2025 OCR A-Level Economics - H460 Practice Paper with Answers

A price floor is a government-imposed minimum price set by law, below which a good may not legally be sold (1 mark, knowledge). In the extract the minimum price of 1.20 per litre is above the 0.90 equilibrium price, so it is binding; quantity supplied exceeds quantity demanded, which is why unsold stock builds up in warehouses (1 mark, application).

1 mark knowledge: a legally enforced minimum price / price below which the good cannot be sold (accept 'price set above the equilibrium'). 1 mark application, one from: the 1.20 per litre minimum on soft drinks; set above the 0.90 market price so it is binding; causes excess supply / unsold stockpiles / falling sales volumes. Application must use the extract; a generic example with no reference to the extract scores 0 for application. Do not credit a definition of a maximum price. BOD for 'minimum price' used without elaboration for the knowledge mark if the application is correct.

Asymmetric information is a situation where one party to a transaction (buyer or seller) has more or better information than the other (1 mark, knowledge). In the extract, sellers know each scooter's service history and battery condition whereas buyers see only the exterior and price, so buyers may overpay or face an unexpected 300 battery replacement (1 mark, application).

1 mark knowledge: one party in a transaction has more/better information than the other (accept 'unequal information'; reject 'no information' or 'imperfect information' alone). 1 mark application, one from: sellers know service history/battery condition but buyers do not; buyers can only see the exterior and asking price; buyers overpay; buyers face a 300 battery replacement cost. Application must be linked to the extract. Accept answers which state the seller has the information advantage. BOD if the definition is implied by a correct, well-explained application.

Percentage change = (new price - old price) / old price x 100.
\( \frac{1.45 - 1.25}{1.25} \times 100 = \frac{0.20}{1.25} \times 100 = 16\% \)
The average retail price rose by 16%.

Award 2 marks for the correct answer of 16% (accept +16% or an increase of 16%; accept 0.16 if clearly identified as a proportion/percentage change).
Award 1 mark for correct working (e.g. 0.20 / 1.25 x 100, or (1.45 - 1.25) / 1.25) but an incorrect final answer.
Award 1 mark only if the % unit or the word 'increase' is missing from an otherwise correct numerical answer, as appropriate to the context.
Do not award marks for -16%, or for 13.8% (calculated using the new price as the base): 1 mark for the method only if the working shows 0.20 as the change.
AO1/AO2 - quantitative skills: 2 marks.

Diagram: price (£) on the vertical axis and quantity of cups (millions per week) on the horizontal axis. Draw downward-sloping demand (D = MPB = MSB) and upward-sloping supply (S = MPC). Draw MSC above MPC (the external disposal cost). Equilibrium is at P1, Q1 where MPC meets D; the socially optimal output Qs is where MSC meets MSB, to the left of Q1. Show the charge as a parallel upward (leftward) shift of supply from S1 to S2 with a vertical gap of 40p, giving a new equilibrium at P2, Q2, where P2 is higher than P1 but by less than 40p, and Q2 is lower than Q1.

Explanation: Cafés now face a higher cost per cup, so at each price they will supply fewer cups and supply decreases. Price rises and quantity demanded contracts along the demand curve to Q2. Because the cost of disposal is a negative externality, the market at Q1 overproduces: marginal social cost is above marginal social benefit. The charge internalises part of the external cost, so output falls towards the social optimum Qs and the welfare loss (the triangle between MSC and MSB from Qs to Q1) shrinks. Cafés and customers share the burden of the charge according to the elasticity of demand: the more inelastic demand is, the more of the 40p is passed on to consumers.

Total 4 marks: 2 marks diagram, 2 marks explanation.

Diagram (2 marks):
- 1 mark: correctly labelled axes, with downward-sloping demand and upward-sloping supply showing the original equilibrium (P1, Q1).
- 1 mark: supply curve shifted left/up (parallel, by the size of the charge) and labelled S2 with a new equilibrium at a higher price and lower quantity (P2, Q2). Accept MSC curve shown with Qs as an optional addition. Do not award the second mark if the shift is to the right or the quantity does not fall.

Explanation (2 marks):
- 1 mark: the charge raises cafés' costs per cup, so supply decreases, price rises and quantity falls / contracts (application to cups and the 40p).
- 1 mark: link to the externality: output falls towards the socially optimal level / external disposal cost is internalised / welfare loss reduced. Accept the price rising by less than 40p because the cost is shared between cafés and consumers (BOD).

Accept a tax drawn as a vertical shift of the MPC curve to MSC if clearly labelled. Reject answers with no reference to the stimulus context for the application mark. Evaluation is not required.

Market failure: disposable cups create a negative externality in production/consumption (litter and landfill costs of about 20p per cup, lines 3-5). Marginal social cost exceeds marginal private cost, so the market overproduces and there is a welfare loss. A diagram showing MSC above MPC, with a tax equal to the marginal external cost shifting the supply curve (MPC + tax) to the socially optimal output Q*, is credited.

Analysis (for the levy): The levy raises the cost of selling each cup. Table 1 shows disposable cups sold falling from 400 to 340 thousand per week, a fall of 15% (60/400 x 100), and reusable cup share rising from 6% to 17%. The price rose by 20p (280 to 300), about 7.1%, so the levy is only partly passed on, meaning that part of it is absorbed by cafés (lines 9-10). The levy of 25p exceeds the estimated 20p external cost, so the tax internalises the externality. Revenue funds recycling (lines 1-2), which may reduce future clean-up costs.

Evaluation (against / limits): (1) The levy is larger than the 20p external cost, so may overshoot and cause government failure (output below the social optimum). (2) Demand may be inelastic for regular commuters (lines 6-7), so the effect on their behaviour may be small; the 15% fall in cups is a mix of responses, including switching to reusable cups, and cannot all be attributed to price. (3) Incidence and burden: independents fall from 120 to 111 while chains rise from 85 to 86, so small firms bear a heavier burden, threatening competition and jobs. (4) Leakage: purchases in neighbouring towns (lines 13-14) mean that cups are still used, so the externality is only moved. (5) Monitoring and enforcement are difficult (lines 11-13). (6) Only twelve months of data; long-run habit change unknown. Alternatives: ban, subsidy on reusable cups, information campaigns.

Judgement: The levy is reasonably effective in cutting disposable cup use, as shown by the data, but its effectiveness is limited by leakage, the distribution of the burden, and uncertainty about the optimal level of the levy. Credit any supported judgement.

8 marks, AO1 2, AO2 2, AO3 2, AO4 2 (approx.; quantitative skills credited within AO2/AO4). Point-marked then levelled. The side of the argument presented first is credited as analysis and the other side as evaluation.

Level 3 (6-8 marks): Strong knowledge of negative externality, MSC > MPC and the use of a per-unit tax to internalise it. Strong application of data from Table 1 and line references (e.g. 15% fall in cups, reusable share 6% to 17%, price rise of 20p against a 25p levy, independents 120 to 111). Good/strong analysis as a coherent chain of reasoning. Evaluation is well supported by evidence and leads to a justified judgement. Top mark: balanced, consistent, judgement addresses 'effective'. Middle: one strand weaker. Bottom: judgement only partly supported.

Level 2 (3-5 marks): Reasonable knowledge and application, some use of the stimulus; analysis may be incomplete or lack a link back to the question; evaluation is reasonable but limited or unsupported; judgement stated but not developed.

Level 1 (1-2 marks): Limited knowledge, generic points with little or no use of the stimulus; assertion without development; no judgement.

Level 0: No creditable response.

Analysis might include: negative externality of litter and landfill; levy of 25p versus 20p external cost; internalisation of the externality and shift of the supply curve; reduced quantity of cups; revenue for recycling; price elasticity of demand; diagram (up to 2 marks within the level if appropriate).

Evaluation might include: elasticity for regular customers; levy above external cost (overshoot); burden on small independents versus chains; leakage to neighbouring towns; monitoring and pass-through difficulties; short time period; alternatives (ban, subsidies, information provision); government failure through imperfect information on the true external cost.

Judgements might include: the levy is partly effective but depends on elasticity, enforcement and level of levy.

Accept: BOD for calculation slips if the method is shown; own figure rule applies to calculated percentages (cups -15%; price +7.1%; PED about -2.1 using cups). Do not credit answers that use no stimulus data above Level 1. Reject: confusing a levy with a subsidy.

Analysis (charge works): Disposable cups impose a negative externality in consumption/production of waste: litter and landfill costs fall on the council and residents, so marginal social cost exceeds marginal private cost and the market overproduces cups. A 25p per-cup charge raises the private cost of using a disposable cup (average drink price up from £2.80 to £2.95, i.e. about 5.4%), shifting the private cost curve toward the social cost curve (diagram: MPC shifts up towards MSC, quantity falls from Q1 towards the socially optimal Qs, welfare loss triangle shrinks). Fig. 1 shows cups used down 9 million, a 30% fall; reusable use up from 4% to 19%; litter index down 18%; council spending down £0.3m from £1.2m (25%). Revenue is ring-fenced for street cleaning, a further benefit (lines 10).

