AQA A-level Economics: Government intervention: tax, subsidy, price controls (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022) sub-section Government intervention in markets: 3.1.5.8 on the AQA website, printed as 4.1.8.9 in the combined PDF. The specification gives no AS-only or A-level-only labels for it. All countries, markets and figures are invented. Price is in currency units (cu).

Teaching is in the study guide and the revision notes. Course pages: AQA A-level Economics hub, printable checklist and the free diagnostics.

Questions

1. Explain how a specific tax differs from an ad valorem tax. [3]

2. In Country B the market for notebooks has demand Qd = 200 − 5P and supply Qs = −40 + 15P.

(a) Calculate the equilibrium price and quantity. [2] (b) A specific tax of 4 cu per notebook is collected from sellers. Find the new price paid by buyers and the new quantity. [3] (c) Find the revenue raised, and how much of it falls on buyers and how much on sellers. [3]

3. For a good, price elasticity of demand is −0.4 and price elasticity of supply is 1.6. A tax of 10 cu per unit is imposed. Using the elasticity values, explain who bears more of the tax and estimate the share each bears. [4]

4. In Country B the market for evening language classes has demand Qd = 260 − 8P and supply Qs = −60 + 12P.

(a) Calculate the equilibrium price and quantity. [1] (b) A subsidy of 5 cu per class is paid to providers. Calculate the price learners pay and the new quantity. [3] (c) Calculate the cost to the government. [1]

5. Bus passes in Country B have demand Qd = 450 − 15P and supply Qs = −90 + 30P. The government sets a maximum price of 9 cu.

(a) Calculate the equilibrium price and quantity. [1] (b) Calculate the shortage that results at the maximum price. [2] (c) Use the figures to explain why an illegal market might develop. [2]

6. A demerit good has demand Qd = 360 − 10P and supply Qs = −60 + 18P. The government sets a minimum price of 20 cu.

(a) Calculate the equilibrium price and quantity. [1] (b) Calculate the surplus at the minimum price. [2] (c) Calculate price elasticity of demand at the original equilibrium and compare consumer spending before and after the minimum price. [2]

7. Three factories in Country B each emit 70 tonnes a year. The government limits total emissions to 150 tonnes and gives each factory 50 permits. Cutting a tonne costs factory A 5 cu, factory B 12 cu and factory C 20 cu. A and B can each cut at most 40 tonnes and C at most 30.

(a) Find the total cost of the cut if each factory reduces emissions by the same amount and trading is not allowed. [2] (b) The permits can now be traded. Find the cheapest total cost of meeting the limit, and state the permit price. [3] (c) Calculate the saving from trading. [1]

8. A lake in Country B is open to any fishing boat. Total catch is T = 24n − n² tonnes with n boats, each boat costs 8 tonnes-worth of fish to run, and net gain is T − 8n.

(a) Calculate the number of boats and the net gain under open access (boats join until the average catch equals 8). [2] (b) Calculate the number of boats and net gain if one owner controls the lake and sets marginal catch equal to 8. [2] (c) Explain why the owner uses fewer boats. [1]

9. A government pays for a vaccination programme for 6,000 people at a cost of 20 cu each. Each person gains a private benefit of 15 cu, and each vaccination gives other people an external benefit of 8 cu. Evaluate whether the programme is worth funding on these figures. [4]

10. A government wants to cut use of a demerit good and also to protect low-income households. Explain how these objectives could conflict if it uses an indirect tax, and how it might respond. [6]

11. A factory in Country B releases fumes that harm nearby residents. Evaluate a tax, tradable permits and regulation as ways to reduce the harm. [12]

Answers

1. A specific tax charges the same amount on every unit sold [1], whereas an ad valorem tax charges a set percentage of the selling price [1]. So a specific tax shifts supply up in parallel, while an ad valorem tax pivots it, because the tax per unit rises as price rises [1]. [3] Examiner insight: A question on how two things differ is best answered by setting them side by side; defining each alone leaves the contrast unstated.

2. (a) 200 − 5P = −40 + 15P, so 240 = 20P [1]. P = 12 and Q = 140 [1]. (b) Sellers need 4 more per unit, so Qs = −40 + 15(P − 4) = −100 + 15P [1]. Setting 200 − 5P = −100 + 15P gives P = 15 [1] and Q = 125 [1]. (c) Revenue = 4 × 125 = 500 cu [1]. Buyers bear (15 − 12) × 125 = 375 [1]. Sellers keep 15 − 4 = 11, so they bear (12 − 11) × 125 = 125 [1]. [8] Examiner insight: Show the adjusted supply equation. It is an easy step to get wrong, and writing it out lets a reader follow your later working.

3. Demand is inelastic (0.4) and supply is elastic (1.6) [1]. The less elastic side bears more of the tax, so buyers bear more [1]. The burden splits in the ratio PES : PED, which is 1.6 : 0.4 = 4 : 1 [1]. Buyers bear about 8 cu (80%) and sellers about 2 cu (20%) [1]. [4] Examiner insight: Say that the split is an estimate; the ratio rule is exact only in simple cases.

