Econ AS Paper 1 2020

1 (a) Define the term ‘free market economy’.                                                                  (1)

An economic system in which the prices of goods and services are determined by supply and demand without government intervention.

(b) Which one of the following is the best example of the rationing function of the

price mechanism?               

D - When there is a shortage of a product, the price will rise and discourage

some consumers from buying the product

(c) Explain one advantage of a free market economy compared to a command economy.          

Competitive markets are responsive to consumers.

So, firms must be efficient and produce what people want, whereas in a command economy, there is no competition to ensure efficiency

2 (a) The income elasticity of demand for bus travel is estimated to be –1.5.

This implies that:                                                                                                                  (1)

D – bus travel is an inferior good

(b) Explain why a firm might try to reduce the price elasticity of demand for its products.                                                                                                                                           (3)

A lower PED means consumers are less sensitive to price changes. E.G. If a product has a PED of -0.1, a 10% increase in price would only reduce sales by 1%, so the firm’s total revenue would increase.

3 (a) In the diagram below, the government grants a subsidy to energy suppliers to

install loft insulation. This shifts the market supply curve for loft insulation from

Supply1 to Supply2.

The total amount spent by the government on subsidies is represented by the area:

(1)

C - P3P1JL

(b) Explain an opportunity cost to the government of granting subsidies to energy

suppliers to install loft insulation.                                                                                       (3)

The next best alternative use of the funds, such as spending on schools or hospitals. By choosing to subsidise loft insulation, the govt. forgoes these other important public services, which could also benefit society. Therefore, while the subsidy may improve energy efficiency, it must be weighed against the economic and social benefits of alternative spending, making the decision one of trade-offs.

 

4 (a) In the diagram below, the government imposes a specific tax on a product. This

shifts the supply curve from Supply1 to Supply2.

The government’s tax revenue is shown by the area:                                                   (1)

C - P3P1HK

 

(b) Using an example, explain why the government imposes specific taxes on many

goods and services.                                                                                                            (3)

A specific tax is a set amount of tax charged per unit of a good or service sold. For example, the government imposes alcohol duty, charging a fixed amount per bottle of alcohol. This tax helps to internalise the external costs of alcohol consumption, such as health problems and social harms, and can also act as a ‘sin tax’ to discourage harmful behavior while raising government revenue.

5 (a) Define the term ‘government failure’.                                                                       (1)

Government failure occurs when government intervention in the economy leads to a net loss of economic welfare.

b) Explain one likely microeconomic reason why the government is using taxpayers’

money to fund HS2

To address positive externalities. E.G. More people using high-speed trains instead of cars reduces road congestion and pollution, benefiting society beyond the individual users.

(c) The diagram below shows the demand for and supply of passenger rail services. The shift of the demand curve from D1 to D2 is most likely to result from a:

(1)

 

A - government decision to impose a tax on workplace parking

6 (a) Explain why ‘the price elasticity of demand for higher education is about –0.5’ may

be of relevance to English universities.

Refer to Extract A in your answer.                                                                                                (5)

Knowledge (2 marks)
Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price.

A PED of –0.5 indicates inelastic demand, meaning a 1% rise in tuition fees leads to only a 0.5% fall in student numbers.

Application (2 marks)
Extract A shows that despite English university fees rising to £9,250 per year and increasing by over 825% since 1998, student numbers rose from 450,000 to over 700,000 by 2018.

Suggests demand for higher education is relatively unresponsive to price changes.

Analysis (2 marks)
Because demand is inelastic, higher tuition fees cause only a small fall in enrolment, allowing universities and the government to increase total revenue.

The proportional decrease in quantity demanded is smaller than the price increase.

Evaluation (4 marks)
However, Extract B shows students from low-income households have much higher dropout rates, suggesting that while overall demand is inelastic, price may significantly affect disadvantaged groups.

This raises concerns about equity and access, meaning policy decisions should consider social factors as well as revenue.

(b) Assess the likely impact of these drop-out rates on the allocation of resources

within an economy.                                                                                                  (10)

Knowledge (2 marks)
Indicate inefficient allocation of scarce resources.

Government funding, university staff time, and facilities are wasted when students leave before completing degrees.

Represents a loss of investment in human capital, reducing potential productive capacity.

Application (2 marks)
In England, tuition fees of £9,250 per year may increase financial pressure on poorer students, making them more likely to drop out (Extract B). Universities and the government invest in loans, teaching, and support, but early drop-outs mean these resources are not fully utilised. In contrast, countries such as Germany, where tuition is low or free, may experience fewer drop-outs and more efficient use of educational resources.

Analysis (2 marks)
High drop-out rates mean the economy fails to maximise its labour force potential. On a PPF diagram, this can be shown as operating inside the frontier, indicating underutilisation of human capital.

There is also an opportunity cost, as resources used on students who drop out could have been allocated to alternative public services.

Evaluation (4 marks)
However, the overall inefficiency may be limited. Extract A shows higher university participation across all backgrounds, suggesting support policies are partly effective. The impact also depends on scale: if most low-income students still complete degrees, the macroeconomic effect is small. Additionally, non-financial factors such as academic readiness and personal circumstances also affect drop-out rates.