Evaluation: (1) Magnitude/elasticity: a 30% fall in cups against a 5.4% rise in average drink price suggests demand for disposable cups is relatively elastic, since reusable cups are a close substitute; but 21 million cups are still used and litter has only fallen 18%, so the externality is reduced not eliminated. The 25p may be too low to equal the true external cost: £0.9m over 21m cups is about 4p per cup of residual council cost, and the original £1.2m over 30m cups was 4p per cup, so 25p is far above the measured council cost, implying possible overcorrection, although wider environmental costs are hard to value. (2) Equity: regressive (lines 12-14), lower-income workers pay a larger share of income. (3) Costs and unintended consequences: small kiosks lose up to 15% of sales and bear compliance costs (lines 11-12); cross-border leakage (lines 18-19) reduces effectiveness; possible government failure from poor information about the correct charge. (4) Alternatives: a ban gives certainty of quantity reduction but removes consumer choice and raises costs to sellers, and offers no revenue; a deposit scheme gives a stronger incentive to return cups and reduces litter, but needs national coordination and has administration costs; information provision/regulation alone would be weaker. (5) Time: in the short run habits are slow to change; in the long run more reusable-cup use could lower the elasticity of the response or raise it as infrastructure improves. Only one year of data is given.

Judgement: The charge is an effective, market-based and low-cost intervention that has clearly cut cup use and council costs, and it is probably more effective than information provision. However, because of equity, kiosk and leakage problems, and because a deposit scheme or national policy could cut litter further, it is not clearly the 'most' effective; its success depends on whether the objective is quantity reduction, revenue or fairness.

12 marks, AO1 x2, AO2 x3, AO3 x3, AO4 x4. Extended response quality assessed. The side of the argument presented first is credited as analysis and the other side as evaluation.

Level 4 (10-12 marks): Strong knowledge of externalities and the use of a per-unit charge/tax (AO1). Strong application using several pieces of evidence from both the article and Fig. 1, including some quantitative use (AO2). Strong, logical analysis of how the charge shifts private costs toward social cost and reduces cups used (AO3). Strong evaluation of effectiveness against alternatives, with a clear supported judgement on 'most effective' (AO4). Top mark if consistently strong; 10 if only partly sustained.
Level 3 (7-9 marks): Good knowledge, good application with some evidence from both sources, good analysis, good evaluation with a reasoned judgement that may be less well supported.
Level 2 (4-6 marks): Reasonable knowledge and application, reasonable chain of analysis, limited or one-sided evaluation, weak or unsupported judgement.
Level 1 (1-3 marks): Limited knowledge, generic with little use of the stimulus, limited analysis, little or no evaluation.
Level 0: 0 marks, no creditworthy response.

Analysis might include: negative externalities, MPC below MSC, market overproduction, charge raising MPC, fall in quantity, substitution to reusable cups, use of revenue; an accurate diagram may be credited as support (BOD for unlabelled axes if the intent is clear).
Application/quantitative evidence: cups down 30% (30m to 21m, accept 9 million); reusable share up 15 percentage points; price up £0.15 (about 5.4%); litter index down 18%; spending down £0.3m (25%); lines 8-10, 10-12, 12-14, 18-19. Own figure rule applies to calculations; calculations are not compulsory.
Evaluation might include: size of price change and elasticity; charge may be too low or too high relative to the external cost; regressivity; harm to small businesses and compliance costs; leakage to neighbouring towns; government failure and information problems; alternatives (ban, deposit scheme, information provision) compared; short run versus long run; only one year of data.
Judgements might include: charge is effective and relatively efficient, but not obviously the most effective; depends on objective and on supporting policies. Accept any supported judgement. Do not credit unsupported assertion or a description of the article without economic analysis.

Introduction: define negative externality (a cost to third parties not reflected in the market price); late-night vans impose noise and air pollution costs on residents, so MSC > MPC and the market over-produces deliveries at Qm, where MPC = MPB, giving allocative inefficiency and a welfare loss.

Diagram: price/costs against quantity of late-night deliveries. Draw MPC (supply), MSC above it (gap = marginal external cost), and MPB = MSB (demand). Mark market equilibrium Pm, Qm and the social optimum Qs where MSC = MSB. Shade the welfare loss triangle. Add the per-trip charge as a vertical shift of MPC to MPC + charge, set equal to the marginal external cost at Qs, internalising the externality; new price paid by firms is Ps and output falls to Qs.

Analysis (side presented first): the charge raises delivery firms' marginal costs, so they cut night trips, switch to daytime or consolidate loads. Output falls to Qs, pollution falls and the welfare loss is eliminated. Revenue can be used to fund noise insulation or cleaner vehicles (the polluter pays principle). Extension: if demand is price inelastic (retailers need rapid restocking) the fall in quantity is smaller, so the charge gives a smaller reduction in pollution but more revenue.

Evaluation (other side): (1) Difficulty in measuring the marginal external cost, so the charge may be set too low (under-correction) or too high (over-correction, lost jobs and higher prices). (2) PED/behavioural response: firms with time-critical contracts will pay and continue, so the externality persists; the charge may be passed on to consumers, and the burden is regressive for small independent firms compared with large chains that can absorb costs. (3) Government failure: administration and enforcement costs (cameras, number plate recognition), possible displacement of vans to adjacent areas or earlier/later hours, lobbying. (4) Alternatives: regulation or a ban on night deliveries is certain but inflexible; tradable permits fix the quantity; subsidies for electric vans address the cause of the pollution, though they cost taxpayers; information campaigns are weak. (5) Short run vs long run: firms may find it hard to adjust in the short run but fleets can be electrified in the long run, which makes the charge more effective over time. (6) Magnitude of the externality: noise is local and varies by neighbourhood, so a flat charge is blunt.

Judgement: the charge is likely to be reasonably effective if set close to the marginal external cost, if substitutes (daytime delivery, cleaner vans) are available, and if enforcement costs are low; it is less effective where demand is inelastic or the externality is hard to value. A supported conclusion should weigh these and may recommend combining it with subsidies for low-emission vehicles.

25 marks: AO1 5 (approx), AO2 5, AO3 8, AO4 7. Quality of extended response is assessed. Levels of response with the standard OCR vocabulary.

Level 4 (21-25): Strong knowledge and understanding of negative externalities, internalisation and a per-trip charge (indirect tax); strong application to late-night vans, pollution, delivery firms, retailers and residents; a correct, fully labelled and well-integrated diagram (MPC, MSC, MPB = MSB, Qm, Qs, welfare loss, charge shift); developed, logical analysis; evaluation is balanced, well supported and in context; a clear, justified judgement that answers 'the extent to which'.
Level 3 (16-20): Good knowledge and application; good diagram with minor errors; good analysis of the effect of the charge; good evaluation of at least two points with some judgement.
Level 2 (9-15): Reasonable knowledge; some application; diagram basic or poorly linked to the written text; analysis or evaluation is partially developed; judgement limited or unsupported.
Level 1 (1-8): Limited knowledge, e.g. definitions or lists; little application; no diagram or an incorrect one; undeveloped chains; no or assertive evaluation.
0: no creditworthy response.

Within a level: top mark for consistent achievement of the descriptors, middle for most, bottom for the minimum. A response with no diagram cannot score above the top of Level 2 (BOD for a correct diagram supplied within the text only if described precisely).

Analysis might include: negative externality in production, MSC > MPC, overproduction, welfare loss; charge shifts MPC up by the marginal external cost; output falls to Qs; the polluter pays principle; revenue recycling; role of PED; effect on costs, prices and profits of firms. The side presented first is credited as analysis and the other side as evaluation.
Evaluation might include: valuation difficulty; PED and substitutes; regressive impact on SMEs; displacement of trips; administration and enforcement costs; government failure; alternatives (regulation, permits, subsidies); time horizon; magnitude and variability of the externality; effects on employment and local retailers.
Judgements might include: effective if well-calibrated, enforced and substitutes are available; best in combination with other measures; conclusion should depend on elasticity and data quality.
Accept: a diagram showing a tax shift on the supply curve to the MSC, or the externality drawn on the demand side if consistent; BOD for equivalent labels (S = MPC, D = MPB). Reject: a diagram with no external cost curve or with a positive externality.

Suggested approach.

Diagram: Draw a market diagram for car journeys into the town centre with MPB = demand, MPC and MSC above MPC (the gap is the marginal external cost: delay to other drivers, pollution, accident risk). The free market equilibrium is at Q1 where MPB = MPC; the socially optimal output is Qs where MSB = MSC. The area between MSC and MSB from Qs to Q1 is the welfare loss. A charge equal to the marginal external cost shifts MPC up to MPC + charge, reducing journeys to Qs and internalising the externality. Revenue is shown as a rectangle.

Analysis (side presented first): The charge raises the private cost of driving, changing incentives so that drivers who value the journey less than the full social cost switch to buses, cycling, car-sharing, off-peak travel or avoid the trip. Congestion and emissions fall, journey times improve, and the revenue can fund buses (a second-round effect: a lower-priced or better substitute, shifting demand away from cars). Allocative efficiency improves as the price reflects marginal social cost.

