Pearson Edexcel International GCSE Economics: Environment and redistribution (4EC1) – Revision Notes

These notes condense section 2.1.1 e) and f) of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3: protection of the environment and redistribution of income. For full explanations, read the study guide. Then try the practice questions, the course hub, the checklist and the free diagnostics. All data below is invented for practice.

1. Environmental damage (2.1.1 e)

The cause is an external cost: harm to third parties that the firm does not pay for. Private cost is lower than social cost, so too much of the good is produced.

Type	Business source	Typical effect
Visual (incl. litter)	Packaging waste, untidy sites	Less attractive area, lost tourism
Noise	Night work, heavy traffic	Poor sleep, stress, lower property values
Air	Smoke, fumes	Breathing problems, health costs
Water	Chemical or sewage discharge	Dead fish, unsafe drinking water, harm to farms

Always write three links: activity, damage, consequence.

2. Government intervention (2.1.1 e)

Method	How it works	Main strength	Main weakness
Taxation	Per-unit tax raises cost; supply shifts up	Raises revenue; makes polluters pay	Weak if demand is inelastic; hits poor households
Subsidy	Payment lowers cost of cleaner choice	Encourages green output	Costs taxpayers; opportunity cost
Regulation	Rules, bans, limits	Direct, certain effect	Needs inspection; raises firms’ costs
Fines	Penalty for breaking rules	Punishes and deters	Deters only if caught and fine is large
Pollution permits	Cap on total emissions; permits traded	Meets the cap at lower cost	Limit may be too loose; monitoring needed
Parks	State provides green space	Absorbs some pollution; health and leisure	Land and money have other uses

Method: effect of a per-unit tax

1. Find the original equilibrium price and quantity.
2. Shift supply up by the tax. Find the new equilibrium.
3. Price paid by buyers minus old price is the buyers’ share. Subtract the tax from the new price to find what sellers receive.
4. Tax revenue is tax multiplied by the new quantity.
5. Change in external cost is external cost per unit multiplied by the change in quantity.

Reminder. A tax of 2 dollars is put on bottled juice. Output falls from 500 to 420 bottles. Revenue is 2 × 420 = 840 dollars. If each bottle causes 1.50 dollars of external cost, external cost falls from 750 to 630 dollars, so it drops by 120 dollars.

Fines: the deterrence idea

A firm weighs its gain against the fine it expects to pay. With a 20% chance of being caught (1 in 5) and a gain of 12,000 dollars, a fine would need to reach 12,000 ÷ 0.2 = 60,000 dollars to remove the gain. Weak inspection weakens fines. This is a reasoning aid, not a required calculation.

Subsidy reminder

A subsidy of 5 dollars is paid on each electric bicycle battery. Sales rise from 300 to 360. The price buyers pay falls from 40 to 37 dollars, a fall of 3 ÷ 40 × 100 = 7.5%. Sellers receive 37 + 5 = 42 dollars, which is 2 dollars more than before. Cost to the government: 5 × 360 = 1,800 dollars. Always multiply the subsidy by the new quantity, and state the opportunity cost of that money.

Permits in three lines

• The government sets the cap and issues permits.
• Firms with cheap ways to cut pollution cut more and sell permits.
• Firms with costly cuts buy permits. The same cap is met at lower total cost.

Reminder. Firms A and B must each cut 50 tonnes. A cuts for 10 dollars a tonne, B for 40 dollars. With no trading the total cost is 50 × 10 + 50 × 40 = 2,500 dollars. With permits trading at 25 dollars, A cuts 100 tonnes (cost 1,000) and sells 50 permits for 1,250. B buys 50 permits for 1,250 and cuts nothing. The cap is met for a real cost of 1,000 dollars, a saving of 1,500 dollars. Both firms gain: A’s net cost is 1,000 − 1,250 = −250 (a profit of 250), and B pays 1,250 instead of 2,000.

3. Definitions (2.1.1 f)

Term	Definition
Income inequality	Income is unevenly shared between individuals or households
Absolute poverty	Unable to afford basic needs (food, water, shelter, clothing)
Relative poverty	Income far lower than what is normal in that country, often a fraction of the median

Must-know distinction: if every income rises by the same percentage, absolute poverty can fall, but relative poverty and inequality do not change.

Reminder. Seven households have monthly incomes per person of 40, 55, 80, 110, 150, 210 and 300 dollars. Median = 110. Using a 50% line: 0.5 × 110 = 55. Only the household on 40 is below 55 (55 itself is not below it), so one household is in relative poverty.