Judgement
Overall, while high drop-out rates among low-income students reduce efficiency and human capital development, their impact is partly offset by widening participation and support schemes. Targeted policies to support vulnerable students would improve resource allocation and equity.

(c) With reference to Extract A, explain one likely private benefit to students and one

likely external benefit of higher education.                                                                       (6)

 

Knowledge (2)

·       A likely private benefit to students is higher earnings after graduation.

·       A likely external benefit of higher education is increased tax revenue for the government.

Application (2)

·       Extract A states that the median graduate income was £10,000 higher than non-graduates, showing the private benefit of additional income.

·       Extract A also notes that the government will benefit greatly from additional tax revenues, demonstrating an external benefit to society.

Analysis (2)

·       Higher earnings allow graduates to enjoy greater spending power, improving their standard of living.

·       The external benefit arises because more educated workers are generally more productive, enabling firms to produce goods more efficiently and potentially at lower costs, which can lead to lower prices for consumers. This shows how higher education benefits society beyond the individual.

(d) With reference to Figure 2, calculate the percentage increase in outstanding

student loans from 2013 to 2018. You are advised to show your working.                (4)

 

Step 1 – Formula:

Formula for percentage calculation (new-old)/old x 100.

 

Step 3 – Calculate difference:

102,357 - 45,418 = 56,939

Step 4 – Divide by old value:

56,939 / 45,418 = 1.254 X 100 = 125.4%

(e) With reference to Figure 1 and Extract A, discuss the benefits of allowing universities to charge higher tuition fees for some degree courses.                  (15)

Knowledge (3)

·       Allowing universities to charge higher tuition fees for some courses reflects the true cost of delivering those courses (e.g., medicine or science degrees require more equipment and staff time).

·       High-earning subjects, such as STEM courses, generate graduate premiums above the average non-graduate income, whereas other subjects may yield lower earnings (Extract A).

·       Differential fees allow universities to maximise revenue and maintain financial sustainability.

Application (3)

·       Figure 1 shows that the top five subjects generate significantly higher earnings, justifying higher fees for these courses.

·       Students are likely to accept higher fees for degrees with clear financial benefits, as the graduate premium is substantial (£10,000 on average).

·       Higher fees can fund improvements, such as better facilities, more staff, and support for disadvantaged students, while less expensive courses could be subsidised.

Analysis (3)

·       Charging variable fees improves resource allocation, as students who gain higher private benefits contribute more to the cost of their education.

·       This aligns with the ‘consumer pays’ principle, where those benefiting most from a service pay a larger share.

·       Long-term benefits include a more skilled workforce, enhancing productivity and contributing to economic growth.

Evaluation (6)

·       However, it may disadvantage poorer students, who could be deterred from high-cost courses despite high potential earnings.

·       Determining the exact fee for each course is difficult to quantify and may fluctuate over time.

·       Some subjects with lower earning potential, such as arts and humanities, are important for a broader education; charging high fees could reduce diversity and social value.

Policies must balance equity, access, and efficiency, ensuring financial sustainability without limiting opportunities for talented students from low-income backgrounds

(f) Evaluate the possible advantages of a free market approach to providing services

such as education.                                                                                                   (20)

 

Knowledge (4 marks)

• A free-market approach to education allows tuition fees and provision to be determined mainly by supply and demand, with limited government control.

• Education is treated as a merit good, generating both private benefits (higher earnings) and positive externalities (higher productivity, tax revenue).

• Students may pay higher fees for degrees with greater expected future earnings, reflecting perceived value.

• International models differ:

  • England/US: high fees at top institutions, lower fees at state universities.

  • Germany: graduate tax, low or no upfront fees.

  • Much of Europe: low or free tuition at point of use.

Application (4 marks)

• In England, tuition fees are £9,250 per year, with courses such as STEM and medicine costing more due to higher delivery costs (Extract A, Figure 1).

• Higher fees encourage students to choose courses with higher expected graduate earnings.

• Targeted support (e.g. lower fees or grants for poorer students) can improve access while keeping market incentives.

• Universities can allocate resources efficiently, funding high-cost courses through higher fees and reducing provision of low-demand courses.

Analysis (6 marks)

• Charging fees based on course value helps universities cover costs and improve quality.

• Students behave as rational consumers, weighing costs against expected benefits and vocational returns.

• Market pricing discourages low-demand courses and reallocates resources to higher-value degrees.

• Higher-earning graduates generate positive externalities through increased tax revenue.

• Supply and demand analysis shows higher fees reduce excess demand for popular courses.

• Efficiency improves as students pay closer to the true cost of education, reducing overconsumption.

Evaluation (6 marks)

• Strengths:

  • Encourages efficient allocation of scarce resources.

  • Allows universities to invest in quality and facilities.

  • Promotes informed decision-making by students.

• Weaknesses:

  • May discourage low-income students, increasing inequality.

  • Socially valuable degrees (e.g. arts, humanities) may be underfunded.

  • European low-fee models suggest wider access and fairness.

  • Assumes students can accurately judge the value of degrees, which may not always hold.

Judgement

• A free-market approach improves efficiency and incentives but risks inequity.

• A hybrid system, combining market pricing with targeted grants and access policies, best balances efficiency with social fairness.