Practise explaining how subsidies shift supply or demand and affect equilibrium, analysing incidence and surplus changes, and evaluating subsidies as policy.
With the help of an example of each, explain the difference between a merit good and a demerit good and consider whether a subsidy given to a merit good will always be effective in increasing its consumption.
Follow the point-based marking guidance at the top of this mark scheme and award:
up to 3 marks for AO1 Knowledge and understanding up to 3 marks for AO2 Analysis up to 2 marks for AO3 Evaluation.
AO1 Knowledge and Understanding (max 3 marks)
A merit good is thought to be desirable but is underprovided / underconsumed due to information failure/a lack of awareness/better than is realised (1) whereas a demerit good is thought to be undesirable but is overprovided / overconsumed due to information failure/a lack of awareness/worse than is realised (1) Third mark to be awarded for valid examples of both a merit and a demerit good. (1)
AO2 Analysis (max 3 marks)
- Points to consider:
- A subsidy may encourage poorer households to consume more merit goods as the reason for underconsumption may be unaffordability as it reduces the price of merit goods. (1)
- However, quantity demanded may be price inelastic meaning it is less responsive to price changes so quantity demanded will be less responsive to the change in price/the rise in quantity demanded would be less than the decrease in price. (1)
- The problem of information failure persists meaning that consumers remain unaware of the benefits and therefore do not increase consumption, regardless of the fall in price. (1)
AO3 Evaluation (max 2 marks)
- For a balanced evaluation of whether a subsidy will always be effective with 1 mark reserved for a justified conclusion.
Please use a text box to show the mark split e.g., 2,2,1
AO1 Knowledge and understanding
AO2 Analysis
AO3 Evaluation