Question 23M.1.SL.TZ1.1
| Date | May 2023 | Marks available | [Maximum mark: 25] | Reference code | 23M.1.SL.TZ1.1 |
| Level | SL | Paper | 1 | Time zone | TZ1 |
| Command term | Discuss, Explain | Question number | 1 | Adapted from | N/A |
Explain why, in the case of healthcare and education, positive externalities might cause market failure.
[10]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: positive externalities, market failure.
- Explanation: of healthcare and education as merit goods which generate external benefits, as well as private benefits, and whose consumption is therefore likely to be less than the socially optimal level if left to the free market to provide; explanation of positive externalities in the case of healthcare, eg control the spread of contagious diseases and healthy workers being more productive; and an explanation of the positive externalities in the case of education, eg the positive relationship between education, productivity, employment, innovation and economic growth.
- Diagram: positive externalities of consumption diagram showing MSB above MPB, MSB not equalling MSC and welfare loss.
A maximum of [6] should be awarded if only one of healthcare or education is explained and developed.
Assessment Criteria
Part (a) 10 marks
This was the most popular question and the one for which candidates were well prepared, in general. Most candidates recognized health care and education as merit goods but were unable to fully explain the external benefits of these two goods. There were proper diagrams illustrating the positive externalities, but the welfare loss was often not correctly labelled. Some candidates incorrectly explained these two merit goods as producing positive externalities of production. Many candidates understood why positive externalities cause market failure and could explain it using the diagram, but it was evident that market failure is a concept that is not understood by all candidates.
Using real-world examples, discuss whether the provision of subsidies is the best way to increase the consumption of merit goods.
[15]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: merit good, subsidy.
- Explanation: of the impact of subsidies in terms of lowering production costs, increasing supply, lowering price and increasing the quantity demanded.
- Diagram: demand and supply diagram showing the impact of a subsidy, or use of an MSC/MSB diagram.
- Synthesis (discuss): the strengths and weaknesses of the use of subsidies, the strengths and weaknesses of other measures such as, direct government provision, legislation and regulation, awareness creation through education/advertising, consideration of “best”.
- Examples: use of real-world examples to show instances of the consumption merit goods being increased through the use of subsidies or through the use of other means.
A maximum of [12] should be awarded if only subsidies are considered.
N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Assessment Criteria
Part (b) 15 marks
Most candidates were able to explain how subsidies work and illustrate them on a properly labelled diagram. It was surprising that the concept of merit goods was not always properly explained. There were some good real-world examples of merit goods but why they are merit goods was often not explained. Many were able to evaluate the use of subsidies to increase the consumption of merit goods but did not compare them to any other ways to increase consumption.