Economics · May / June 2016 · Paper 22 · Question 2

2281

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The question as text

In 2013 the Mexican Government was considering imposing a sales tax of one peso per litre on the price of fizzy drinks. The Government wanted to discourage people from consuming too many fizzy drinks – 40% more fizzy drinks per person are consumed than in the United States of America. A number of multinational fizzy drinks companies have threatened to leave the country if taxes are increased.

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2(a)[2]
Giving an example, define ‘a sales tax’. [2]
A tax on spending/an indirect tax/ a tax on goods and services/ a tax on consumers (1)
e.g. VAT, GST, a tax on a specific product e.g. petrol (1).
2(b)[4]
Explain the difference between private costs and social costs. [4]
Up to 2 marks for private costs:
Private costs are costs borne by those consuming the product (1)
producing the product (1)
example of such a cost (1)
Social costs – external costs (1). Up to 2 marks for social costs:
Social costs are private costs plus external costs (2)
total costs to society/total cost (1)
2(c)[6]
Using a demand and supply diagram, analyse the effect of imposing a tax on fizzy drinks. [6]
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 left (1)
correct equilibriums identified either by lines drawn to both axes or equilibrium prices clearly identified e.g. E and E1 (1)
the tax per unit shown (1). Up to 2 marks for written comments:
an indirect tax is an extra cost on firms (1)
a decrease in supply will raise the price of fizzy drinks (1). D D S S1 S1 S P Q Q1 P1 O price quantity
2(d)[8]
Discuss whether a country’s economy would be harmed if multinational companies moved out. [8]
Up to 5 marks for why it might:
Employment may fall (1)
and output/income/GDP/economic growth may decline (1).
The current account position may worsen (1)
as the MNC may have contributed to exports (1).
Wages may fall (1)
if the MNC was paying above wages paid by domestic employers (1).
Government tax revenues may fall (1)
reducing its ability to spend on e.g. education (1).
Less variety of products may be available to consumers (1).
Discourage other MNCs setting up (1). Up to 5 marks for why it might not:
The MNC may have been depleting the country’s resources (1)
reducing its ability to grow in the future (1).
More domestic firms may set up/expand (1)
to meet the demand that had previously been supplied by the MNC (1).
The MNC have been sending profits home (1)
and so tax revenue may not fall significantly (1).
The MNC may have been putting pressure on the government to follow policies not in the country’s interest (1).
The MNC may have not have created much employment (1)
keeping top jobs for workers from own country (1).
MNCs may have been subsidised (1)
can use tax revenue for other purposes (1)

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