AQA ECON1: June 2014 - Question 8 - Model Answer:
Once again, the key here is to fully understand what the question is asking us and to answer it.
One technique I encourage the use of is to ‘translate’ the question, to make it more
understandable.
This is not the most complicated of questions, and can be translated as such:
Should the government give payments to producers to encourage the use of newspaper and online
news?
It is really important, as it always is, that you read the extracts. Some students think that they can
save time by not reading them, or not reading them properly, and, whilst this is true, the information
in the extracts has been written by the exam board (Check the sources, non-specific, so they’ve
been written especially for this exam) to help you to answer the questions.
Phil Hensman
@PhilsEconomics
The key piece in the extract that leads you to the correct answer here is:
This piece of information, that newspapers are a source of education, leads us to the conclusion
that newspapers are a merit good, and this forms the economics of our argument.
Once again I’ll be taking the DICEDSPAC approach to this answer:
Definition
In
Context
Explained
Diagram
Solutions
Problems
Alternatives
Conclusion
Here is how I would answer this question:
The extract implies that newspapers and online news provide education to those people
consuming them. As a result, they can be seen as examples of merit goods, (here comes my
definition, which I’ve already put into context by explaining why it is relevant to the question) goods
which are under consumed and under provided in a free market economy, as people do not
perceive the true benefits to society. This can be shown through a positive externalities in
consumption diagram, as seen below:
Phil Hensman
@PhilsEconomics
We can see from this diagram (explaining the diagram and why it is relevant to the question) that, if
newspapers provide education, and that by consuming them, people are better educated, that this
could have a wider positive impact upon society. By consuming the information that newspapers
provide, this could lead to better decision making, a better allocation of resources and a better
educated society is able to get better jobs, paying higher wages and therefore providing more tax
revenue for the government, which can then be used to improve society for everybody.
However, people are not always aware of the true benefits of the consumption of newspapers, or
do not care about the positive impacts upon society. They are more likely to only care about their
own private benefits, and compare them with their private costs and therefore consume at Q1. The
most allocatively efficient output for society, where there is no welfare loss, occurs where the costs
to society are equal to the benefits for society, the Socially Optimum Output (SOO).
If the government were to subsidise newspapers and online news, this would lower the production
costs for the producers (really important that we include the economics of the argument, rather
than turn it into a General Studies essay) encouraging them to produce more of the product and
theoretically lowering the price of the product to the consumer, causing an extension along the
demand curve. (So I have now explained the ‘Solution’ part of my answer)
However, this solution could (Notice my use of language, could, instead of will or would. This
allows me to evaluate this comment later on. For more on this read: The Hat of Generalisation )
lead to a number of issues which may not be predictable (Problems part of the essay). One of the
major issues is that the funding of news by government will come with an opportunity cost, as the
money spent on this could be used in other areas, some of which could be seen as more beneficial
to society, therefore not solving the problem of an inefficient allocation of resources, and therefore
leading to Government Failure. There could also be an element of corruption involved if the
government are funding the news, will the producers be independent and allowed to report what
they want, or will this payment give the government more control over the press.
It is also very difficult (This paragraph will score me lots of points for evaluation) for the government
to determine exactly how much more news needs to be consumed in order to have the optimum
allocation of resources, the socially optimum output, and as such it would be difficult to determine
how much the subsidy would need to be in order to reach the best output. Likewise, the effects of
the subsidy would DEPEND UPON (Love this phrase for evaluation) both the price elasticity of
supply and the price elasticity of demand, and therefore whether or not the subsidy is passed onto
the consumer or kept by the producer. There is also the issue that a large number of news sources
are already free to consume to some extent, the extract points to a number of news websites and
The Metro, a free newspaper, has long been established in the UK (Using my knowledge of the
real world examples) so it is debatable as to whether a price change would have much of an effect
on consumption. Likewise, not all news output is viewed as being of the same quality or
educational benefit, so would celebrity ‘news’ be subsidised by the government as well as
economic or political news?