Evaluation might include: (1) Elasticity - if demand for car travel into the centre is price inelastic (commuters with no alternative, short-run) the quantity falls by little, so the charge mainly raises revenue; more elastic in the long run as people change jobs, homes or habits. (2) Availability and quality of substitutes - the charge is more effective if bus services are improved first. (3) Equity - the charge is regressive; low-income drivers lose a higher proportion of income; exemptions or rebates add admin cost and weaken the incentive. (4) Impact on local businesses and the town centre economy - footfall may fall, shops may lose sales; displacement of traffic to the edge of the zone. (5) Information failure and government failure - the council cannot know the exact marginal external cost, so the charge may be set too high or too low; the cost of cameras and enforcement; political pressure. (6) Alternatives: subsidies to public transport (costly in opportunity cost, may not discourage car use enough), regulation such as low-emission zones or bans (blunt, no revenue, but certain), parking restrictions, investment in cycle lanes, information campaigns and travel planning (weak on their own), and tradable permits. (7) Time horizon and scale - the effectiveness differs between peak and off-peak and between short and long run.

Judgement: A supported conclusion might be that the charge is likely to be the most effective single tool where substitutes exist and the charge is set near the marginal external cost, but that it is most effective as part of a package with improved public transport and protection for low-income groups; where substitutes are poor and demand is inelastic, regulation or investment may do more. Credit any reasoned conclusion that is justified by the factors weighed.

25 marks: AO1 5, AO2 5, AO3 7, AO4 8 (approx.). Use levels of response; the side of the argument presented first is credited as analysis and the other side as evaluation. Within a level, award the top, middle or bottom mark depending on consistency.

Level 5 (21-25): Strong knowledge and understanding of externalities, internalising costs and alternative policies, with an accurate, labelled MPC/MSC diagram used in the answer. Strong application to the traffic and town-centre context. Strong, well-developed chains of analysis. Strong evaluation of the charge against alternatives with a justified, supported judgement.

Level 4 (16-20): Good knowledge; good application; good analysis with a mostly accurate diagram; good evaluation with some judgement, perhaps not fully supported.

Level 3 (11-15): Reasonable knowledge and application; reasonable analysis, diagram may have errors; some evaluation, limited or unsupported judgement.

Level 2 (6-10): Limited knowledge; limited application; limited or one-sided analysis, diagram missing or poor; evaluation is assertion only.

Level 1 (1-5): Isolated points of knowledge, little or no application or analysis. 0 marks: no creditable response.

Knowledge and understanding: negative externality, MPC, MSC, MSB, welfare loss, internalising an externality, congestion charge as an indirect tax; alternatives (subsidy, regulation, information, permits); government failure.

Application: congestion, commuters, buses, shops, pollution, low-income households, use of the scenario information.

Analysis might include: diagram of the charge shifting MPC to the social optimum; changed incentives; reduced congestion and emissions; revenue recycled to improve buses; comparison with subsidy or regulation.

Evaluation might include: PED and substitutes, short run vs long run, regressive effect, effect on businesses, difficulty measuring external cost, enforcement costs, displacement of traffic, political acceptability, use of a package of policies.

Judgements might include: a charge is most effective when substitutes exist and the charge is set near the marginal external cost; combined with transport investment; or alternatives preferable where demand is inelastic or equity concerns dominate. Accept any well-supported judgement, BOD for a diagram that shows a tax on the MPC curve with correct labelling or a shift of supply. Candidates who do not use a diagram cannot access Level 4 or 5.

The question asks only for identification of two supply-side policies announced in lines 6 to 8. Any two of the three measures in the plan are enough: the apprenticeship subsidy (training), extra spending on vocational colleges (education), and the research and development tax allowance (tax incentive for innovation). No explanation is needed.

Award 1 mark for each correct policy identified, up to a maximum of 2 marks. Two from:
- Subsidy paid to firms that take on apprentices (line 6 to 7)
- Increased spending on vocational colleges (line 7)
- Tax allowance allowing firms to deduct part of research and development spending from taxable profit (line 7 to 8)
Accept brief paraphrases, e.g. 'training subsidies', 'more money for colleges', 'tax breaks for R&D'. BOD for minor wording errors if the policy is clearly recognisable.
Do not credit: the call to relax migration limits (line 14 to 15), as this is a business group's request and not an announced government policy; the budget deficit; the rise in vacancies; or a policy repeated in different words (award 1 mark only).
No marks for explanation, but do not penalise it if the policy is identified correctly.
Assessment objectives: AO1 1 mark, AO2 1 mark (stimulus application).

A budget deficit occurs when government spending exceeds tax revenue; a surplus occurs when tax revenue exceeds spending.

2022: \( 410 - 380 = 30 \), a deficit of £30 billion.
2025: \( 460 - 455 = 5 \), a surplus of £5 billion.

Tax revenue rose by £80 billion while spending rose by only £45 billion, so the budget moved from deficit to surplus (a £35 billion improvement).

2 marks: 1 mark for knowledge, 1 mark for application.

- 1 mark (knowledge): a budget deficit is when government spending exceeds tax revenue / a surplus is when tax revenue exceeds spending. Accept a clear statement that the budget balance = revenue minus spending, BOD.
- 1 mark (application): uses Fig. 1 data, e.g. deficit of £30bn in 2022 (410 vs 380) moving to a surplus of £5bn in 2025 (455 vs 460); or revenue rose by £80bn while spending rose by £45bn.

Accept the deficit narrowing each year and becoming a surplus by 2025. Own figure rule applies to a single arithmetic slip if the method is correct. Do not credit a description of the data with no reference to deficit/surplus for the knowledge mark. Units (£bn) should be given for the application mark; one mark only if units are missing and no other application is shown.

AO1: 1, AO2: 1. Quantitative skills: 1 mark.

Rate of inflation = \( \frac{\text{CPI}_{2024} - \text{CPI}_{2023}}{\text{CPI}_{2023}} \times 100 \)

\( = \frac{116.9 - 112.4}{112.4} \times 100 = \frac{4.5}{112.4} \times 100 = 4.0\% \) (to one decimal place).

The general price level rose by 4.0% between 2023 and 2024.

Award 2 marks for the correct answer of 4.0% (accept 4%, 4.00% or 4.004%).
Award 1 mark for correct working (e.g. (116.9 - 112.4) / 112.4 x 100, or 4.5 / 112.4) but an incorrect final answer.
Award 1 mark only if the % sign or unit is missing (e.g. answer given as 4.0 with no % sign), as long as the working is correct.
Do not credit 4.5 (index point change) or 3.8 (calculated using 116.9 as the denominator); these earn 1 mark at most for the working shown if the formula is correct.
BOD: accept alternative formats, e.g. 1.04 or 104.0 shown as an index with an explicit statement that inflation is 4.0%.
AO2 (quantitative skills): 2 marks.

Step 1 - Describe the pattern: the points slope downwards from left to right, so there is a negative correlation. Corvane spends 0.1% of GDP and has 4.6% long-term unemployment; Larkspur spends 1.1% and has 1.4%.

Step 2 - Explain why: vocational training and apprenticeships raise workers' skills, improving occupational mobility. This reduces structural unemployment, where the unemployed lack the skills that expanding industries demand (lines 3-5, 10-11). The supply-side improvement in the quality of labour raises employability, so fewer people remain out of work for over a year.

Step 3 - Qualify: Dunmarch (0.8%, 3.9%) lies well off the trend because regional unemployment (lines 13-15) is a separate cause. The graph shows correlation, not proven causation, and other factors such as automation (lines 8-9) also affect the outcome.

4 marks: AO1 x1, AO2 x1, AO3 x2.

- 1 mark: identifies a negative/inverse relationship (higher training spending associated with lower long-term unemployment). Accept 'as one rises the other falls'.
- 1 mark: application of data from Fig. 1, e.g. Corvane 0.1% / 4.6% compared with Larkspur 1.1% / 1.4%, or a calculated difference (3.2 percentage points). Both axes must be used for the mark; own figure rule applies for reasonable readings from the graph.
- Up to 2 marks for explanation (analysis) of why the relationship exists, e.g.:
- training raises skills/human capital, improving occupational mobility and employability (1);
- this reduces structural unemployment because workers match the skills demanded by expanding industries (1);
- higher productivity attracts employer demand for labour, lowering the number out of work (1).
- Credit, as long as it is linked to the figure: the Dunmarch outlier as evidence that regional factors also influence unemployment, or that correlation does not prove causation (BOD, maximum 1 of the 2 analysis marks).
- Do not credit: description of data with no explanation for 3 or 4 marks; reversed direction of relationship; stating the figure shows a positive relationship.
- Maximum 3 marks if no data from Fig. 1 is used.

Knowledge/analysis (tariff): a tariff is a tax on imports. It raises the domestic price of imports, shifts the supply of imports upward, reduces import quantity and lets domestic producers sell more at a higher price. Evidence: imports rose from 22m to 49m m2 and domestic output fell from 48m to 31m m2 (Fig. 1), so protection could slow job losses in the northern towns (lines 5-6). Revenue of N$140m (line 7) can fund retraining. Evaluation: Fig. 2 shows Kestorian cost of N$9.0; with a 20% tariff the price is N$10.80, still below the Norvalian cost of N$13.5, so many firms may still be uncompetitive. Higher tile prices raise housebuilding costs (lines 10-12), harming construction and consumers; retaliation threatens citrus exporters (lines 12-13); the tariff does not address old kilns and may reduce the incentive to become efficient (lines 15-16). Alternative: an investment subsidy (lines 16-17) targets the cause (high unit costs), but is costly for the government (opportunity cost), may not be spent well (government failure), and takes time to work. Other considerations: size of tariff revenue versus subsidy cost, price elasticity of demand for tiles, time horizon, WTO rules. Judgement: a tariff is unlikely to be the most effective on its own; a temporary tariff combined with an investment subsidy, or a subsidy alone, is likely better for long-run competitiveness, though the tariff is quicker at protecting jobs.

