (1)

    e.g. a limit can be imposed on the price that can be charged by a monopoly water company (1)

    to reduce exploitation of labour (1)

    by imposing minimum wages (1). 6 Only reward answers that refer to laws and regulations, not taxes and subsidies.

  • 5(d)[8]

    Discuss whether or not an increase in the number of firms will benefit an economy. In assessing each answer, use the table opposite. Why it might:

    may increase competition
    higher competition may lower costs and prices and increase quality
    may increase choice
    may reduce monopoly power
    more firms may increase output
    higher output may increase employment and living standards. 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 sided 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 Why it might not:
    firms may be smaller
    may not be able to take advantage of economies of scale
    may be wasteful duplication
    may have lower profits and so invest less, lower innovation. 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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