4. Why reduce poverty and inequality

• Meet basic needs: food, water, shelter, medicine.
• Raise standards of living: more consumption, better health, a more productive workforce.
• Ethical reasons: fairness; everyone deserves a minimum standard of life.

Counter-point to use in evaluation: high taxes and generous benefits may reduce incentives to work or invest.

5. Redistribution methods

Progressive taxation

A progressive tax: the percentage of income paid goes up as income goes up. Average tax rate is tax divided by gross income, multiplied by 100.

Reminder. Country D (illustrative): 0% on the first 5,000; 10% on income between 5,000 and 20,000; 30% above 20,000.

Gross pay	Working	Tax	Net pay	Average rate
4,000	all in the 0% band	0	4,000	0%
15,000	0.1 × 10,000	1,000	14,000	6.7%
40,000	1,500 + 0.3 × 20,000	7,500	32,500	18.75%

Net pay is gross pay minus tax. A regressive tax takes a bigger share from lower incomes. A proportional (flat) tax takes the same share.

Progressive, regressive and proportional compared:

Tax type	Share of income taken as income rises	Example
Progressive	Rises	Banded income tax
Proportional	Stays the same	One flat rate on all income
Regressive	Falls	A charge that is the same amount for everyone, or a sales tax on spending when the poor spend most of their income

Benefit payments

Money paid to people (for example unemployment or disability support), paid for out of tax revenue. It raises the income of the poorest immediately. Worked reminder: a poor household earns 6,000, pays 300 tax and receives 1,800 in benefits, so ends with 7,500 (up 25%). A rich household earns 36,000 and pays 10,800 tax, so ends with 25,200 (down 30%). The ratio of rich to poor income falls from 36,000 ÷ 6,000 = 6 to 25,200 ÷ 7,500 = 3.36. Weakness: it costs money, and if benefits stop sharply as pay rises, working may bring little extra.

Education and healthcare investment

Raises skills, health and productivity, so people can earn more. It addresses causes, not just symptoms. Weakness: the results take years and cost a lot now.

6. Evaluation chains

• Tax on polluter: price rises, quantity falls, pollution falls. Judge by elasticity, by what is done with the revenue and by the effect on poor households.
• Regulation versus tax: regulation gives certainty, taxes give a flexible incentive. The best answer compares them in the context given.
• Redistribution: short run (benefits, tax) versus long run (education, healthcare). Conclude which fits the situation.

Quick self-test

1. State two types of pollution a quarry might cause.
2. A tax of 3 dollars is placed on a good. Equilibrium quantity falls from 800 to 650. Calculate tax revenue.
3. Calculate the percentage fall in output in question 2.
4. In Country D (section 5), calculate the tax and net pay for gross pay of 12,000.
5. Define absolute poverty.
6. A country’s incomes all rise by 8%. State what happens to relative poverty.
7. Give one advantage and one disadvantage of tradable permits.
8. A firm gains 20,000 dollars from dumping waste, with a 25% chance of being caught. State the minimum fine that removes the gain.
9. State two reasons to reduce income inequality.
10. Explain one reason education spending may reduce poverty.

Answers

1. Noise and air (or visual or water).
2. 3 × 650 = 1,950 dollars.
3. (650 − 800) ÷ 800 × 100 = −18.75%, a fall of 18.75%.
4. 0.1 × (12,000 − 5,000) = 700 dollars tax; net pay = 11,300 dollars.
5. Being unable to afford basic needs such as food, water, shelter and clothing.
6. It stays the same, because the poorest are still the same distance below the median in percentage terms.
7. Advantage: the cap is met at lower cost. Disadvantage: the limit may be too loose, or monitoring is costly.
8. 20,000 ÷ 0.25 = 80,000 dollars.
9. Examples: to meet basic needs; to raise living standards; ethical fairness.
10. It raises skills, so workers can get higher-paid jobs, which lifts household income and cuts poverty over time.

Where marks are usually lost

• Writing “pollution” without naming the type or linking it to a business activity.
• Mixing up a tax (paid by producers or consumers) with a subsidy (paid to producers).
• Multiplying the tax by the quantity before the tax rather than after it.
• Defining relative poverty as “being poor” without comparing with others.
• Saying progressive tax means the rich pay “more”, rather than a higher percentage.
• Forgetting that growth can cut absolute poverty without cutting inequality.
• Listing policies without a judgement or without using the context given.
• Leaving out the unit or the working in a calculation.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1), specification Issue 3, February 2026, Pearson Education Limited, section 2.1.1 e) and f).