8 marks. AO1 knowledge 1, AO2 application 3 (approx.), AO3 analysis 2, AO4 evaluation 2 (flexible). Side argued first is credited as analysis; the other side as evaluation.

Level 3 (6-8 marks): Strong analysis of tariff effects (and/or subsidy) with chains of reasoning; effective use of both figures and the article (e.g. import rise, N$10.80 versus N$13.5, retaliation, retraining revenue); evaluation weighs both sides and reaches a supported judgement. Top 8, middle 7, bottom 6.
Level 2 (3-5 marks): Reasonable analysis, some use of evidence; evaluation present but limited or unbalanced; judgement partial. Top 5, middle 4, bottom 3.
Level 1 (1-2 marks): Limited knowledge, generic statements, little or no use of the stimulus; no judgement.
0 marks: no creditworthy response.

Analysis might include: tariff raises import price, reduces imports, increases domestic output and jobs; tariff revenue; subsidy lowers firms' costs and supports modernisation.
Evaluation might include: tariff still leaves Kestorian price (N$10.80) below Norvalian cost; higher prices for builders and households; retaliation against citrus exporters; reduced efficiency incentives; cost and targeting of subsidy; time scale; elasticity; WTO constraints.
Judgements might include: tariff is only a short-term measure; subsidy or a combination is better for long-run competitiveness. Accept any supported judgement. BOD for correct calculation of the tariff-inclusive price using own figure rule. Max Level 2 if no use of the stimulus; max Level 2 if one-sided.

Key evidence from the data:
- Fig. 1: youth unemployment falls by 1.7 percentage points (17.6% to 15.9%) after the scheme; productivity growth rises from 0.7% to 0.9% (modest, and only one year of data; years -2 and -1 show 0.6 and 0.5).
- Fig. 2: starts rise by 56 000 (62 000 to 118 000, about a 90% increase). But the share who are existing employees rises from 8% to 31%, so many 'new' starts are relabelled, which suggests deadweight loss and substitution. Retention falls from 71% to 49%, suggesting poor quality or dependence on the subsidy. Business confidence falls from 96 to 94.

Analysis (supportive side): Firms under-invest in training because trained workers can be poached (lines 3-5), so training has positive externalities and the free market under-provides it. A 40% wage subsidy lowers the cost of employing and training young workers, raising the quantity of trained labour and the skills of the workforce. Higher productivity lowers unit labour costs, shifting long run aggregate supply (LRAS) to the right, raising potential output, and allowing growth with lower inflationary pressure. Lower youth unemployment raises income and tax receipts and reduces benefit payments, giving a partial offset to the cost of the scheme.

Evaluation (critical side): Deadweight loss (1 in 4 small firms would hire anyway) and substitution of existing staff for subsidised apprentices (31% of starts) mean the true effect on unemployment is smaller than the headline starts figure. The fall in youth unemployment of 1.7 percentage points is smaller than the rise in starts of 56 000 would suggest, which is consistent with this. Weak aggregate demand (line 18-19; confidence at 94) means cheaper labour may not lead to more hiring, so there may be demand deficient unemployment which a supply side policy cannot address. Retention falls to 49%, so skills gains may not be sustained. Financing: 1.8% of national income funded by borrowing worsens the deficit and debt (lines 11-12) and has an opportunity cost, since the funds could be used for infrastructure or education; it may also crowd out private investment if interest rates rise. Time lags of five to ten years (line 21) mean one year of data is insufficient, and productivity growth changes of 0.2 percentage points could be due to other factors. Magnitude depends on the elasticity of demand for labour among firms, and on the quality of training.

Judgement: The subsidy is likely to be partly effective. It has reduced youth unemployment and raised starts, and it addresses a genuine market failure, but the evidence of deadweight loss, substitution, falling retention, weak demand and a high fiscal cost suggests its overall success depends on tighter eligibility rules, quality control, the state of aggregate demand and the long term evidence of productivity gains. Accept a reasoned alternative judgement.

Total 12 marks. AO1 2, AO2 3, AO3 3, AO4 4. Levels of response; the side presented first is credited as analysis and the other side as evaluation.

Level 4 (10-12 marks): Strong knowledge and understanding of supply side policy, subsidies, market failure and unemployment. Strong application using several pieces of evidence from the stimulus and both figures, with accurate use of data. Strong, developed analysis with logical chains of reasoning. Strong evaluation leading to a supported judgement that follows from the argument. Top of level (12): consistent across all skills, and the judgement is clearly justified and weighs short run against long run. Middle (11) and bottom (10): some inconsistency.

Level 3 (7-9 marks): Good knowledge. Good application with some use of data from the stimulus. Good analysis, mostly developed. Good evaluation with some supported judgement, though possibly one-sided in places.

Level 2 (4-6 marks): Reasonable knowledge. Reasonable but limited application, possibly general. Reasonable analysis that may be partly developed. Limited evaluation, with an unsupported or brief conclusion.

Level 1 (1-3 marks): Limited knowledge, application, analysis and evaluation; mostly descriptive or generic with little reference to the stimulus.

Level 0: 0 marks, no creditworthy response.

Knowledge and understanding might include: supply side policy; subsidy; apprenticeships and human capital; unemployment (structural, demand deficient); long run aggregate supply; productivity; budget deficit and national debt; opportunity cost; crowding out; deadweight loss.

Application / relevant context: youth unemployment from 17.6% to 15.9%; starts from 62 000 to 118 000; existing employees share from 8% to 31%; retention from 71% to 49%; business confidence 96 to 94; productivity growth 0.7% to 0.9%; 40% wage subsidy; cost of 1.8% of national income; 1 in 4 small firms; five to ten year lag.

Analysis might include: training under-provision due to poaching and positive externalities, so subsidy corrects the market failure; lower cost of employing young workers increases demand for them; higher productivity lowers unit labour costs and shifts LRAS right (diagram may be credited but is not required); lower unemployment raises income, tax revenue and reduces benefit spending; improved structural match of skills and vacancies.

Evaluation might include: deadweight loss and substitution reduce effectiveness; the fall in unemployment is smaller than the rise in starts; falling retention and variable training quality; weak AD and confidence limit hiring so demand side measures may be needed; borrowing worsens deficit and debt, opportunity cost, possible crowding out; long time lags and only one year of data; productivity gain small and other factors may be responsible; depends on firm size, sector and elasticity of labour demand.

Judgements might include: partly effective or effective only in the long run / only if redesigned; compare short run unemployment effects with long run productivity effects; weigh fiscal cost against benefits. Accept any well-supported judgement; BOD for sensible use of data where calculation is slightly inaccurate.

Quantitative skills: up to 2 of the 12 marks may be awarded for correct use or calculation of data (for example percentage point change in unemployment, percentage change in starts).

Assessment objective grid: AO1 2, AO2 3, AO3 3, AO4 4 (total 12).

Diagram: AD/AS (preferably Keynesian or with SRAS and LRAS) with price level on the vertical axis and real GDP on the horizontal axis. Show AD1 shifting left to AD2 (higher income tax lowers disposable income and consumption; lower government investment reduces G), real GDP falling from Y1 to Y2 and the price level from P1 to P2. A second diagram could show a leftward shift of LRAS over time as lower capital expenditure reduces the quality of infrastructure and the economy's productive capacity.

Analysis (side presented first): Higher income tax raises revenue per worker and lowers disposable income, so consumption falls. Cutting capital expenditure directly reduces government spending, a component of AD. The deficit narrows because revenue rises and spending falls. The reduction in AD is magnified by the multiplier, \(k = \frac{1}{1-MPC}\) (for example MPC = 0.6 gives k = 2.5, so a £4bn cut could reduce real GDP by up to £10bn). Lower AD reduces demand-pull inflationary pressure and may improve the current account if imports fall. Falling national debt interest costs over time and increased confidence of bond markets can lower government borrowing costs and interest rates, encouraging private investment (reverse crowding out).

Evaluation: (1) Multiplier and automatic stabilisers: lower GDP reduces tax receipts and raises benefit spending, so the deficit may fall by less than planned; if growth is slow the effect is larger. (2) Spare capacity: with slow growth, an output gap is likely to be negative, so cuts risk deeper recession and rising cyclical unemployment; if the economy is near capacity the cost is smaller. (3) Structural versus cyclical deficit: tax rises and spending cuts address the structural element, but only if they are permanent. (4) Type of spending cut: capital expenditure cuts are politically easy but reduce LRAS, potential growth and future tax revenue, so the long-run effect on the deficit may be worse. (5) Type of tax: income tax rises may reduce incentives to work (Laffer curve), though at moderate rates the effect is small; they are progressive and may reduce inequality compared with VAT rises. (6) Time lags and expectations: confidence effects may offset the fall in AD, and a credible plan may lower interest rates; monetary policy and exports (depends on exchange rate) can partially offset. (7) Policy conflicts: deficit reduction conflicts with growth and employment objectives, though with inflation and the current account it may be complementary.

