Government Intervention (Edexcel A Level Economics A): Exam Questions

The EU tradable pollution permits scheme is expected to become more effective by 2020, due to recent reductions in the number of tradable pollution permits.

(Source adapted from: https://ec.europa.eu)

Figure 1: UK government subsidy to Northern, a train operating company in Northern England

Extract B

Free market approach

Are free markets incompatible with good health? If the solution to every problem involves banning advertising, raising prices and restricting availability, you might easily conclude that the free market is the disease and government regulation is the cure. From this perspective, the providers of food, alcohol and tobacco are determined to push the most unhealthy products on the public at the lowest prices. Contrary to this viewpoint, the profit motive is not unhealthy. Businesses have an obvious incentive to keep their customers alive and customers have a strong incentive to seek out healthier options. Any company that can make a scientifically sound health claim gains a competitive advantage over its rivals. Health sells. In contrast, government regulation can lead to negative health outcomes. Markets can correct themselves long before government failures are even acknowledged. Over a million Britons, almost all of whom are smokers or ex-smokers, use e-cigarettes, as a less hazardous product than cigarettes and yet e-cigarettes face increased regulations and in many countries they are banned. It is neither consistent nor ethical to prevent smokers from switching to much safer alternatives. Efforts to regulate e-cigarettes are a far greater threat to public health than the products themselves. We argue that the interests of consumers are nearly always better advanced by the provision of accurate information and free choice than by prohibitions and regulations. The government policy of small but steady tax rises on tobacco and ever-larger warning labels is becoming less effective and leads to unintended consequences.

(Source: adapted from http://www.iea.org.uk)

Extract B

Turkey aims to bin the plastic bag

You get a free plastic bag whenever you go to a shop, even if it is just to buy a loaf of bread or a chocolate bar. In Turkey, plastic bags are everywhere, with millions being thrown away, and their use is causing a growing environmental problem. In Istanbul, the country’s biggest city with about 12 million people, around 10000 tonnes of waste are being collected every day. Plastic bags and other plastic waste make up 950 tonnes, or almost 10%, of the total waste.

The Turkish government said it was looking at ways to discourage the consumption of single‑use plastic bags. One possible step currently under review is a ban of the black bags that are said to contain carcinogens. Another is that the state may raise taxes on plastic products, which could lead to supermarkets charging consumers for the bags.

In Corlu, a town north‑west of Istanbul, a local environmental group distributed 20000 canvas bags to shoppers in one month. In some parts of Turkey, plastic bags are completely banned, with heavy fines for both firms and consumers who use them.

(Source adapted from: https://www.thenational.ae/world)

The UK Energy Drinks Market

Figure 1: Market share of energy drink brands (2024)

Source: UK Beverage Association, 2024

Figure 2: UK Energy Drink Consumer Survey (2024)

Survey of 1,200 UK consumers aged 16–25

Extract A: Marketing activities

Energy drink brands in the UK have increased spending on marketing and sponsorship over the past five years. Red Bull and Pulse Energy sponsor large-scale events such as international esports tournaments, extreme sports, and music festivals. Volt and Atomic Rush focus on smaller regional sponsorships and university-level sports partnerships.

Marketing campaigns often use short-form video content on TikTok, YouTube, and Instagram, featuring athletes, musicians, and online personalities popular with young adults. Retailers confirm that Red Bull and Pulse Energy benefit from prominent in-store displays and greater online visibility through delivery apps and supermarket websites. Smaller brands typically rely on local advertising and word-of-mouth promotion.

Consumer interviews suggest that while some buyers are influenced by advertising and limited-edition product launches, others prioritise taste, caffeine strength, or packaging convenience. Some respondents said they try new products when they appear in stores or when friends recommend them.

Extract B: Production, distribution and packaging

Most energy drink manufacturers in the UK import ingredients such as caffeine and taurine, though bottling and packaging are mainly carried out domestically. Red Bull and Pulse Energy have expanded UK-based facilities in recent years, whereas Volt and Atomic Rush use third-party production. Analysts note that fluctuating aluminium and transport costs have affected packaging prices, putting pressure on profit margins.

Distribution networks are dominated by major supermarket chains, with convenience stores and petrol stations providing secondary outlets. Online grocery platforms have seen rapid growth since 2020, and many smaller companies use direct-to-consumer websites to reach niche markets. However, large retailers often charge listing fees or require promotional commitments that can be difficult for newer entrants to meet.

Product development has focused on sugar-free and low-calorie lines in response to shifting consumer tastes and public-health initiatives. Several companies have trialled recyclable packaging and smaller cans aimed at environmentally aware consumers. Manufacturers typically expand output in summer months to match higher demand linked to festivals and sporting events.

