Paper 3 question on indirect taxation (HL only)

Introduction

This page contains a paper three type question on demand and supply and the impact of indirect taxation of market equilibrium.  A reminder that under the syllabus P3 questions are now graded out of thirty and contain quantitative and qualitative questions.  

Lesson time: 50 minutes

Lesson objectives:

Paper three type question practise.

Paper 3 question on Carthy wine (HL only)

This question is worth [30 marks]. This paper is based on the new syllabus and contains a policy response question.

1. (a) The village shop in Carthy has the following weekly demand and supply functions for 1 Ltr bottles of wine:

Price ($)

Quantity Demanded

Quantity supplied

4

1,200

600

6

1,100

800

8

1,000

1,000

10

900

1,200

12

800

1,400

14

700

1,600

i. Calculate the price which would result in a demand of 500 bottles per week. [2 marks]

$18 

ii. Calculate PES and PED for wine in the store between 8$ and 10$. [4 marks]

PES = 20% / 25% = 0.8 and PED = 10% / 25% = 0.25

(b) On the graph paper provided, draw the demand and supply curves using a price range from $2 to $14 per bottle.  [2 marks]

(c) Following a negative report from the government’s health department the government imposes a flat rate tax of $5 per litre bottle.

On the graph, plot the new supply curve to illustrate the effect of the indirect tax, showing the burden of tax paid by both the consumer and producer, as well as the welfare loss. [4 marks]

(d)  Suggest 2 reasons why the government may have chosen to add a flat rate tax rather than an ad valorem tax to the production of wine.  [4 marks]

The primary benefit of a flat tax rate is its simplicity; all products are taxed at the same rate.

Another benefit could that unlike flat rate taxes an ad valorem tax does not need to be updated each year as it will automatically update each year.  This also means that the amount of tax revenue collected by governments will rise during a period of economic growth / inflation.

(e) Explain the significance of price elasticity of demand theory in any government decision to reduce consumption of certain goods and services. [4 marks] 

Level

0 The work does not reach a standard described by the descriptors below. 0

1 The written response is limited. 1–2

For an explanation that the price elasticity of demand for any product will influences the number of customers who will reduce their consumption following a rise in the price of the good or service.

2 The written response is accurate. 3–4

For an explanation that if the PED for a product is lower than the PES then the resulting fall in quantity demanded will be proportionately lower than the increase in price, reducing the effectiveness of any tax placed on a good or service. Taxing such goods, however, will generate significant revenues for the government which can be used to finance the provisions of public services.

Alternatively responses may use the example of PED elastic goods and services which are more responsive to changes in price and therefore more likely to result in a significant change in consumption.

(f) Using your knowledge of economics suggest two alternative policies available to the government that might be successful in reducing alcohol consumption.  [10 marks]

Possible policies may include (but are not restricted to):

  • legislation e.g. raising the minimum legal drinking age
  • restricting the sales of alcoholic beverages
  • imposing a minimum price for alcohol
  • conducting marketing campaigns that promote sensible alcohol consumption.

Responses in section (f) should be graded according to the following mark bands:

Maximum mark 10

Level

Descriptor

Mark

0

The response is below the minimum standards described below.

0

1

An appropriate policy has been identified

Little economic theory is included and superficially applied.

The response contains no evidence of synthesis or evaluation

The response contains significant errors.

1 - 2

2

The response identifies an appropriate policy

Some relevant economic theory is included and one policy likely to lead to economic growth is explained

Some relevant economic terms are included

The response contains evidence of superficial synthesis or evaluation.

3 - 4

3

The response identifies and explains an appropriate policy

The response demonstrates a clear understanding of how the recommended policy might contribute to economic growth

Some relevant economic terms are used appropriately

The response contains evidence of appropriate synthesis or evaluation but lacks balance

There are minimal errors included in the response.

5 - 6

4

The response identifies and explains fully a suitable policy

Relevant economic theory is included, with the policy likely to lead to economic growth comprehensively explained and skilfully applied

The response contains evidence of appropriate synthesis or evaluation that is mostly balanced, for example a recognition that due to the relatively low PED of alcoholic drinks, policies aimed at raising the price of alcohol may be ineffective

Any errors are minor and do not detract from the overall quality of the response.

7 - 8

5

The response identifies and fully explains an appropriate policy

The response uses relevant economic theory effectively to support the recommendation Relevant economic terms are used appropriately throughout the response

The use of information from the text/data is appropriate, relevant and supports the analysis/evaluation effectively

The response contains evidence of effective and balanced synthesis or evaluation.

9 - 10

This question paper is available as a PDF file at: P3 question on tax

The mark scheme is available as a PDF file at: Carthy mark scheme

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