Here is a sample answer to a 25 mark question on government intervention.
Sample question
Consider this question:
Evaluate possible methods of government intervention to reduce the environmental damage caused by the consumption of goods that emit CO2, such as cars (25 marks).
This question could be accompanied by a short extract, for example:
“A car produces about 10% of its carbon dioxide emissions during production, 5% during disposal and 85% during the car’s use period. Managing the levels of carbon dioxide may require action from both firms and consumers.”
Answer
Knowledge, application and analysis (KAA) point 1
A tax can be used to tackle negative externalities of consumption. Pollution can come from driving cars, which can cause negative externalities such as breathing problems for those with asthma or contribute to climate change. In a free market without a tax, the market does not take into account the negative externality, only accounting for private benefits and costs. As a result there is overconsumption of cars in the free market. A tax could be imposed, such as the Ultra Low Emissions Zone (ULEZ) in Greater London, which taxes polluting cars for entering a zone in London. A tax shifts supply left from S to S1, so the price of driving a car rises from p to p1 and the quantity of cars falls from q to q1. This fall in quantity moves the free market closer to the socially optimal quantity of cars, as the tax makes polluting car users pay for the externality. This tax therefore increases social welfare by making consumers internalise the externality. The red area shows the consumer incidence of the tax. As consumers are worse off from the tax with higher prices and lower quantity, they reduce their consumption of polluting cars. Consumers are therefore likely to switch to less polluting methods of transport such as buses or the underground, which would cause an overall fall in CO2 emissions compared to driving a polluting car. Indeed ULEZ has reduced CO2 emissions in London by 800,000 tonnes from 2019 to 2022.
Evaluation point 1
This depends on the price elasticity of demand for car travel. The PED may be inelastic because use of the car may be a necessity in some parts of Greater London, where there might not be enough connections to public transport networks and hence there is an absence of substitutes for car users. In this case, the tax causes the equilibrium quantity of car travel to fall by less, so CO2 emissions fall by less, so the externality remains and is not fully internalised, so welfare loss from the externality largely remains.
KAA point 2
Another policy to reduce emissions is to use regulation. For example Paris is banning diesel cars from entering the city starting in 2025. This will lower demand for diesel cars in France for those who drive in and out of Paris. So demand for diesel vehicles in France shifts left from D to D1. So the price of diesel cars falls from p to p1 and the quantity of diesel cars falls from q to q1. This fall in diesel car use should reduce the amount of CO2 emissions from diesel cars, leading to an increase in social welfare for those who are victims of pollution through breathing difficulties and from extreme weather events associated with climate change. The consumer surplus for diesel car users falls from CEp to BFp1. The producer surplus for diesel car producers falls by the shaded area shown. This will reduce profits of car producers and make it less profitable to invest in diesel car production. As a result, firms may be incentivised to invest more in diesel car substitutes, such as trains or electric vehicles. This will increase supply of electric vehicles, lowering the price of electric vehicles and encouraging even more consumers to switch from diesel to electric vehicles, further reducing CO2 emissions. French car companies such as Renault are indeed switching from diesel to electric car production, with Renault stating that from 2030, it will only be selling electric cars such as its E-Tech range. Moreover, with fewer cars on the road with some consumers opting for public transport instead, there will be less traffic, reducing the amount of CO2 emissions from cars waiting in traffic with engines on.
Evaluation point 2
However it may be unaffordable for those on low incomes to replace their diesel cars with electric cars. This is because there are fewer buyers for used diesel cars with the ban coming into force, but consumers may have to buy a new electric car nonetheless. This may result in some people not being able to afford to commute to work or having less leftover income, after car payments, to pay other bills. Thus inequality and poverty could rise as a result, which could lead to social unrest and protests in Paris, while consumers may continue to use petrol/diesel cars illegally in protest. This reduces the extent to which CO2 emissions fall as a result of the ban.
Conclusion
Overall the policy of taxing use of polluting vehicles in low emission zones is likely to be the most effective policy, as the revenue raised from the tax, shown by the sum of consumer and producer incidence in the first diagram, can be spent on increasing the availability of public transport, leading to even more people switching to public transport away from petrol/diesel cars, further reducing emissions. The success of the tax depends on the time frame. The PED might become more elastic over time, as substitutes, such as electric vehicles and public transport, become more widely available to consumers. In this case, the tax should lead to a greater reduction in emissions over time. It may be beneficial to combine a tax with subsidies for scrapping used petrol / diesel vehicles, such as the £110 million London scrappage scheme , so that those on low incomes are not driven into poverty by the tax and can switch to electric vehicles without extra cost.
Comments on the essay
Comments on KAA paragraphs:
- The essay above has detailed KAA (knowledge, application and analysis paragraphs).
- KAA reaches a high level with extensions to the chains of reasoning and high level diagrams that label key areas.
- The first KAA point explains the effect of a tax, referring to consumer/producer incidence and discussing the consumer incidence impact in a way that relates to emissions.
- The second KAA point explains the effect of regulation, extending the discussion to producer surplus and the effects on producers, again linking back to the effects on emissions from car use.
Comments on evaluation paragraphs:
- The length of evaluation paragraphs is proportionate, touching on key micro evaluation points such as elasticities and impacts on inequality.
- Further evaluation in the conclusion covers the time frame and the concept of combining policies (tax and subsidy) to maximise emission reduction.
As a result, this essay would likely score full marks or close to it.
For Edexcel A Economics, note the negative externality of consumption diagram is not in the syllabus (see specification point 1.3.2 parts c to d). So, while students can score highly without the negative externality of consumption diagram for this essay, I would expect students to be able to explain the negative externality (of consumption) in words, including in this case the effect of policies on such negative externalities.
Other policies could have been mentioned here. For instance, subsidies for green substitutes such as buses, energy efficiency measures or other regulations or even tradable pollution permit schemes.
Note an introduction is not needed for an Edexcel Economics A 25 mark answer. You can find sample essays in examiner reports that score full marks without an introduction.
If you would like to refer to another context, for instance television, consider the following policy examples.
- Minimum energy performance standards for TVs, a type of regulation, in the EU.
- Charging higher prices for peak electricity use as opposed to off-peak. Peak electricity use is more likely to rely on fossil fuels, so reducing peak use could reduce emissions.
- Regulations / public awareness with energy efficiency ratings for different television sets. This could raise awareness of which TVs are less environmentally friendly and encourage environmentally conscious consumers to switch.
For more on the EU’s approach see the link here.
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