Judgement: The policy is likely to reduce the deficit in nominal terms, but the extent depends on the multiplier and the state of the economy. In a slow-growing economy with spare capacity, the cut to capital expenditure is the weakest element as it harms long-run supply, and a more balanced mix (protecting investment, phasing the consolidation in as growth recovers) would reduce harm to growth and employment.

25 marks: AO1 5, AO2 5, AO3 8, AO4 7 (quantitative skills may be credited under any AO). The side of the argument presented first is credited as analysis and the other side as evaluation. Do not award diagram marks separately: a diagram is needed to reach the top of Level 3 and above for analysis.

Level 5 (21-25): Strong knowledge of fiscal policy terms (structural/cyclical deficit, multiplier, automatic stabilisers, capital expenditure) with accurate, well-labelled AD/AS diagram(s) used within the argument. Strong application to the stimulus (slow growth, near natural rate of unemployment, income tax and capital expenditure). Developed, logical chains of analysis. Strong evaluation of several factors with a supported, justified judgement on 'the extent'. Award top, middle or bottom mark within the level for consistency.
Level 4 (16-20): Good knowledge and application; accurate diagram; good analysis with chains of reasoning; good evaluation of at least two factors; judgement present but may not be fully supported.
Level 3 (11-15): Reasonable knowledge and application; diagram present with minor errors or limited use; reasonable analysis, some evaluative comment, limited judgement.
Level 2 (6-10): Limited knowledge; limited or inaccurate diagram; some one-sided or descriptive analysis; limited or no evaluation.
Level 1 (1-5): Isolated points about taxes or spending with little economic analysis; no diagram or incorrect diagram.
0: No creditworthy response.

Knowledge and understanding: budget deficit, structural and cyclical deficit, national debt, discretionary fiscal policy, automatic stabilisers, multiplier, crowding out, Laffer curve, direct tax, capital expenditure.
Application: use of income tax and transport capital expenditure; slow growth; unemployment near natural rate; calculation of the multiplier effect (BOD for sensible illustrative figures, own figure rule).
Analysis might include: AD shift left via C and G; multiplier; fall in price level and real GDP; lower borrowing; reduced inflationary pressure; fall in LRAS from lower capital spending; effect on unemployment.
Evaluation might include: size of multiplier; spare capacity; automatic stabilisers offsetting deficit reduction; structural versus cyclical; type of spending cut and tax; incentives and Laffer curve; time lags; confidence and interest rates; monetary policy and exports; policy conflicts.
Judgements might include: extent depends on the size of the output gap and multiplier; protect investment; phase the consolidation; short-run versus long-run effects. Accept any well-supported judgement.

Introduction: plastic packaging creates a negative externality in production and consumption: the marginal social cost (MSC) exceeds the marginal private cost (MPC) because of litter, marine damage and clean-up costs borne by third parties. The market produces at Qm where MPC = MSB, above the socially optimal Q*, giving a deadweight welfare loss.

Analysis (side presented first):
1. Per-unit tax: a tax equal to the marginal external cost at Q* shifts MPC up to MPC + t, which coincides with MSC. The market output of packaging falls from Qm to Q*, the externality is internalised, and the tax revenue can fund recycling or be used to cut other taxes (double dividend). Diagram: MPC, MSC, MSB=MPB, Qm, Q*, tax wedge, welfare loss triangle removed.
2. Tradable permits: a cap fixes the total quantity of plastic at Q*. A vertical supply of permits is set; firms with low abatement costs reduce use and sell permits to firms with high abatement costs, so the cap is met at the lowest total cost (productive efficiency). The permit price acts as the price of pollution and gives a continuing incentive to innovate in alternative packaging. Diagram: vertical permit supply at Q*, demand for permits, permit price.

Evaluation:
- Tax: the effect depends on price elasticity of demand for plastic packaging. If demand is inelastic (few substitutes, e.g. leak-proof hot-food containers), a large tax is needed to achieve a small fall in quantity; with elastic demand the tax is very effective. Firms may pass the cost to consumers, who are price sensitive in a competitive delivery market, so may lead to lost sales and jobs. The tax may be regressive on low-income households.
- Government failure: it is hard to estimate the monetary value of the external cost, so the tax is likely to be set too high or too low; the permit cap is also an estimate of Q* but certainty over the quantity is a strength compared with uncertainty over the response to the tax.
- Permits: administration, monitoring and enforcement costs are high with many small restaurant and delivery firms; the initial allocation (free or auctioned) is contentious and large firms may hoard permits; permit price volatility creates uncertainty for investment.
- Time lags: firms need time to switch to biodegradable or reusable alternatives, so the short-run effect is smaller than in the long run.
- Alternatives: regulation or a ban, subsidies for reusable packaging, or information provision may be more effective or may complement the policies; the externality is also affected by consumer disposal behaviour, which neither policy directly targets.
- International leakage: firms or imported packaging from countries without such policies can undermine the effect.

Judgement: both policies can reduce the market failure and move output towards Q*, but not eliminate it. The permit scheme gives greater certainty over the quantity, while the tax is simpler to administer in a market with many small firms. The extent of success depends on elasticity, accurate valuation of the external cost, enforcement, and the time horizon; in the long run, with substitutes available, intervention is likely to be substantially effective.

25 marks: AO1 6, AO2 6, AO3 6, AO4 7. Quality of extended response assessed. The side of the argument presented first is credited as analysis and the other side as evaluation.

Level 4 (21-25 marks): Strong knowledge and understanding of externalities and of both policy tools; strong application to plastic packaging and delivery firms; strong, well-developed analysis with a correct, labelled diagram (MPC, MSC, Q*, Qm; tax wedge or permit supply/demand); strong evaluation that is balanced, developed and focused on the 'extent'; a supported, justified judgement. Top mark if consistent across all AOs; middle/bottom if one element is weaker.

Level 3 (13-20 marks): Good knowledge; good application; good analysis with a diagram that may have minor errors; good evaluation with some development and a judgement that is partly supported. 17-20 for strong Level 3, 13-16 for more limited.

Level 2 (7-12 marks): Reasonable knowledge and some application; reasonable analysis, diagram missing or flawed, or one policy only; evaluation is stated rather than developed; judgement unsupported.

Level 1 (1-6 marks): Limited knowledge, generic or no application, limited analysis, assertion only. 0 marks for no creditworthy response.

Knowledge and understanding might include: negative externality, MPC, MSC, social optimum, internalising the externality, per-unit tax, tradable pollution permits, cap, government failure.
Application: delivery firms, takeaway containers, litter and marine pollution, clean-up costs, substitutes such as paper or reusable containers; accept any sensible context, BOD.
Analysis might include: tax shifts MPC to MSC and reduces output to Q*; revenue used for recycling; permits fix the quantity and allow trading to the lowest cost abatement; permit price signal and incentive to innovate.
Evaluation might include: PED of packaging and the availability of substitutes; difficulty valuing the externality; tax too high or low; regressive effects; administration, enforcement and monitoring costs; initial permit allocation; price volatility; time lags; competitiveness and leakage; alternative policies such as bans, subsidies or information; unintended consequences.
Judgements might include: policy is likely to be partially effective; the choice between tax and permits depends on certainty of quantity versus ease of administration; long-run success is greater than short-run.
Diagram: required for Level 3 and above to access analysis marks; accept correct alternative diagrams (e.g. tax on a supply and demand diagram, with externality shown); a diagram not integrated into the text limits the level.

Percentage change in price = \(\frac{6-5}{5}\times 100 = 20\%\). Percentage change in quantity demanded = \(\frac{440-500}{500}\times 100 = -12\%\). PED = \(\frac{-12}{20} = -0.6\). Demand is price inelastic. Option B inverts the ratio (20/12); C and D are not correct results from the data.

1 mark for A only. Method: % change in quantity divided by % change in price. Reject any option other than A. Accept -0.6 shown as 0.6 in working (sign convention) but the option must be A.

Marginal tax rate = change in tax paid / change in income \(\times 100 = \frac{1{,}500}{10{,}000}\times 100 = 15\%\). 13.75% is the average tax rate at £40,000 (\(5{,}500/40{,}000\)); 18.3% and 25% are not correct results from the data.

1 mark for B only. Reject A (average rate, not marginal rate).

Total market sales = 120 + 90 + 60 + 30 + 100 = £400 million. The three largest firms (P, Q, R) sell 120 + 90 + 60 = £270 million. Three-firm concentration ratio = \(\frac{270}{400}\times 100 = 67.5\%\). B is the four-firm ratio (300/400), C and D do not follow from the data.

1 mark for A only. Reject B (four-firm ratio).

Moral hazard arises from information failure when a party changes behaviour, taking more risk, because another party bears the costs and cannot observe the behaviour. The customer's riskier parking after being insured fits this. Free riding concerns non-excludable goods, externalities concern third parties, and government failure concerns intervention.

1 mark for A only.

Free-market equilibrium: \(120 - 4P = 20 + 6P\), so \(P = 10\), which is above the £8 ceiling, so the ceiling is binding. At \(P = 8\): \(Q_d = 120 - 32 = 88\); \(Q_s = 20 + 48 = 68\). Excess demand = 88 - 68 = 20 rooms, a shortage of 20. Answer C.

1 mark for C. A: confuses a ceiling with a floor (surplus). B: uses the wrong quantity difference. D: subtracts at the wrong prices. No partial credit for MCQ.