Any government intervention in this market is likely to be seen as an attempt to manipulate the
media (dismissing alternatives is as valid as accepting them) so subsidies, maximum prices or
state provision is likely to be viewed with suspicion. As a result of this information (drawing a
conclusion) it seems unrealistic that governments should subsidise news outlets, as they are able
to receive revenue and the fact that many are run at a loss may indicate the need for some
producers to leave the market, thus pushing up the price to consumers. There will always be a
demand for news, so the market mechanism should be given the chance to operate and inefficient
producers allowed to leave the market.
As tastes change and people move away from getting information from traditional sources, it is up
to these companies to develop along with the tastes and move towards Apps and internet based
news, which can be funded through advertising revenue or subscriptions. Therefore there is no
Phil Hensman
@PhilsEconomics
need for the government to intervene and subsidise this market. Even of the price of consuming
news comes down, it does not mean that everybody will consume it equally. (I have now gone
back to the question and answered it.)
Here’s the answer without the annotations:
The extract implies that newspapers and online news provide education to the consuming them. As
a result, they can be seen as examples of merit goods, goods which are under consumed and
under provided in a free market economy, as people do not perceive the true benefits to society.
This can be shown through a positive externalities in consumption diagram, as seen below:
We can see from this diagram that, if newspapers provide education, and that by consuming them,
people are better educated, that this could have a wider positive impact upon society. By
consuming the information that newspapers provide, this could lead to better decision making, a
better allocation of resources and a better educated society is able to get better jobs, paying higher
wages and therefore providing more tax revenue for the government, which can then be used to
improve society for everybody.
However, people are not always aware of the true benefits of the consumption of newspapers, or
do not care about the positive impacts upon society. They are more likely to only care about their
own private benefits, and compare them with their private costs and therefore consume at Q1. The
most allocatively efficient output for society, where there is no welfare loss, occurs where the costs
to society are equal to the benefits for society, the Socially Optimum Output (SOO).
If the government were to subsidise newspapers and online news, this would lower the production
costs for the producers encouraging them to produce more of the product and theoretically
lowering the price of the product to the consumer, causing an extension along the demand curve.
However, this solution could lead to a number of issues which may not be predictable. One of the
major issues is that the funding of news by government will come with an opportunity cost, as the
money spent on this could be used in other areas, some of which could be seen as more beneficial
to society, therefore not solving the problem of an inefficient allocation of resources, and therefore
leading to Government Failure. There could also be an element of corruption involved of the
Phil Hensman
@PhilsEconomics
government are funding the news, will the producers be independent and allowed to report what
they want, or will this payment give the government more control over the press.
It is also very difficult for the government to determine exactly how much more news needs to be
consumed in order to have the optimum allocation of resources, the socially optimum output, and
as such it would be difficult to determine how much the subsidy would need to be in order to reach
the best output. Likewise, the effects of the subsidy would DEPEND UPON both the price elasticity
of supply and the price elasticity of demand, and therefore whether or not the subsidy is passed
onto the consumer or kept by the producer. There is also the issue that a large number of news
sources are already free to consume to some extent, the extract points to a number of news
websites and The Metro, a free newspaper, has long been established in the UK so it is debatable
as to whether a price change would have much of an effect on consumption. Likewise, not all news
output is viewed as being of the same quality or educational benefit, so would celebrity ‘news’ be
subsidised by the government as well as economic or political news?
Any government intervention in this market is likely to be seen as an attempt to manipulate the
media so subsidies, maximum prices or state provision is likely to be viewed with suspicion. As a
result of this information it seems unrealistic that governments should subsidise news outlets, as
they are able to receive revenue and the fact that many are run at a loss may indicate the need for
some producers to leave the market, thus pushing up the price to consumers. There will always be
a demand for news, so the market mechanism should be given the chance to operate and
inefficient producers allowed to leave the market.
As tastes change and people move away from getting information from traditional sources, it is up
to these companies to develop along with the tastes and move towards Apps and internet based
news, which can be funded through advertising revenue or subscriptions. Therefore there is no
need for the government to intervene and subsidise this market. Even of the price of consuming
news comes down, it does not mean that everybody will consume it equally.
Phil Hensman
@PhilsEconomics