Question 20N.1.HL.TZ0.1b
| Date | November 2020 | Marks available | [Maximum mark: 15] | Reference code | 20N.1.HL.TZ0.1b |
| Level | HL | Paper | 1 | Time zone | TZ0 |
| Command term | Discuss | Question number | b | Adapted from | N/A |
Discuss how the introduction of a subsidy in a market will affect consumers, producers and the government.
[15]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definition of subsidy
- diagram to show the imposition of a subsidy and the consequences for the three stakeholders
- explanation of how a subsidy lowers the price of the product and may lead to increased consumption/consumer surplus by consumers, increased production/revenue/producer surplus for producers and increased government expenditure
- examples of markets where subsidies have been introduced in practice
- synthesis or evaluation (discuss).
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Discussion may include: judgments about which stakeholders are better off and which stakeholders are worse off due to the imposition of a subsidy, which are well supported by the explanation of the theory, the diagram and the example(s).
The subsidy is a difficult topic to examine because there are many types of subsidies that governments use in practice to support the firms in a given industry. The two main types are a subsidy that has the form of a specific cash payment per unit of production (the opposite of a specific per unit tax) and a subsidy that decreases the cost of production (such as provision of infrastructure, subsidized wages, subsidized energy, low-interest loans, etc). A correctly drawn diagram appropriate for the first type of subsidy was often used, but in their explanations, candidates were confusingly explaining that the subsidy decreases the producers' cost of production. Some weaker answers also had the effects of the subsidy on consumer and producer surplus shown incorrectly on the diagram. Another common mistake was to give an example where the subsidy is provided to stimulate the production and consumption of a merit good while simultaneously pointing out that the provision of subsidy would create deadweight loss/lead to allocative inefficiency.
