October 2020: AS Paper 1

Mark scheme

Examiner's comment

Candidates typically performed well on this question, with most able to identify what the key features of a free market economy are. Typically a recognition of the interaction of supply and demand or minimal government intervention were typical responses.

Notes from the mark scheme and report

• prices set by the free interaction of supply and demand, without government intervention

Answer

D

Mark scheme

Notes from the mark scheme and report

• rationing: when there is a shortage the price rises and discourages some consumers from buying (D)
• A is the incentive function, B the signalling function
• C is wrong because a rise in price reduces the shortage

Mark scheme

Examiner's comment

It was important in this question to make the comparison between a free market and a command economy. Confident candidates were able to illustrate a ‘problem’ with the command economy which market forces ‘solved’, and many characteristics were clearly in evidence.

Notes from the mark scheme and report

• one advantage plus development, compared explicitly with a command economy (competition makes firms efficient and responsive
• prices carry information without costly bureaucracy
• less government failure)

Answer

D

Mark scheme

Notes from the mark scheme and report

• a negative YED means demand falls as income rises, so bus travel is an inferior good (D)
• A describes PED
• B is wrong as falling unemployment raises incomes and reduces bus use
• C is about XED

Quantitative skills: QS 8 (make calculations of elasticity and interpret the result)

Mark scheme

Examiner's comment

Though many candidates were able to achieve the mark available here, lack of precision in exploring the concept of total revenue was an obvious issue for many. Typically, we were looking for some link to the data provided, and perhaps manipulation of it to show why firms might try to reduce PED.

Notes from the mark scheme and report

• lower PED means quantity demanded is less responsive, so the firm can raise price and increase total revenue
• a numerical example earns application (e.g. PED -0.1: 10% price rise cuts sales by 1%)
• many were imprecise about total revenue

Quantitative skills: QS 8 (make calculations of elasticity and interpret the result)

Answer

C

Mark scheme

Notes from the mark scheme and report

• subsidy per unit (vertical distance J to L) x quantity Q2 = area P3P1JL (C)
• OP3LQ2 is consumer spending
• the other areas ignore the supply shift or the subsidised quantity

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme

Examiner's comment

This question was a challenge for some. Though loft insulation is mentioned in the question, it was not necessary to discuss it exclusively. Candidates could access the marks by exploring any opportunity cost to government form such a subsidy, as long as it was clearly explained with a relevant example.

Notes from the mark scheme and report

• opportunity cost = next best alternative forgone
• give a specific alternative use of government spending (schools, hospitals)
• analysis e.g. judge the subsidy on efficiency and fairness grounds
• need not be about loft insulation only

Answer

C

Mark scheme

Notes from the mark scheme and report

• tax revenue = tax per unit (H to K) x Q1 = area P3P1HK (C)
• P2P1HJ is the consumers' share and P3P2JK the producers' share of the tax
• OP1HQ1 is total consumer spending

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme

Examiner's comment

It was important that candidates were able to identify why specific taxes as per unit rather than ad valorem, are used in a market. Often products have both VAT and a specific tax levied on them, and it is important to explore why this is the case. As usual, a relevant example is crucial for application.

Notes from the mark scheme and report

• define a specific tax as a fixed amount per unit (not ad valorem)
• give an example (fuel, alcohol, tobacco, air passenger duty, sugar tax)
• develop it: internalise external costs, sin taxes, raise revenue

Mark scheme

Examiner's comment

Strong candidates were able to express clearly what government failure is, in terms of a net welfare loss caused by the said intervention. It is important not to confuse this with a market failure.

Notes from the mark scheme and report

• intervention that results in a net welfare loss
• do not confuse with market failure

Mark scheme

Examiner's comment

Candidates were able to recognise the fact that government support is necessary because of the scale of the project. However, it is crucial to recognise that public transport infrastructure is not a public good per se. Rather, such infrastructure has large positive externalities in consumption, whilst being excludable and rival.

Notes from the mark scheme and report

• positive externalities from people using rail instead of roads, or risk deterring private finance, then develop
• rail infrastructure is not a public good (it is excludable and rival)

Answer

A

Mark scheme

Notes from the mark scheme and report

• a tax on workplace parking raises the cost of driving to work, so demand for rail (a substitute) shifts right (A)
• subsidies and more track shift supply, not demand
• cheaper petrol would reduce rail demand

Quantitative skills: QS 4 (construct and interpret a range of standard graphical forms)

Mark scheme

Examiner's comment

This question required candidates to consider how the price low price elasticity affected demand for university places. The data suggests that students are not particularly price sensitive, though such statistics may different as we consider different socio-economic groups in more detail. Good responses could clearly draw the conclusion that universities had considerable flexibility in their potential to set prices to increase total revenue.

