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IDK EXAM TECHNIQUE: AQA ECON1 Q4- EVALUATION

Choice of question

Choose the question that enables you to talk about merit/de-merit goods. This helps you to draw diagrams and write about taxes/subsidies as forms of government intervention. Look out for three key themes:

  • Pollution
  • Healthcare
  • Education

Sometimes both questions will allow you to talk about externalities, in which case pick whichever you're most comfortable with! 

Mark breakdown 

  • Follows a "tiered" marking approach, cannot access application marks without demonstrating knowledge, cannot access analysis marks without demonstrating application etc.
  • Knowledge: primarily through definitions and use of technical language
  • Application: explicit references to the extracts- include at least one per paragraph. 
  • Analysis: diagrams and developing a "chain of reasoning"
  • Evaluation: what is your argument dependent on? Why might this not happen? Include at least one evaluation point per paragraph from paragraph 2 onwards.

June 2013 Q4

Question paper: http://filestore.aqa.org.uk/subjects/AQA-ECON1-QP-JUN13.PDF
Mark scheme: http://filestore.aqa.org.uk/subjects/AQA-ECON1-W-MS-JUN13.PDF

Paragraph 1- "introduction"

1. Start with your written definitions and add relevant examples (similar to Q1 or Q3). If you've chosen your question sensibly, you'll be able to define merit goods/de-merit goods and private/social/external benefits/costs. This targets your knowledge and application marks:

Merit goods are goods that include an external benefit that accrues to individuals outside the transaction. These are often provided on the basis of need rather than the ability to pay e.g healthcare. In the case of the education market, the external benefits might include lower crime rates or the benefits of a more productive workforce. The private benefits to education could include the increase in salary that result from an undergraduate degree.

2. Add in an explicit reference to the extract, either as an example linked to your definition or as a means of introducing your main argument.

Extract C, line 5 says that “The average graduate earns £160 000 more than the average non-graduate over a lifetime”.

3. Introduce the concept of market failure as the key theme running through your essay i.e good X is underprovided or overprovided.

Merit goods tend to be underprovided by the market.

Paragraph 2- "market failure"

1. Draw the relevant externalities diagram depending on whether the question refers to a merit/de-merit good. Explain what this shows.

 

When only the private benefit of education is taken into account, then the demand curve would be at D1 however when the external benefits of a merit good are taken into account the demand curve would be at D2 i.e the marginal social benefit. The gap between these two curves is the external benefit of the good. The rise in the demand curve from D1 to D2 would cause the price of university education from P1 to P2 should increase the quantity consumed from Q1 to Q2. This shows that the market is under providing education below the allocatively efficient level after considering its true social benefit and is an example of market failure.

2. Evaluate this point. Is the good in question really a merit/de-merit good? Don't forget you want to be making at least one reference to the extracts per paragraph.

In spite of this, it may be argued that education is not a merit good. Extract C line 6 alludes to the fact that student profit personally from higher education meaning the external benefits might be negligible. In this case under-consumption below the allocatively efficient level is unlikely and tuition fees paid by the individual are appropriate.

Aside from the external benefits, undergraduate education could be under consumed due to a lack of information as to the private benefits. Students may not appreciate the full extent of their salary premium.

Paragraph 3- "correcting market failure"

1. How can the government address this market failure? If the good is a de-merit good, the government will impose a tax; if it is a merit good, the government will impose a subsidy. Draw the relevant diagram. 

The government can correct this market failure by subsidising the provision of education (extract B, line 4). This would lower the cost of production for the producer i.e universities, causing the supply curve to shift to the right from S to S1. Price would fall from P1 to P3 and the market quantity would also rise to Q2, the socially optimal level.  

2. Evaluate this point. Talk about the significance of elasticities i.e if demand is inelastic, the size of the tax/subsidy will have to be greater to bring about a given change in quantity. You can also draw a diagram to illustrate this.

However, the extent to which university degrees need to be subsidised to address the issue of oversupply is dependant on the price elasticity of demand. When university prices rose by 3 times, university subscription still increased that year according to (extract C, line 12). This suggests that the PED of undergraduate education is low and that the size of the subsidy would have to be large to incentivize more students to attend university.

Paragraph 4- "alternative forms of government intervention"

1. What else could the government do to address this market failure? Education/awareness, regulation, permits? 

The government could implement other forms of policy in order to address the market failure presented by the under-consumption of education. For example, it could better educate students as to the benefits of higher education.   

2. Evaluate this point. Introduce the concept of government failure- this is when the government intervenes but fails to restore the socially optimal quantity. Can use this as an evaluation point for any form of government intervention. 

