A-Level Economics October/November 2024 Q1(b): Consider the likely success of one policy that Chile could use to reduce the imports of…

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  One policy that Chile could use to reduce the imports of consumer goods is the imposition of a tariff.

  A tariff is a tax placed on imported goods. This tax increases the cost for foreign firms to sell their goods in Chile, which is then passed on to Chilean consumers in the form of a higher price.

  As the price of imported consumer goods rises relative to domestically produced goods, consumers are incentivised to switch their expenditure towards the now relatively cheaper domestic substitutes. According to the law of demand, this increase in price will lead to a contraction in the quantity demanded of imported consumer goods, thereby reducing the total volume and value of these imports.

  However, the success of a tariff in reducing import expenditure is not guaranteed. Its effectiveness depends heavily on the price elasticity of demand (PED) for the imported consumer goods. If demand for these imports is price inelastic (i.e., PED < 1), the percentage decrease in quantity demanded will be smaller than the percentage increase in price. In this scenario, the total expenditure on imports could actually increase, making the policy counterproductive. This is likely if the imported goods are necessities or have few close domestic substitutes available in Chile.

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  How the marks are awarded

  • M1 — The first mark is awarded for identifying a valid policy, which is done by stating 'the imposition of a tariff'.
  • M2 — The second mark is for explaining how the policy works, specifically that a tariff is a tax that 'is then passed on to Chilean consumers in the form of a higher price'.
  • M3 — The third mark is for further developing the explanation, linking the higher price to a 'contraction in the quantity demanded' as consumers 'switch their expenditure towards the now relatively cheaper domestic substitutes'.
  • A1 — The final evaluation mark is awarded for considering the 'likely success' of the policy by linking its effectiveness to the 'price elasticity of demand (PED) for the imported consumer goods' and explaining the outcome if demand is inelastic.

  Common mistakes

  • Identifying a policy like a tariff but failing to explain the mechanism of how it reduces imports, thus missing the explanation marks.
  • Confusing the mechanisms of different policies, for example, stating that a tariff directly limits the quantity of imports (which is the function of a quota).
  • Providing a one-sided answer that only explains how the policy works, without offering any evaluation of its potential limitations or failures as required by 'likely success'.
  • Making a vague evaluation point, such as 'it might not work', without linking it to a specific economic concept like PED, retaliation from trading partners, or the size of the tariff.

  Examiner tip: For any question asking you to assess the 'success' of a policy, structure your answer by first explaining the intended mechanism and then evaluating the factors that determine its effectiveness.

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