IB Economics SL 2.7 Role of Government in Microeconomics Question Bank

Analyse why governments intervene in markets and evaluate how taxes, subsidies, controls and regulation affect stakeholders and outcomes.

Exam points

Use intervention diagrams to explain price ceilings, floors, taxes and subsidies in a market.
Analyse how intervention changes consumer surplus, producer surplus, government spending, equity and welfare.
Evaluate intervention by weighing efficiency, equity, unintended effects and outcomes for stakeholders.

Covered syllabus points

2.7.1—Reasons for government intervention 2.7.2—Main forms of intervention 2.7.3—Consequences of intervention

[Maximum number: 25]

(a)

Explain why a government might decide to impose an indirect tax on the consumption of cigarettes.

[ 10 ]

(b)

Discuss the possible consequences of the imposition of an indirect tax on cigarettes for the different stakeholders in the market.

[ 15 ]

Answers may include:

- definitions of indirect tax and market

- theory to explain the implications for consumers; for producers; for the government

- diagram to show the application of a tax to illustrate the impacts on different stakeholders

- examples of use of indirect taxes and the impact on stakeholders in practice

- synthesis or evaluation (discuss).

Discussion may include: the advantages and disadvantages as applied to the different stakeholders and more generally in terms of society, for example reduced passive smoking for all as well as reduced consumption for individual consumers.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Assessment Criteria
Part (b) 15 marks

Level 0 (0 marks): The work does not reach a standard described by the descriptors below.

Level 1 (1-5 marks): There is little understanding of the specific demands of the question. Relevant economic terms are not defined. There is very little knowledge of relevant economic theory. There are significant errors.

Level 2 (6-9 marks): There is some understanding of the specific demands of the question. Some relevant economic terms are defined. There is some knowledge of relevant economic theory. There are some errors.

Level 3 (10-12 marks): There is understanding of the specific demands of the question. Relevant economic terms are defined. Relevant economic theory is explained and applied. Where appropriate, diagrams are included and applied. Where appropriate, examples are used. There is an attempt at synthesis or evaluation. There are few errors.

Level 4 (13-15 marks): There is clear understanding of the specific demands of the question. Relevant economic terms are clearly defined. Relevant economic theory is clearly explained and applied. Where appropriate, diagrams are included and applied effectively. Where appropriate, examples are used effectively. There is evidence of appropriate synthesis or evaluation. There are no significant errors.

[Maximum number: 4]

Read the extracts and answer the questions that follow.
Text D - Overview of Cameroon

(1) Cameroon is a country in Central Africa with a population of 25 million. It is rich in natural resources, including oil and mineral ores, and produces a wide range of agricultural products, such as cotton and cocoa. Its economic growth is usually driven by the export of oil. The gross domestic product (GDP) of Cameroon grew by an average of 5.6 % per year between 2013 and 2014 when oil prices were high.

(2) Economic growth slowed and the budget deficit increased sharply between 2014 and 2016, when oil prices fell by 45 %. Oil production is a major part of the formal economy and is an important source of tax revenue for the government of Cameroon. Up to 90 % of the workers in other sectors are employed in the informal economy and hence contribute significantly less to tax revenue. Increased military spending in response to recent conflicts in the western regions of Cameroon further widened the budget deficit.

(3) Since the collapse of oil prices, economic growth has been supported by expansionary fiscal policy, which has become increasingly difficult to sustain. The budget deficit has increased to around 5 % of GDP and caused government (national) debt to rise to 30 % of GDP.

(4) Although there has been some reduction in absolute poverty in Cameroon, the number of people living in relative poverty increased by 12 % to 8.1 million between 2007 and 2014. The funds allocated for poverty reduction often go to subsidies for electricity, food and fuel. This reduces available funding for education and healthcare, which is insufficient in rural areas where poverty is most extreme.

(5) With an abundance of natural resources, Cameroon has the potential to attract foreign direct investment (FDI). However, weak governance and the poor business environment have deterred foreign investors. Local entrepreneurs are also discouraged by the long wait times for obtaining licenses to operate and the difficulties in securing business loans.

(6) Cameroon maintains a fixed exchange rate to the euro, at 1 franc =0.0015 euro. Because of the persistent trade deficit, the franc (Cameroon's currency) is overvalued at this level. Interest rates are kept high to prevent capital flight, which could increase the currency's overvaluation.
Text E - The Growth and Employment Strategy

(1) The Growth and Employment Strategy is a set of policies adopted by the government of Cameroon to encourage diversification and promote efficiency in production. The policies have three broad objectives:
- Create jobs and reduce the size of the informal economy through investment in human capital.
- Increase productivity in agriculture, mining, and selected industries with potential for growth (timber, tourism, and information and communication technologies).
- Encourage private investment and trade through the provision of infrastructure (including roads, ports and clean water supply).

(2) Productivity is low, especially in the primary sector. Cameroon has one million small farms engaged in traditional agriculture, but has a limited number of workers trained in good farming practices and management skills. Unskilled workers often work in the informal economy.

(3) Access to imported fertilizer and lower transportation costs could reduce costs of production significantly. Farms also need to increase productivity to reduce labour costs. The monthly agricultural wage averages 20000 francs but the government has recently increased the minimum wage to 36270 francs. This could lead to an improvement in the economic well-being of workers in the formal economy but could increase unemployment and force some workers to enter the informal economy.

(4) The government remains committed to keeping food prices low in the short term through subsidies. Due to improved farming methods, farmers produced better quality cocoa beans in 2019, allowing them to charge higher prices on the international market. Over time, the increase in productivity should lead to higher incomes, lower prices and higher-quality products.
Text F - Free trade agreements with the European Union (EU) and the United Kingdom (UK)
Cameroon has signed free trade agreements with the EU and the UK, which allow tariff-free access to the EU and the UK markets for products such as bananas, aluminium and processed cocoa products. Tariffs on imports into Cameroon of machinery and equipment, vehicles and fertilizers were also removed. However, tariffs on textiles and strategic agricultural products such as meat products, milk and selected vegetables were maintained.

Table 3: Selected data for Cameroon

* charged by financial institutions on loans

Table 4: Cameroon's main export markets (2019)

Using a demand and supply diagram, explain how government subsidies may help to keep food prices low (Text E, paragraph 4).

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Covered syllabus points

2.7 Role of government in microeconomics question 1

Question (a)

Question (b)

2.7 Role of government in microeconomics question 2