4. (a) 260 − 8P = −60 + 12P, so 320 = 20P. P = 16 and Q = 132 [1]. (b) Providers receive P + 5, so Qs = −60 + 12(P + 5) = 12P [1]. Setting 260 − 8P = 12P gives P = 13 [1] and Q = 156 [1]. (c) Cost = 5 × 156 = 780 cu [1]. [5] Examiner insight: Learners pay 13 but providers receive 18. State both prices so the gap equals the subsidy.

5. (a) 450 − 15P = −90 + 30P, so 540 = 45P. P = 12 and Q = 270 [1]. (b) At 9: Qd = 450 − 135 = 315 [1] and Qs = −90 + 270 = 180 [1]. Shortage = 135. (c) Buyers would pay up to (450 − 180) ÷ 15 = 18 cu for the last pass supplied [1], well above 9, so sellers and buyers gain from trading illegally at higher prices [1]. [5] Examiner insight: Check that the ceiling is below equilibrium before calculating a shortage; above it, nothing changes.

6. (a) 360 − 10P = −60 + 18P, so 420 = 28P. P = 15 and Q = 210 [1]. (b) At 20: Qd = 160 [1] and Qs = 300. Surplus = 140 [1]. (c) PED = −10 × 15 ÷ 210 = −0.71 [1]. Spending rises from 15 × 210 = 3,150 to 20 × 160 = 3,200 [1]. [5] Examiner insight: Quote the sign and size of elasticity, and tie the spending result back to inelastic demand.

7. (a) Cap 150 means 60 tonnes must be cut, so each cuts 20 [1]. Cost = 20 × 5 + 20 × 12 + 20 × 20 = 100 + 240 + 400 = 740 cu [1]. (b) The cheapest cuts happen: A cuts 40 (its limit) [1] and B cuts 20 [1]. Cost = 200 + 240 = 440 cu. The permit price is 12 cu, set by B as the marginal cutter [1]. (c) Saving = 740 − 440 = 300 cu [1]. [6] Examiner insight: Explain why the permit price equals 12 cu: it is the cost of the last tonne cut, and it is below the 20 cu that factory C would otherwise pay.

8. (a) 24 − n = 8, so n = 16 [1]. T = 384 − 256 = 128 and net gain = 128 − 128 = 0 [1]. (b) 24 − 2n = 8, so n = 8 [1]. T = 192 − 64 = 128 and net gain = 128 − 64 = 64 [1]. (c) The owner counts the cost that an extra boat imposes on the others, whereas open-access boats ignore it [1]. [5] Examiner insight: Note that the catch is identical in both cases; the gain comes from lower cost, which is the point of the comparison.

9. Cost = 6,000 × 20 = 120,000 cu [1]. Private benefit = 6,000 × 15 = 90,000, a net private loss of 30,000 [1]. Adding the external benefit of 6,000 × 8 = 48,000 gives total benefit of 138,000 [1]. Net social benefit = 138,000 − 120,000 = 18,000 cu, so it is worth funding if the external benefit is reliable, but not otherwise [1]. [4] Examiner insight: A judgement is needed, not only the sum, and the judgement should rest on how certain the external benefit is.

10. A tax raises price and cuts demand [1]. If demand is inelastic, consumption falls little, so the first aim is only partly met [1]. Low-income households spend a larger share of income on the good, so the tax is regressive [1]. This conflicts with the aim of protecting them [1]. The government could use revenue for support or health services, or choose regulation instead [1]. The choice depends on which objective carries more weight [1]. [6] Examiner insight: Name the conflict and then make a decision on it; listing both aims without a resolution leaves the question half answered.

11. Tax: it raises costs, shifting supply up and cutting output [1]. Set at the external cost, it gives the social optimum [1]. But the external cost is hard to measure [1], and revenue can fund clean-up or support [1]. Permits: the cap fixes the total [1], and trading finds the cheapest cuts [1], but the cap, allocation and monitoring are hard, and a market needs many firms [1]. Regulation: a standard is simple and certain [1], but it ignores differences in cost between firms and needs enforcement [1]. Evaluation: with one factory, a permit market would be thin, so a tax or standard is better [1]. If the harm is severe or a safe limit is known, a standard gives certainty; if costs vary and the harm can be measured, a tax is cheaper [1]. Reasoned overall judgement that weighs these [1]. [12] Examiner insight: Compare the three tools against each other in this setting rather than describing each in turn; a conclusion that uses the factory context is stronger.

Where marks are usually lost

• Moving the demand curve when a tax or subsidy changes costs.
• Not adjusting the supply equation correctly when a tax or subsidy is added.
• Treating the price paid and the price received as the same after a tax.
• Calculating a shortage or surplus without checking the control binds.
• Giving an elasticity without a sign, or without linking it to who bears a tax.
• Describing a policy but not the failure it addresses.
• Listing strengths and weaknesses with no judgement.
• Ignoring cost and what the government gives up.

Next steps

• Review with the revision notes and the study guide.
• Course pages: AQA A-level Economics hub and printable checklist.
• Find weak spots with the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics, specification version 1.3 (29 June 2022), AQA. Sub-section covered: Government intervention in markets (3.1.5.8 on the AQA website; 4.1.8.9 in the combined PDF).