The four-firm concentration ratio sums the shares of the four largest firms: 28 + 22 + 17 + 11 = 78%. Answer C.

1 mark for C. A: sums only the smallest firms or two firms. B: omits DunePath's share and adds 28+22+17. D: includes all five firms (86%), which is the five-firm ratio.

Marginal tax rate = change in tax / change in income = £2,500 / £10,000 = 25%. Average rate at £30,000 = 4,000/30,000 = 13.3%; at £40,000 = 6,500/40,000 = 16.25%. The average rate rises with income, so the tax is progressive. Answer B.

1 mark for B. A: gives the average rate at £40,000 and the wrong system. C: correct rate but a rising average rate is not regressive. D: divides the extra income by tax (inverted).

Moral hazard is a change in behaviour after a transaction, where a party takes more risk because someone else bears the cost. Fully insured homeowners taking less care is a classic case. A and C are asymmetric information before a transaction (adverse selection). D is a government remedy for information failure, not an example of moral hazard. Answer B.

1 mark for B. Reject A and C: these are hidden information before the contract, not changed behaviour afterwards. D is a policy response.

The three largest firms have combined sales of \(70 + 55 + 40 = £165\) million. Three-firm concentration ratio \(= \frac{165}{250} \times 100 = 66\%\). Option B uses four firms (\(\frac{190}{250}\) = 76%); C is 100% minus the correct answer; D is the combined sales figure expressed as a percentage of nothing meaningful (sales in £m, not a share).

1 mark for A only. Correct working: sum of the three largest firms' sales divided by total market sales, multiplied by 100. Reject B (four-firm ratio), C and D.

Tax on the band £12,000 to £50,000: \(0.20 \times 38{,}000 = £7{,}600\). Tax on the band above £50,000: \(0.40 \times 10{,}000 = £4{,}000\). Total tax \(= £11{,}600\). Average tax rate \(= \frac{11{,}600}{60{,}000} \times 100 = 19.3\% \approx 19\%\). Option A is the marginal rate, and D applies the basic rate to the whole income.

1 mark for B only. Accept any working that reaches total tax of £11,600 divided by £60,000. Reject A (marginal rate), D (basic rate), C.

A maximum price set below equilibrium lowers the quantity supplied and raises the quantity demanded, creating excess demand (a shortage). This encourages a black market or side payments. B describes a price floor effect, C is wrong because producer surplus falls as price and quantity supplied fall, and D contradicts the fall in quantity supplied along the supply curve.

1 mark for A only. Reject B (confuses ceiling with floor), C and D.

Dollar price \(= 8{,}000 \times 1.10 = \$8{,}800\). Before the change it was \(8{,}000 \times 1.25 = \$10{,}000\) (option B), so the sterling depreciation makes UK exports cheaper in dollars. D divides by the rate instead of multiplying.

1 mark for A only. Method: sterling price multiplied by the new dollars-per-pound rate. Reject B (old price), C and D.

New price = £12, a rise of \(\frac{2}{10}\times 100 = 20\%\). Quantity falls from 1000 to 900, a change of \(-10\%\). PED = \(\frac{-10\%}{20\%} = -0.5\). Demand is price inelastic. Option B inverts the ratio; C and D use incorrect percentage changes.

1 mark for A (-0.5). Accept the answer being identified as A only. Reject any other letter. Method: % change in price = 20%, % change in quantity = -10%, PED = -0.5.

Total market sales = 120 + 90 + 60 + 40 + 30 + 25 + 20 + 15 = £400 million. Top four firms = 120 + 90 + 60 + 40 = £310 million. Ratio = \(\frac{310}{400}\times 100 = 77.5\%\). A is the three-firm ratio (270/400); C and D include extra firms.

1 mark for B (77.5%). Method: sum of top four sales divided by total market sales, multiplied by 100. Reject any other letter.

Average tax rate at £20 000 = 10%. Extra tax £2 000 on extra income £10 000 gives a marginal rate of 20%. Average rate at £30 000 = 13.3%. The average rate rises with income, so the tax is progressive. B, C and D rest on wrong reasoning or wrong figures.

1 mark for A. Reject any other letter. Supporting working: ATR = tax/income x 100; MTR = change in tax / change in income x 100.

Moral hazard occurs when one party takes more risk after a contract is made because another party bears the cost, and the insurer cannot fully observe the behaviour (information failure). The other options describe different concepts: no third-party spillover, non-excludable benefit or poor state intervention is described.

1 mark for A (moral hazard). Reject any other letter.

Price rises by £2 (from £12 to £14), so consumers bear £2 of the £3 tax per unit. Producers bear the remaining £3 - £2 = £1 per unit. Producers' share of revenue = \(£1 \times 340 = £340\).

1 mark for B (£340). A is total tax revenue (£3 x 340); C is the consumers' share (£2 x 340); D uses the pre-tax quantity (£3 x 400). No partial marks in an MCQ.

Marginal tax rate = change in tax / change in income = \(\frac{7{,}500 - 5{,}000}{40{,}000 - 30{,}000} = \frac{2{,}500}{10{,}000} = 25\%\).

1 mark for C (25%). A is the average tax rate at £40,000 (7,500/40,000); B and D are not derived from the data correctly. No partial marks in an MCQ.

Goods balance = 120 - 150 = -30. Services balance = 90 - 55 = +35. Trade balance = +5. Adding primary income (-12) and secondary income (-8): \(5 - 12 - 8 = -15\), a deficit of £15 billion.

1 mark for A. B ignores primary and secondary income; C treats the income balances as positive; D counts only the goods balance. No partial marks in an MCQ.

The four-firm concentration ratio is the combined market share of the four largest firms: \(28 + 22 + 15 + 11 = 76\%\).

1 mark for D (76%). A is the three-firm ratio; B is the combined share of the three smallest firms; C is the total of all firms. No partial marks in an MCQ.

The three largest firms are P, Q and R: \(120 + 80 + 60 = 260\). \(CR_3 = \frac{260}{800} \times 100 = 32.5\%\). B is the two-firm ratio (200/800); C is the four-firm ratio (300/800); D is a miscalculation.

1 mark for A (32.5%). No working required. Do not award marks for B or C, which use the wrong number of firms.

Tax paid = \(20\% \times (42{,}000 - 12{,}000) = £6{,}000\). Average tax rate = \(\frac{6{,}000}{42{,}000} \times 100 \approx 14.3\%\). A is the marginal rate; D divides by the wrong base (£35,000).

1 mark for B (14.3%). Reject A, which is the marginal rate.

Before: \(55{,}000 \div 1.25 = £44{,}000\). After: \(55{,}000 \div 1.10 = £50{,}000\). The pound has depreciated, so the cost rises by £6,000.

1 mark for B. Reject A (direction wrong) and D (the dollar price is fixed but the sterling cost changes).

At £25: \(Q_d = 100 - 50 = 50\) and \(Q_s = 20 + 50 = 70\). Excess supply = \(70 - 50 = 20\) units. (Equilibrium is £20 and 60 units, so the minimum price is above equilibrium and is binding.)

1 mark for B (20 units). Reject C (quantity demanded) and D (quantity supplied) as the excess itself.

Taxable income = £50,000 - £10,000 = £40,000. Tax = 25% x £40,000 = £10,000. Average tax rate = \( \frac{10{,}000}{50{,}000} \times 100 = 20\% \). The answer is B.

1 mark for B. A is not supported by any correct working. C is the marginal rate, not the average rate. D is not supported by any correct working.

At £1 = $1.25 the price is \( 90 \div 1.25 = £72 \). At £1 = $1.50 the price is \( 90 \div 1.50 = £60 \). The sterling price falls by £12. The answer is A.

1 mark for A. B has the direction wrong. C and D come from multiplying $90 by the change in the rate (0.25) rather than converting at each rate.

The four-firm concentration ratio is the combined market share of the four largest firms: 28 + 22 + 15 + 11 = 76%. The answer is B.

1 mark for B. A is the three-firm ratio. C is the five-firm ratio. D is the share held by all other firms (100 - 76).

Moral hazard occurs when one party takes greater risks because another party bears the cost, and this is usually because of asymmetric information after an agreement. The insured driver, who is protected from the cost, behaves more riskily. The answer is A.

1 mark for A. B is asymmetric information between buyer and seller (adverse selection) rather than a change in behaviour after a contract. C is imperfect information about a demerit good. D is the free rider problem with a public good.

Percentage change in quantity demanded = \((170-200)/200 \times 100 = -15\%\). Percentage change in price = \((5-4)/4 \times 100 = +25\%\). PED = \(-15 / 25 = -0.6\). Demand is price inelastic. B comes from using a wrong base; C inverts the formula (25/15); D is the percentage change in quantity only.

1 mark for A only. Method: % change in Q divided by % change in P. Reject any other letter. Distractors: C = inverted formula, D = forgot to divide by % change in price.

Tax on the 20% band = \(0.20 \times 30{,}000 = £6{,}000\). Tax on the 40% band = \(0.40 \times 10{,}000 = £4{,}000\). Total tax = £10,000. Average tax rate = \(10{,}000 / 50{,}000 \times 100 = 20\%\). D is the marginal rate; C divides tax by income after the 40% band is excluded (10,000/40,000); A divides by the wrong total.

1 mark for B only. Method: total tax divided by total income. Reject any other letter. Distractors: D = marginal rate confused with average rate, C = wrong denominator (£40,000), A = other miscalculation.