Notes from the mark scheme and report

• PED of -0.5 is inelastic, so universities can raise fees and increase revenue without much fall in applications
• quote £9 250, -0.5, or the 825% rise in fees since £1 000 in 1998 (2 marks)

Quantitative skills: QS 8 (make calculations of elasticity and interpret the result); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

Candidates performed less well on this question, though there were many strong responses that explored whether giving such support to students from low income backgrounds was itself not a waste of scarce resources. Many candidates could also identify that students from low income backgrounds could be dissuaded by the thought of significant debt. To gain high marks some use of a diagram such as the PPF would sharpen the analysis, whilst allowing candidates to showcase their broader economic knowledge.

Notes from the mark scheme and report

• 'these drop-out rates' are from Extract B (9% of disadvantaged students vs under 5% of high-income)
• drop-outs waste scarce resources, economy inside its PPF
• evaluate with rising participation (Extract A), whether support schemes are themselves wasteful, debt as the cause
• report: candidates performed less well here

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

As been discussed earlier, many candidates could explain the private benefit by using the salaries shown in Figure 1, whilst being able to illustrate the third party effect of probable higher tax revenues accruing to graduates as being a benefit to society as a whole.

Notes from the mark scheme and report

• one private benefit (higher earnings, graduate premium £10 000, Figure 1) and one external benefit (extra tax revenue, higher productivity) each quoted from Extract A and developed
• up to 3 marks for each benefit

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme

Examiner's comment

This question was a four-mark calculation based on the manipulation of student loans data. A large majority of candidates were able to complete this successfully, which is a pleasing indicator of the improving numeracy of the cohort each year. There were still errors, nonetheless, where percentage changes were clearly confused.

Notes from the mark scheme and report

• (102 357 - 45 418) / 45 418 x 100 = 125% (accept 125 to 126)
• up to 3 marks for correct working
• some confused the percentage change formula

Quantitative skills: QS 2 (calculate, use and understand percentages, percentage changes and percentage point changes); QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This fifteen-mark question was a strong test of a candidate’s ability to link textbook knowledge of supply and demand factors to a sector of the economy where market forces are unusual. The question asks candidates to discuss the benefits to universities of such an opportunity and many candidates were able to confidently explore to chance to increase the quality of facilities and to pay higher salaries to those sectors where demand is increasing. There was a recognition that subjects providing a greater future return to graduates should, perhaps, be charged fees more appropriate to this potential, whilst less lucrative degrees may be priced more appropriately. Throughout, however, there was a recognition amongst candidates that students from less well off families may struggle to gain access to the more expensive degree courses, something that could widen the gap between the wealthy and the less wealthy.

Notes from the mark scheme and report

• fees reflecting costs and graduate returns (top five subjects earn well above non-graduates) give price signals and allocate resources, fund better courses and staff
• evaluate with access for poorer students, wider inequality, value of creative arts degrees beyond money

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question was reasonably popular and allowed candidates to consider the merits of a free market approach where state intervention is more usually the norm. the free market approach to education is explored throughout the data, and the use of tuition fees is already a move towards that outcome. Greater reliance of differential course fees is another example. Candidates did not have to consider the ‘market’ for tertiary education and could have explored schools just as easily. It is important to note that a diagram showing the price mechanism at work in this sector raises a series of questions. Schools, as we know from Finland and from the Netherlands, do not have to be exclusively state run or privately run. It is crucial, however, that candidates confidently explore the problems of an overreliance on the market in the face of significant positive externalities in consumption. The question of equality of access is also highly significant. The UK’s large independent sector is a good example in this regard.

Notes from the mark scheme and report

• price mechanism, choice, efficiency and fees by value of degree, US model
• can discuss schools as well as universities
• evaluate with positive externalities in consumption, under-consumption, unequal access and the European low-fee model

Mark scheme, including the levels grid and indicative content

Examiner's comment

This was a highly accessible question considering the role of government intervention in education. Nonetheless, perhaps because of its slightly more theoretical premises, it proved to be less popular than 6(f). There are numerous failures alluded to in the extracts, particularly asymmetric information, and inequality. This essay requires a clear exercise of critical analysis and good candidates would be expected to have a developed notion of the positive externalities generated by education and how they may be under-provided in a free market. Good candidates used a positive externalities diagram and used it to intelligently assess why free markets would lead to a sub-optimal allocation of resources in the education sector. This would require government intervention of some kind to correct this market failure. The key concept of government failure could then be used to consider whether governments could actually solve the problem created by the market. Strong candidates could comfortably explore the problems of state education and whether a ‘one size fits all’ approach is appropriate where education is a state monopoly.

Notes from the mark scheme and report

• positive externalities diagram (MSB above MPB, under-consumption at H rather than optimum J)
• state provision, subsidies, information
• evaluate with difficulty of valuing external benefits and government failure (information gaps, unintended consequences, one size fits all)