Question
(a) Describe the benefits to consumers of living in a free market economy. [10 marks]
(b) Using real-world examples, evaluate whether or not governments should provide merit goods
to consumers free of charge. [15 marks]
Mark scheme microeconomics
Teacher notes
This paper 1 style question contains section (a) and part (b) questions. Part A asks candidates
to explain the benefits of a free market economy, from the viewpoint of consumers.
Responses should highlight benefits which may be received as a result of increased
competition in the economy.
Responses to part (b) should also include an effective evaluation in terms of the costs and
benefits of a government decision to provide merit goods such as education and health free of
charge, as well as outline some alternative methods of merit good provision.
9a. Describe the benefits to consumers of living in a free market
economy. [10 marks]
Responses should include the following:
A definition of a free market economy, including a reliance on the price mechanism to
allocate goods and services as well as set prices and wage levels.
A recognition of the benefits of a free market economy to consumers including the following:
A recognition that shortages or surpluses of goods are rare as the market for goods and
services are produced at
an
equilibrium level. This is because production decisions are determined by the invisible hand.
Firms switch resources towards the production of more profitable goods and services from
less profitable products. In the long run, therefore, both production levels and market price
will adjust to changes in market conditions and demand will always equal supply.
This is illustrated on diagram 1, showing a reduction in the supply (S1 to S2) of hotel rooms
in Turkey as a result of changing market conditions - (D1 - D2).
Similarly the profit incentive means that producers will always look to innovate or create new
products. This ensures a wider range of goods and services for customers to enjoy.
A recognition that high level of competition between firms, in market economies, should also
ensure that consumers enjoy lower prices providing that monopolies or collusive oligopolies
do not emerge.
Responses in section (a) should be graded according to the following mark bands:
Maximum mark for this section 10
Level Descriptor Mark
0 The response does not the standards described below. 0
The key term free market is not defined or is defined incorrectly.
The response demonstrates a basic understanding of the how the free
1 market works and the potential benefits to consumers. 1-3
There response contains limited links to relevant economic theory.
The response contains significant errors.
A basic definition of the free market is provided.
The response demonstrates some understanding of the how the free market
works and the potential benefits to consumers, including some examples.
2 4-6
The response attempts to use relevant economic theory in answering the
question.
There are some errors but these are relatively minor.
A definition of free market is provided.
The candidate demonstrates an understanding of how consumers may
benefit from living in a free market. Relevant economic theory is
explained and applied.
3 7-8
At least one appropriate, correctly labelled diagram is included and
explained.
The response contains appropriate and relevant examples.
There are minimal errors included in the response.
A definition of free market is provided.
The candidate demonstrates a clear understanding of how consumers can
benefit from living in a free market. Relevant economic theory is
explained and applied and real life examples are used.
At least one appropriate, correctly labelled diagram, is included and
4 9 - 10
explained.
Examples are provided of instances where, for example a monopoly
develops, the consumer may not benefit from living in a free market.
Any errors are minor and do not detract from the overall quality of the
response.
b. Using real world examples, evaluate whether or not governments should provide
merit goods to consumers free of charge. [15 marks]
Command term: Evaluate
The command term for this section (b) question requires an evaluative response. The
response must consider whether or not governments should provide merit goods to consumers
free of charge? In doing so they should consider the impact on a range of different
stakeholders e.g. consumers of merit goods, tax payers, high income earners and low income
earners. Candidates are also encouraged to consider alternatives to free merit goods, which
may include the provision of some merit goods by the private sector.
Responses should include the following:
A definition of merit goods and market failure. Merit goods are products which provide a
benefit to a third party when they are consumed e.g. education and health services. Market
failure describes a situation when the market fails to
allocate reso
urces in an efficient manner.
A recognition that merit goods such as education, health or public transport will be under
consumed if consumers are forced to pay the full price of the good or service. This is
because consumers (as human beings) only consider their own private benefits when making
a purchasing decision and do not consider the external benefits enjoyed by others.
From the MSC/MSB diagram (to the right), which illustrates the market for university places,
it can be observed that the socially optimum level of output is represented by Q2. However,
without any intervention from the government, consumption and output remain at Q1 and the
price at P1. This means that there is a potential loss to society represented by the fact that
fewer students attend university. Governments can close this welfare gap by subsidising the
good or service or even providing it free of charge. The diagram below, for instance,
illustrates the impact of a government subsidy on university education places, with the cost of
the subsidy represented by the green shaded area and the number of students at university
rising to the socially optimum level of Q2.
Providing a merit good free of charge will increase consumption of the good or service in an
economy. In turn this will
lead to
higher external benefits to a society. Specifically this could mean an economy enjoys the
benefits of a better educated and healthier population, amongst other benefits.
On the other hand there are also disadvantages of providing merit goods free of charge.
Examples of this include the opportunity costs in terms of higher tax rates or reduced public
spending in other areas. Another disadvantage includes the physical / psychological
crowding out of the private sector by free public services e.g. patients in genuine need forced
to wait for an appointment due to over demand for services.
Responses should also provide examples of merit goods provided free in certain countries
and evaluate the effectiveness of this policy. An example might include a comparison of the
free health care provision in many parts of Europe, with the private health system in the
USA.
When comparing systems responses must evaluate the impact on a range of stakeholders
including tax payers as well as the consumers of public services.
Responses in section (b) should be graded according to the following mark bands:
Maximum mark for this section 15.
Level Descriptor Mark
0 The response does not meet the standards described below. 0
A definition of merit goods and market failure is not provided or is
included but defined inaccurately.
The response demonstrates a limited understanding of the demands of the
1 question and makes little or no attempt to address the question. 1-4
There is little economic theory included in the response and examples are
not included.
The response contains significant errors.
Either merit goods or market failure are defined and the response
demonstrates some understanding of the demands of the question.
The response demonstrates some knowledge of appropriate economic
2 theory and provides a few examples of situations where merit goods are 5-8
provided free of charge / not provided free at the point of use but does not
explain the merits and weaknesses of each.
There response contains some relatively minor errors.
Both merit goods and market failure are defined and the response
demonstrates an understanding of the demands of the question.
The response demonstrates knowledge of appropriate economic theory
and provides examples of situations where merit goods are provided free
of charge / not provided free at the point of use and then explains some of
the merits and weaknesses of each.
3 At least one suitable diagram, correctly labelled, is included and 9 - 12
explained.
The response includes examples of merit goods which are particularly
suitable to be provided free of charge, as well as some that are not.
Some key terms e.g. free rider, opportunity cost and market failure are
included in the response.
There are minimal errors included in the response.
4 All relevant terms are defined correctly. 13 - 15
The response demonstrates a clear understanding of the demands of the
question, including the merits and weaknesses of offering merit goods
free of charge.
The response demonstrates excellent knowledge of the relevant theory
and includes relevant examples, effectively applied to the demands of the
question. This might include a comparison of say health services in a
state funded system v the private funded system in USA.
Appropriate diagram(s) are included and explained.
Key terms e.g. free rider, opportunity cost and market failure are included
in the response.
Any errors are minor and do not detract from the overall quality of the
response.
