CAIE A-Level Economics 3 Government Microeconomic Intervention Question Bank

A government wishes to ensure adequate flood defences are provided in its coastal areas.
Which action is most likely to be undertaken only by the government?

The air transport market in India

Over the past 20 years or so, global air transport markets have become more competitive. This is especially the case in the United States (US), the European Union (EU) and, most recently, in Asia. Governments have sought to provide opportunities for new firms, invariably 'low-cost carriers' (budget airlines), to open new routes and compete with established airline operators, often in domestic markets.

The situation in India is typical but only to a certain extent. The country has two established airline operators with extensive international as well as domestic service networks. They now face increasing competition from a number of low-cost carriers who operate services within India.

Consumers have benefitted from these changes. As well as opening new routes, the increased competition has seen all airline operators offering cheaper prices. At the same time, the established airline operators have had to reduce costs to remain competitive. Also, demand has increased for leisure travel as well as business travel.

The Indian air transport market still has some restrictions imposed by the Indian government. An important restriction is the ' 5 / 20 rule'. This stipulates that Indian-owned airline operators must have a minimum number of aircraft (20) and have been in business for a minimum of 5 years, before they can operate international services.

Opponents to the 5/20 rule argue that it seriously discriminates against Indian airline operators by not allowing them to compete in a free market. They further claim that applying the rule is having a negative impact on the Indian economy. Foreign-owned airline operators, which have a 70% share of international passenger traffic to and from India, do not have to meet the 5/20 rule.

Source: Times of India, 27 February 2016 and The Mint, 25 February 2016

In February 2016, the Indian government increased the tax on aviation fuel from 8 % to 14 %.

Use a diagram to analyse the effects of this increase on the market for aviation fuel. Explain what would determine the incidence of this tax between the aviation fuel producers and the airline operators who buy the fuel.

What would be included in a measure of wealth?

Are doughnuts demerit goods?

Consumers love to eat doughnuts. In 2019, 10 billion of these deep-fried sugar-coated products were consumed in the United States (US). Fig. 1.1 shows that the US market increased steadily from 2011 to 2019. Doughnuts are widely available throughout the US. There are specialist shops selling their branded products almost everywhere; local coffee shops invariably sell 'hole in one' doughnuts as a popular breakfast snack to tempt consumers on their way to work. The growing number of shops selling doughnuts has been an important reason behind overall market growth.

The COVID-19 pandemic has had a varying impact on the US doughnut market. Despite having less income, many consumers have continued to buy small luxuries such as doughnuts which remain affordable and can provide some short-term relief from the stresses of the pandemic. Overall, sales of doughnuts fell in 2020 and are forecast to remain below their 2019 peak into 2021. Reasons for this fall in demand are that consumers are making fewer shopping trips and in cities, more people are working from home and therefore not buying their daily coffee and doughnut snack.

In the United Kingdom (UK), more so than in the US, there are growing concerns about the increase in sugar consumption amongst children. This increase comes from soft drinks, chocolate biscuits and sweets (candy) as well as from jam-filled doughnuts, all of which are widely available in supermarkets and local convenience stores. In 2021, it was estimated that a third of teenagers and two thirds of adults in the UK were overweight. This has increased the pressure on the UK government to end online advertising of a range of products including doughnuts. It has been estimated that viewing one minute of advertising for products like doughnuts leads to a child consuming an additional 14.2 calories. Moreover, a ban on advertising sugary foods would result in children consuming the equivalent of 62 million fewer doughnuts a year in the UK.

Assess the likely effects on UK consumers and the UK government of a ban on online adverts for sugary foods.