Extract C: Consumer behaviour, health and regulation

Surveys of young adults aged 16–25 show that energy drinks have become a regular feature of social and academic life. Many report drinking them during study sessions, part-time work, and social occasions. Some participants describe energy drinks as “essential” for concentration and staying awake during exams or night shifts, while others associate them with parties, gaming, and sporting activity.

Lifestyle patterns strongly influence brand choice. Products associated with gaming or music are especially popular among frequent consumers, while fitness-oriented individuals are more likely to select brands advertising “low sugar” or “natural” ingredients. Several respondents say they first tried a brand because of sponsorships at festivals or university events. Peer influence also matters: many consumers report choosing the brand their friends prefer, though some state that taste and perceived energy boost outweigh social factors.

Focus-group discussions highlight how consumption habits vary by gender and activity. Male respondents are more likely to purchase large cans before exercise or gaming sessions, whereas female consumers often prefer smaller cans or sugar-free options. Some mention switching brands when new flavours are released or when prices are discounted at convenience stores.

Health organisations, including the British Dietetic Association and the Royal Society for Public Health, have expressed concern about the growing consumption of high-caffeine, high-sugar drinks among young adults. Studies have linked frequent use to disrupted sleep patterns, anxiety, and cardiovascular strain. Several schools and universities have restricted sales on campus, citing wellbeing concerns.

Public debate has turned to possible government intervention. Suggested measures include clearer caffeine labelling, age restrictions on purchases, and limits on marketing directed at under-18s. Government bodies have also suggested introducing a tax on energy drinks to discourage overconsumption among young adults and to fund public health initiatives. Industry reactions vary: Red Bull has said its products are intended for adults and already meet existing guidelines, while Pulse Energy has stated that any new regulations would mainly affect advertising rather than production. Smaller brands argue that tighter advertising rules could reduce the dominance of the largest firms by giving newer entrants greater visibility.

Consumer groups have also called for educational campaigns about caffeine consumption, claiming that awareness is low among younger people. Surveys indicate that many consumers underestimate the caffeine content of energy drinks compared with coffee. Some analysts believe that long-term health campaigns could gradually shift demand toward low-sugar or functional beverages, reshaping the competitive landscape of the industry.

Extract A

The effects of a total ban on advertising of HFSS foods

Foods and drinks that are high in fat, salt, or sugar (HFSS) tend to be sold in highly concentrated markets. Tough new rules banning advertisements for HFSS products, such as those for confectionery, fizzy drinks, and potato crisps, come into effect in July 2017 as a means to reduce consumption. The rules apply to media targeted at under-16s and will mean a major reduction in the number of advertisements children see for HFSS products in posters near schools, in films targeted at children, on catch-up television, and in social media if it is directed at children.

There are three main factors that will determine the effectiveness of the intervention: first, whether advertising acts to expand the market share or steal rivals’ market share. Secondly, how firms in the market adapt their behaviour in response to the ban. Thirdly, what substitute products do consumers turn to if they opt out of the targeted market.

Results from a recent survey in the UK suggest that the total quantity of crisps sold would fall by around 15% in the presence of an advertising ban, or by 10% if firms respond with price cuts, since the ban acts to make the market more competitive and firms respond to the ban by, on average, lowering their prices.

The survey showed that following a ban, consumers are more likely to switch to another junk food than to a healthy food, which (in addition to the pricing response of firms) acts to partially offset any health gains from the policy.

(Source: adapted from https://academic.oup.com and https://www.asa.org.uk)

Extract B
Taxing HFSS foods and subsidising healthy eating widens inequality

Since low-income groups spend a higher proportion of their income on food and tend to eat less healthily, they are the main targets of taxes on products that are high in fat, salt or sugar (HFSS). Subsidies on healthy food are seen as an alternative policy approach to encourage healthy eating. While data on the impact of such policies are scarce, a recent study on the distributional impacts of HFSS taxes and healthy food subsidies found that these actually widened health and fiscal inequalities.

The policies tend to be regressive and favour higher-income consumers. Taxes on unhealthy food increase prices which have a greater impact on low income groups rather than higher income groups. Lower income groups prefer to buy HFSS food. Subsidies encouraged all income groups to buy more fruit and vegetables. However, those on higher incomes proved more responsive and the average share of budget spent on healthy food actually increased for the higher income groups who were more likely to buy the subsidised healthy food and then spend the savings they had enjoyed on yet more healthy food.