Calculate the balance on each component (credits minus debits):

- Trade in goods: \(148 - 171 = -23\)
- Trade in services: \(96 - 62 = +34\)
- Primary income: \(41 - 55 = -14\)
- Secondary income: \(12 - 29 = -17\)

Current account balance = \(-23 + 34 - 14 - 17 = -20\).

Equivalently, total credits = \(148 + 96 + 41 + 12 = 297\) and total debits = \(171 + 62 + 55 + 29 = 317\), so \(297 - 317 = -20\).

Marlovia has a current account deficit of Mr 20 bn.

Award 2 marks for the correct answer: a deficit of Mr 20 bn (or -20 bn), with unit.
Award 1 mark for correct working (e.g. component balances of -23, +34, -14, -17, or total credits 297 and total debits 317) but an incorrect final answer.
Alternative formats accepted: -20 or 'deficit of 20' with the unit given; debits minus credits shown as 20 is accepted only if clearly labelled a deficit.
One mark only if the unit (Mr bn) is missing, or if the figure of 20 is given without stating that it is a deficit (BOD if a negative sign is used).
Own figure rule: if one component balance is miscalculated but the others are added correctly and the result is labelled correctly, award 1 mark.

Diagram: axes Price (£) and Quantity of disposable cups per week. Demand (D = MPB = MSB). Original supply S1 = MPC with equilibrium at P1, Q1 (40 000). MSC drawn above MPC, reflecting the clearing-up cost not paid by cafes or customers. The 25p per-unit charge shifts supply vertically upwards to S2 (S1 + 25p), giving a new equilibrium at P2 (higher than P1, by less than 25p) and Q2 (lower than Q1). Q2 lies closer to the socially optimal output Qs where MSC cuts D.

Explanation: The cups are a negative externality in consumption/production because the council and society bear the clean-up cost, so the market overproduces at Q1 (MSC > MSB). The charge raises cafes' marginal cost by 25p per cup, so at every price they supply fewer cups (supply shifts left/up). The price consumers pay rises and quantity demanded contracts along the demand curve, so output falls from Q1 to Q2. This internalises part of the externality and reduces the welfare loss. The 25p is shared between consumers (P2 - P1) and cafes (25p minus the price rise), depending on the price elasticity of demand.

Total 4 marks: 2 for diagram, 2 for explanation.

Diagram (2 marks):
- 1 mark: correctly labelled axes, downward-sloping demand and upward-sloping supply (MPC) with original equilibrium P1/Q1.
- 1 mark: supply curve shifted vertically upwards/left by the charge (parallel shift, labelled S2 or MPC + tax), with new equilibrium P2/Q2 shown, P2 > P1 and Q2 < Q1. Accept MSC curve shown but not required. Do not award if the shift is to the right or if demand is shifted instead.

Explanation (2 marks):
- 1 mark (knowledge/analysis): the charge raises firms' costs per unit so supply decreases, leading to a higher price and lower quantity (OR identifies negative externality / the cost to the council not paid by the market).
- 1 mark (application/development): applies to Extract A, e.g. cafes sell fewer than 40 000 cups, price of drinks/cups rises, fewer cups discarded so external clean-up cost falls; OR the tax is shared between consumers and cafes (incidence).

Accept BOD for a tax shift drawn from the MPC to the MSC-style curve. Own figure rule: accept any reasonable quantities if shown consistently with the diagram. Max 2 marks if no diagram; max 2 marks if no application to context.

Market failure: fizzy drinks are a demerit good. Information failure (Extract A line 3, Extract C line 2) means consumers underestimate private costs, so marginal private benefit is overstated relative to marginal social benefit; the health service cost borne by taxpayers is a negative externality in consumption, so MSC exceeds MPC and the market overproduces.

Diagram: demand (MPB) and supply (MPC=S) with equilibrium at 1.50 and 400m litres; a tax of 0.30 shifts supply up to S+tax, price rises to 1.72 (consumers bear 0.22, producers 0.08 of the 0.30 tax) and quantity falls to 368m, moving closer to the socially optimal level. Tax revenue approx 0.30 x 368m = 110.4m per year, in line with the 210m over two years being broadly consistent (2025 and 2026).

Analysis in favour of the tax: internalises the externality; price signal; quantity down 8% in 2025 on a price rise of about 14.7% (PED approx -0.5 so inelastic, less effective at cutting demand); reformulation cut sugar by 26 per cent from 105g to 78g by 2026 (Extract B note), a dynamic incentive effect; revenue funds free fruit (Extract C line 3); health service costs fall from 620m to 590m.

Evaluation: demand is inelastic so quantity effect is modest (400 to 361 = about 9.8% fall over two years); health cost fall of 30m is small relative to 210m revenue and costs are lagged, so long-run effect unknown; regressive effect on low-income households (Extract A line 4); cross-border shopping and untaxed substitutes (Extract C line 4) weaken effectiveness; information provision (warning labels, advertising ban) tackles the root cause of information failure and the survey shows 58% of teenagers misjudge sugar content, but labels may be ignored and take time to change behaviour; regulation/ban on advertising has enforcement costs; the government may suffer government failure from imperfect information about the right tax rate (the 0.30 may not equal the true external cost). Judgement: a tax is effective at changing producer behaviour and raising revenue, but is likely the most effective only when combined with information measures, particularly for young consumers. Depends on the size of external cost relative to tax, the time period, and PED.

15 marks: AO1 2, AO2 3, AO3 5, AO4 5 (approx). Levels of response, with the side presented first credited as analysis and the other side as evaluation.

Level 3 (11-15 marks): Strong knowledge and understanding of demerit goods, externalities, information failure and per-unit taxes. Strong application of data from at least two extracts. Strong, coherent analysis with an accurate diagram. Strong evaluation leading to a supported judgement on the extent to which a tax is the most effective policy. Top of the level for a fully developed, consistent judgement; middle for good evaluation with some imbalance; bottom for reasonable but less well-supported judgement.

Level 2 (6-10 marks): Good or reasonable knowledge; some application of extract data; analysis may be partly developed or diagram partly accurate; evaluation present but limited or not linked to the extracts; judgement partial or unsupported.

Level 1 (1-5 marks): Limited knowledge, generic points with little or no use of the extracts, little or no analysis, descriptive or no evaluation.

0 marks: no creditable response.

Knowledge and understanding: demerit good; negative externality in consumption; information failure; per-unit (indirect) tax; MSC and MPC; elasticity; government failure.

Application: Extract B price rise 1.50 to 1.72 and quantity 400 to 368; sugar reformulation; health service cost 620 to 590; Extract C survey (58%), cross-border shopping, untaxed substitutes, revenue 210m; regressive impact (Extract A).

Analysis might include: diagram showing a supply shift up by the tax, higher price and lower quantity, tax incidence, welfare gain or reduction in deadweight loss; incentive for firms to cut sugar; revenue used for other goods; labelling and advertising restrictions correcting information failure.

Evaluation might include: inelastic demand and size of the quantity fall; difficulty of setting the tax at the correct external cost; regressivity; leakages (cross-border, substitutes); time lags; cost of enforcement; effectiveness of information measures on young consumers; combination of policies.

Judgements might include: tax is effective but not sufficient alone; information provision may be more effective for teenagers; depends on elasticity, time period and extent of substitution.

Diagram: up to 3 of the AO3 marks are only available with an appropriate, labelled diagram (axes, MPB/MSB or MPC/MSC, supply shift by the tax, new price and quantity); BOD for different but valid labelling. Accept an MSC diagram or a tax diagram with consumer and producer burden shown. Own figure rule applies to any calculations from the extracts (for example PED approx -0.5, revenue approx 110m).

Diagram: market for sugary drinks with D = MPB (= MSB, or MSB shown if candidate recognises information failure), S = MPC, and MSC above MPC. Free-market equilibrium at Q1 where MPB = MPC, with the socially optimal output Q* where MSB = MSC at a lower quantity. A per-unit tax of 20p shifts S (MPC) vertically upwards by the amount of the tax to S+tax, giving a new equilibrium at Q2 between Q1 and Q*. Price rises from £1.10 to £1.26 (a 16p rise for consumers, 4p absorbed by producers/retailers). Welfare loss area shrinks but does not vanish.

Useful calculations from Extract 2: % change in price = (1.26 - 1.10)/1.10 x 100 = 14.5%; % change in quantity = (790 - 820)/820 x 100 = -3.7%; PED = -3.7/14.5 = about -0.25 (inelastic). Tax revenue = 0.20 x 790 million = £158 million. Consumer share of the tax burden = 16/20 = 80%.

Analysis (side argued first): Negative externality of consumption: health costs borne by the health service (lines 2-4 of Extract 1), so MSC > MPC and the market overproduces. The tax raises costs, shifts supply left, raises price and reduces quantity towards the optimum, internalising the externality. Revenue of about £158m can be recycled into school breakfast clubs (line 9-10), which could improve nutrition. Reformulation (14% to 31% of sales) shows dynamic incentive effects: producers cut sugar even if volume falls little, lowering harm per litre.