However, this may result in government failure, as it is hard to quantify the effects of such a scheme and there would be an opportunity cost of addressing the information gap in this manner. The tax revenue may be better spent on other skills initiatives like apprenticeship schemes. Increased spending on raising awareness of the benefits of higher education may result in unintended consequences such as an oversupply of graduates in the market.

Paragraph 5- "other" (optional)

1. Include anything else that you haven't already mentioned here. If you've covered all the bases, can skip to your concluding remarks (see below).

Extract B, line 13 suggests that philanthropy may be an effective alternative to tuition fees.   

2. Evaluate this point. 

In spite of this, the extract also states that this form of funding does not raise significant sums and that there is less of a culture of charitable giving in the UK. Relying on philanthropy leaves the allocation of resources to means outside of the market mechanism and can be perceived as inefficient in this manner.

Paragraph 6- "concluding remarks"

  • Keep it open ended
  • Summarise key points
  • Recap evaluative points "government could do this, but it depends on X, Y and Z."
  • Can introduce equity vs efficiency arguments here

The efficacy of government intervention depends on the availability of accurate information for both policymakers and consumer/students. Ultimately, the strongest argument in favour of subsidising education through lowering tuition fees may be a question of equity rather than efficiency- is higher education a true merit good?

Keywords: 

The following will help you structure your answer and gain knowledge marks. They've been highlighted in bold in the full mark response below. De-merit/ merit goods
Private/external/social benefits/costs
Underprovision/ overprovision/ underconsumption/ overconsumption
Socially optimal/ allocatively efficient
Signalling 
Incentive
Rationing
Market mechanism
Allocative efficiency
Government failure
Unintended consequences
Opportunity cost

Full mark response: 

Merit goods are goods that include an external benefit that accrues to individuals outside the transaction. These are often provided on the basis of need rather than the ability to pay e.g healthcare. In the case of the education market, the external benefits might include lower crime rates or the benefits of a more productive workforce. The private benefits to education could include the increase in salary that result from an undergraduate degree. Extract C, line 5 says that “The average graduate earns £160 000 more than the average non-graduate over a lifetime”. Merit goods tend to be underprovided by the market.
When only the private benefit of education is taken into account, then the demand curve would be at D1 however when the external benefits of a merit good are taken into account the demand curve would be at D2 i.e the marginal social benefit. The gap between these two curves is the external benefit of the good. The rise in the demand curve from D1 to D2 would cause the price of university education from P1 to P2 should increase the quantity consumed from Q1 to Q2. This shows that the market is under providing education below the allocatively efficient level after considering its true social benefit and is an example of market failure. In spite of this, it may be argued that education is not a merit good. Extract C line 6 alludes to the fact that student profit personally from higher education meaning the external benefits might be negligible. In this case under-consumption below the allocatively efficient level is unlikely and tuition fees paid by the individual are appropriate.
Aside from the external benefits, undergraduate education could be under consumed due to a lack of information as to the private benefits. Students may not appreciate the full extent of their salary premium.
The government can correct this market failure by subsidising the provision of education (extract B, line 4). This would lower the cost of production for the producer i.e universities, causing the supply curve to shift to the right from S to S1. Price would fall from P1 to P3 and the market quantity would also rise to Q2, the socially optimal level.  However, the extent to which university degrees need to be subsidised to address the issue of oversupply is dependant on the price elasticity of demand. When university prices rose by 3 times, university subscription still increased that year according to (extract C, line 12). This suggests that the PED of undergraduate education is low and that the size of the subsidy would have to be large to incentivize more students to attend university.
The government could implement other forms of policy in order to address the market failure presented by the under-consumption of education. For example, it could better educate students as to the benefits of higher education. However, this may result in government failure, as it is hard to quantify the effects of such a scheme and there would be an opportunity cost of addressing the information gap in this manner. The tax revenue may be better spent on other skills initiatives like apprenticeship schemes. Increased spending on raising awareness of the benefits of higher education may result in unintended consequences such as an oversupply of graduates in the market.
Extract B, line 13 suggests that philanthropy may be an effective alternative to tuition fees. In spite of this, the extract also states that this form of funding does not raise significant sums and that there is less of a culture of charitable giving in the UK. Relying on philanthropy leaves the allocation of resources to means outside of the market mechanism and can be perceived as inefficient in this manner.
The efficacy of government intervention depends on the availability of accurate information for both policymakers and consumer/students. Ultimately, the strongest argument in favour of subsidising education through lowering tuition fees may be a question of equity rather than efficiency- is higher education a true merit good?