The diets of the higher income groups before the subsidy tended to be healthier. The choices of the higher income groups are more responsive to price changes. By contrast, lower income groups, if they responded to lower prices, often used the money saved to buy unhealthy items or something else entirely. The long-term benefits of a healthier diet are harder to grasp for consumers when information gaps exist. Often the immediate boost of a tasty treat is more appealing. Taxes and subsidies do not change that. Other strategies are needed to promote healthy eating, especially education.

(Source: adapted from Economist)

Extract C
Tax on fatty foods in Denmark is an economic disaster

Denmark introduced a specific tax on saturated fat in October 2011. Recognised as a world-leading public health policy, it was abandoned just 15 months later having been both an economic and political disaster. Indirect taxes of this sort are invariably regressive, disproportionately affecting the elderly and the poor.

The specific tax led to prices rising on average 15% for highest-fat products, yielding a total decrease of 5% in the intake of saturated fat from products such as minced beef and cream. 80% of Danish consumers did not change their shopping habits at all. The behavioural change was economically damaging as consumers switched to cheaper brands and crossed the border to Sweden and Germany to do their shopping. Danish tax revenue fell as a result.

(Source: adapted from https://iea.org.uk/)

Figure 1: UK Market Share of Crisps

Extract A

The effects of a total ban on advertising of HFSS foods

Foods and drinks that are high in fat, salt, or sugar (HFSS) tend to be sold in highly concentrated markets. Tough new rules banning advertisements for HFSS products, such as those for confectionery, fizzy drinks, and potato crisps, come into effect in July 2017 as a means to reduce consumption. The rules apply to media targeted at under-16s and will mean a major reduction in the number of advertisements children see for HFSS products in posters near schools, in films targeted at children, on catch-up television, and in social media if it is directed at children.

There are three main factors that will determine the effectiveness of the intervention: first, whether advertising acts to expand the market share or steal rivals’ market share. Secondly, how firms in the market adapt their behaviour in response to the ban. Thirdly, what substitute products do consumers turn to if they opt out of the targeted market.

Results from a recent survey in the UK suggest that the total quantity of crisps sold would fall by around 15% in the presence of an advertising ban, or by 10% if firms respond with price cuts, since the ban acts to make the market more competitive and firms respond to the ban by, on average, lowering their prices.

The survey showed that following a ban, consumers are more likely to switch to another junk food than to a healthy food, which (in addition to the pricing response of firms) acts to partially offset any health gains from the policy.

(Source: adapted from https://academic.oup.com and https://www.asa.org.uk)

Extract B
Taxing HFSS foods and subsidising healthy eating widens inequality

Since low-income groups spend a higher proportion of their income on food and tend to eat less healthily, they are the main targets of taxes on products that are high in fat, salt or sugar (HFSS). Subsidies on healthy food are seen as an alternative policy approach to encourage healthy eating. While data on the impact of such policies are scarce, a recent study on the distributional impacts of HFSS taxes and healthy food subsidies found that these actually widened health and fiscal inequalities.

The policies tend to be regressive and favour higher-income consumers. Taxes on unhealthy food increase prices which have a greater impact on low income groups rather than higher income groups. Lower income groups prefer to buy HFSS food. Subsidies encouraged all income groups to buy more fruit and vegetables. However, those on higher incomes proved more responsive and the average share of budget spent on healthy food actually increased for the higher income groups who were more likely to buy the subsidised healthy food and then spend the savings they had enjoyed on yet more healthy food.

The diets of the higher income groups before the subsidy tended to be healthier. The choices of the higher income groups are more responsive to price changes. By contrast, lower income groups, if they responded to lower prices, often used the money saved to buy unhealthy items or something else entirely. The long-term benefits of a healthier diet are harder to grasp for consumers when information gaps exist. Often the immediate boost of a tasty treat is more appealing. Taxes and subsidies do not change that. Other strategies are needed to promote healthy eating, especially education.

(Source: adapted from Economist)

Extract C
Tax on fatty foods in Denmark is an economic disaster

Denmark introduced a specific tax on saturated fat in October 2011. Recognised as a world-leading public health policy, it was abandoned just 15 months later having been both an economic and political disaster. Indirect taxes of this sort are invariably regressive, disproportionately affecting the elderly and the poor.

The specific tax led to prices rising on average 15% for highest-fat products, yielding a total decrease of 5% in the intake of saturated fat from products such as minced beef and cream. 80% of Danish consumers did not change their shopping habits at all. The behavioural change was economically damaging as consumers switched to cheaper brands and crossed the border to Sweden and Germany to do their shopping. Danish tax revenue fell as a result.

(Source: adapted from https://iea.org.uk/)

In 2015 a report by Public Health England recommended the imposition of a 20% tax on the sale of soft drinks that contain high levels of sugar.