Section 1.3.6 — Annotated model answers for indirect taxes, subsidies, and government intervention to correct market failure.
These model answers demonstrate how to structure responses for Edexcel International A-Level (IAL) Economics and Business exams. Each answer includes a mark scheme breakdown, PEEL structure (where applicable), annotated paragraphs, and examiner commentary explaining what earns marks at each band.
Filter by marks:
8 marks
Unit 1 · 1.3.6 Government Intervention · Analysis
Analyse: how the imposition of an indirect tax on sugary drinks could reduce market failure.
Mark Scheme Breakdown
1–2 marksKnowledge: definition of indirect tax and/or negative externality / demerit good
3–4 marksApplication: mechanism of tax on sugary drinks (raises price, internalises external cost)
5–8 marksAnalysis: developed chain through to reduced consumption, welfare gain, potential limitations
PEEL Structure
P
Point
An indirect tax raises the private cost of production, shifting supply left and reducing consumption.
E
Evidence
E.g. the UK Soft Drinks Industry Levy (2018) — a two-tier tax on sugar content in drinks.
E
Explain
The tax internalises the external cost (obesity, NHS burden) by making the market price reflect the social cost, moving output closer to the socially optimal level.
L
Link
This reduces the welfare loss from over-consumption of demerit goods, though effectiveness depends on PED and whether firms reformulate.
KKnowledge
AApplication
AnAnalysis chain
DDiagram ref.
Model Answer
Para 1
Sugary drinks can be classified as a demerit good — a good that is over-consumed because consumers underestimate the long-term health costs and because consumption generates negative externalities (e.g. increased burden on the NHS from obesity-related illness). K An indirect tax is a government-imposed levy on producers that raises the cost of production. K The UK introduced the Soft Drinks Industry Levy in 2018 as an example of this approach. A
Para 2
The tax shifts the supply curve leftward (from S to S+tax), raising the market price and reducing the equilibrium quantity consumed. An By increasing the private cost, the tax effectively internalises the external cost — making the market price closer to the true social cost of consumption. An This moves output from the free-market quantity (Qm) toward the socially optimal quantity (Qopt), reducing the welfare loss (deadweight loss) caused by over-consumption. D
Para 3
However, the effectiveness of the tax depends on the price elasticity of demand for sugary drinks. An If demand is price inelastic — for example, among habitual consumers or those with few perceived substitutes — the reduction in quantity consumed will be small, and the tax will primarily raise revenue rather than change behaviour. An Conversely, the UK sugar levy has been credited with encouraging manufacturers to reformulate products with less sugar, reducing consumption even without large price increases — an outcome that extends the policy's impact beyond the simple price mechanism. A
Examiner Commentary
Top marks are earned by the developed chain: tax → supply shifts left → price rises → quantity falls → welfare loss reduced. The conditional point on PED shows sophisticated analysis — examiners at this level want to see candidates qualify their reasoning. The UK sugar levy is an excellent real-world application. A diagram showing the tax wedge between S and S+tax, with the welfare gain shaded, would earn full diagram credit.
Likely Score7–8 / 8
4 marks
Unit 1 · 1.3.6 Government Intervention · Knowledge & Application
Explain: how an indirect tax can be used to correct a negative externality.
Mark Scheme Breakdown
1–2 marksKnowledge: definition of indirect tax and/or negative externality
3–4 marksApplication: tax internalises external cost, raises private cost to social cost level
KKnowledge/Definition
AApplication
Model Answer
An indirect tax is a tax levied on the sale of goods or services, paid by producers but often passed on to consumers through higher prices. K A negative externality occurs when production or consumption imposes costs on third parties — meaning the social cost exceeds the private cost. K
A government can set an indirect tax equal to the external cost per unit. This forces producers to internalise the externality — their private cost now includes the external cost, raising the supply curve to align with the marginal social cost. A Output falls from the free market level to the socially optimal level, and the welfare loss is eliminated. For example, the UK's landfill tax raises the cost of sending waste to landfill, encouraging recycling and reducing environmental damage. A
Examiner Commentary
Precise definitions followed by clear mechanism (tax = external cost, internalise, output falls to social optimum). The landfill tax example provides concrete application. Avoid saying "the government taxes the externality" — instead say "the tax equals the external cost per unit."
Likely Score4 / 4
More Model Answers
Browse all Edexcel IAL Economics & Business model answers with mark scheme breakdowns and examiner commentary.