Evaluation: Demand is price inelastic (PED about -0.25), so the fall in consumption is small and the tax is a weak tool for cutting quantity; the tax does not equal the marginal external cost, so correction may be too little or too much and the externality is hard to measure. Regressive: the poorest fifth spend 2.5% of income against 0.6% for the richest, so the burden falls mostly on the poor (although they may also gain most health benefit). Information failure (lines 7-8): consumers underestimate sugar content, so the private benefit curve is overstated; education or labelling may complement the tax. Cross-border shopping and own-label switching (Extract 3) reduce effectiveness; the 1,200 job losses are a cost and the beverage association is a biased source. Time lag: health benefits take a decade (Extract 3), so the effect is uncertain in the short run; the evidence covers one year only. Government failure risks: threshold design, revenue not necessarily spent well, lobbying.

Judgement: the tax is moderately effective: it moves the market in the right direction and encourages reformulation, but small quantity effects, regressivity, leakage and information failure mean it works best alongside other policies (labelling, education, regulation). Effectiveness depends on elasticity over time, the size of the external cost and how much consumers switch to unhealthy substitutes.

15 marks: AO1 3, AO2 4, AO3 4, AO4 4 (including up to 2 quantitative skills marks for use of the Extract 2 data). The side presented first is credited as analysis and the other side as evaluation. Apply levels, then choose top, middle or bottom of the level by consistency.

Level 4 (12-15 marks): Strong knowledge of negative externalities, specific taxes and their effect on supply; strong application to Varnland using several items from the extracts; well-developed, logical chains of analysis supported by an accurate, fully labelled diagram (MPC/S, MSC, tax shift, Q1, Q2, Q*, welfare loss) integrated into the answer; strong evaluation that weighs several factors and reaches a supported judgement on effectiveness.
Level 3 (8-11 marks): Good knowledge and application; good analysis, diagram broadly accurate with minor errors; evaluation of some factors with a reasoned but not fully supported judgement.
Level 2 (4-7 marks): Reasonable knowledge; limited application to the extracts; some analysis that may be partly asserted; diagram absent or flawed; limited or one-sided evaluation.
Level 1 (1-3 marks): Limited knowledge, little or no application, mostly descriptive or assertion; no valid diagram; no evaluation.
Zero: no creditworthy response.

Guidance - Knowledge and understanding: negative externality of consumption, MPC, MSC, specific (per-unit) tax, price elasticity of demand, incidence, regressive tax, information failure, government failure.
Application: use of Extract 2 figures, e.g. price up 14.5%, quantity down 3.7%, PED about -0.25 (accept -0.2 to -0.3 with working; own figure rule applies), revenue about £158m, burden on consumers 80%; reformulation 14% to 31%; poorest fifth 2.5% versus richest 0.6%.
Relevant context: health service costs, school breakfast clubs, border shopping, own-label switching, 1,200 job losses, ten-year lag for health benefits.
Analysis might include: tax shifts S left, higher price, lower quantity moving towards social optimum; revenue recycling; producer incentive to reformulate; inelastic demand limiting the reduction in quantity.
Evaluation might include: inelastic demand; regressive impact; leakage via cross-border shopping and substitution; information failure and need for complementary policies; time lag and short evidence period; difficulty valuing the external cost; bias of sources; employment effects; government failure.
Judgements might include: effective partly or mainly in the long run, or limited in the short run, supported by weighing of evidence; accept any reasoned judgement.
Diagram: 'appropriate diagram' needed to reach Level 3 or above in analysis; award no credit for an unlabelled diagram. Accept MSB shown where information failure is used; accept shifting MPC upwards by the tax, BOD for roughly parallel shift.
Accept for calculations: working shown; PED sign ignored if interpretation is correct.

Three-firm concentration ratio: \(31 + 24 + 14 = 69\%\). Four-firm ratio is 78%. An oligopoly is a market dominated by a small number of large firms whose decisions are interdependent. Here three firms control over two-thirds of sales, so the market is highly concentrated, even though there are many smaller firms (twelve) sharing 22%.

1 mark: calculates a concentration ratio correctly (CR3 = 69% or CR4 = 78%); accept working shown; own figure rule applies if the arithmetic slip is minor. 1 mark: knowledge of oligopoly, e.g. a few large firms dominate the market / high concentration / interdependence. 1 mark: application, linking the figure to the data, e.g. three firms hold 69% so the market is dominated by a few firms. Accept CR of any sensible number of firms (BOD). Do not credit simply listing the shares without interpretation. Maximum 3 marks. AO1 1, AO2 1, AO3 1 (quantitative skills: 1).

Unemployment rate = unemployed / labour force x 100. National: \(\frac{63+64}{900+1600}\times 100 = \frac{127}{2500}\times 100 = 5.08\%\). Coastal: \(\frac{63}{900}\times 100 = 7\%\). Central: \(\frac{64}{1600}\times 100 = 4\%\). The national average of about 5.1% hides the fact that Coastal unemployment is well above it, and Central well below it, so policymakers relying on the national figure could overlook regional (e.g. structural) unemployment.

1 mark: correct national rate (5.08%, accept 5.1% or 5%; unit % needed). 1 mark: correct regional rates showing a difference (Coastal 7% and Central 4%); one correct regional rate with a comparison to the national rate is acceptable. 1 mark: explanation that the average hides regional variation, so the national figure understates the problem in Coastal / may lead to poorly targeted policy; accept reference to geographical immobility or structural unemployment. If the % unit is missing throughout, deduct one mark only. Maximum 3 marks. AO1 1, AO2 1, AO3 1 (quantitative skills: 2).

Diagram (candidate-drawn): demand (= MPB) and supply (= MPC) for containers, with MSC above MPC by a vertical gap of $0.22. Free-market equilibrium at P = $0.50, Q = 90m, which is greater than the socially optimal output, giving a welfare loss triangle. A $0.20 per-unit tax shifts supply (S + tax) upwards/leftwards, giving a new equilibrium at $0.64 and 66m. The tax is almost equal to the external cost of $0.22, so S + tax is close to MSC and the welfare loss is largely removed.

Analysis: Containers are overused because restaurants ignore the clean-up and landfill costs borne by councils (negative externality in production/consumption; lines 2-3). The levy internalises the externality. Quantity falls by 24m, which is 26.7% (24/90 x 100). The price paid rises by $0.14 (28%), so the PED over this range is about -0.95, which is inelastic but not very inelastic, supporting the Association's claim only in part. Incidence: restaurants pay $0.14 of the $0.20 and suppliers absorb $0.06 (0.50 - 0.44). Tax revenue = 0.20 x 66m = $13.2m, matching the extract, and can be used to fund recycling (a double dividend).

Evaluation: (1) The $0.20 tax is slightly below the $0.22 external cost, and external costs are only estimates, so the optimum may not be reached; some under-correction remains. (2) Inelastic demand means the fall in quantity is modest (26.7%), and restaurants and customers bear a higher price, which is regressive for low-income consumers and harms small firms (lines 6-7). (3) Evasion and the black market (lines 8-9) are a government failure and cost enforcement resources. (4) Long run: the growth of paper-based substitutes (line 8) makes demand more elastic over time, so the levy may become more effective. (5) Alternatives such as regulation or a ban might work more directly but lack revenue and flexibility. Judgement: the levy is largely effective, since it moves output close to the social optimum and raises revenue, but the size of the success depends on the accuracy of the external cost estimate, the extent of evasion and the long-run availability of substitutes.

Total 8 marks: AO1 2, AO2 2, AO3 2, AO4 2 (indicative); levels of response.

Level 3 (6-8 marks): Strong knowledge of externalities and indirect taxes. Strong application to the extract and Fig. 1, with correct data use. Accurate, well-labelled diagram integrated into the analysis. Strong, well-developed chain of reasoning. Evaluation is balanced, supported by evidence and leads to a supported judgement. Top of the level (8) needs a clear judgement; 7 for good evaluation with a limited judgement; 6 for reasonable evaluation.

Level 2 (3-5 marks): Good/reasonable knowledge and application. Diagram present, with some errors or limited use. Analysis is reasonable but may be incomplete. Evaluation is limited or one-sided or asserted.

Level 1 (1-2 marks): Limited knowledge; little use of the extract; diagram missing or inaccurate; assertion only.

0 marks: no creditable response.

Diagram guidance: axes labelled price/costs and quantity; D = MPB; S = MPC; MSC above MPC; S + tax shifted up/left; Q1 = 90m and Q2 = 66m; price paid $0.50 to $0.64; welfare loss area. Accept a diagram with S1 and S2 only if the tax is shown. Do not credit a diagram that is unreferred to in the answer.

Analysis might include: negative externality of $0.22 per container leading to overconsumption; levy of $0.20 internalises the externality; price rises and quantity falls (90m to 66m, -26.7%); PED approx -0.95; incidence split ($0.14 to restaurants, $0.06 to suppliers); revenue $13.2m used for recycling. Accept the other side being treated first (the side presented first is credited as analysis and the other as evaluation). Own figure rule applies to calculations; BOD for rounding.

Evaluation might include: tax slightly below the external cost and the cost is only an estimate; inelastic demand limits reduction; regressive effects and closures of small firms; evasion and enforcement costs (government failure); substitutes make long-run demand more elastic; alternatives (ban, regulation, subsidy for alternatives); use of revenue; time lags.

Judgements might include: effective because output moves close to the social optimum and revenue is raised; or only partly effective because of evasion, uncertainty and the burden on small firms. Credit any reasoned judgement.