What is the Edexcel A-Level Economics test? The Edexcel A-Level Economics test is an economics-focused qualification offered to British students in their final two years of secondary school study. A-levels are typically taken as courses intended to lead to University or other further education. A-level economics students will often go on to study economics or a similar subject at University. The Edexcel A-Level Economics test is offered by Pearson Edexcel. The main alternative to Edexcel is the AQA A-Level Economics course. Edexcel is a privately-owned British education and exams body founded in 1996. Edexcel has been owned by Pearson plc. since 2005. Edexcel produces qualifications and tests for the British education system and is the UK’s largest entity offering educational qualifications.
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We found this Edexcel Economics A-Level Past Paper market structures questions by going through past Edexcel A-Level Economics papers according to the current specification. We picked out market structure questions and put them together in this list so that you can go through them without having to search through the different Edexcel A-Level Economics papers currently online.
What is Monopoly?
Monopoly is a market structure in which one company is the exclusive producer of a product. In other words, the company producing a particular product has no competitors.
Monopolies can form organically because one company is able to effectively eliminate all competitors in a market. More commonly, monopolies form because of legal barriers implemented by a government that make it illegal or impractical for multiple companies to compete in a single market.
A real-world example of a monopoly occurs when a pharmaceutical company develops a new drug and is granted a patent that prevents any other company from producing or selling that drug for a certain period of time. Patents are an example of a legal monopoly because the government is preventing competitors from entering the market.
Monopolies generally result in higher prices because a monopoly can charge whatever it wants for a product without worrying about competitors undercutting them on price. How much a monopoly is able to “price set” depends on how willing consumers are to go without the product if the price increases (price elasticity of demand).
Monopolies are generally characterised by high barriers to entry, high fixed costs, and highly differentiated products. These conditions make it harder for potential competitors to enter the market and thus make monopolies more likely.
What is Oligopoly?
An oligopoly is a market structure in which a small number of companies compete in a market. A duopoly is a market with two competirors and so an oligopoly is a market with two or more. A market with many companies competing against one another would be considered competitive, so an oligopoly has a small number of competitors but more than two. In an oligopoly, the behaviour of any one firm will have a significant impact on the fortunes of other firms in the market. Companies in an oligopolic market cannot set prices in the same way as a monopoly but are generally able to charge higher prices than a monopoly. Collusion is also a lot more likely in an oligopoly because collusion is easier to coordinate across a smaller number of companies Like monopolies, oligopolies are more likely to form in markets with high barriers to entry, high fixed costs, and differentiated products.
What is Perfect Competition?
Perfect competition is a market structure in which a large number of companies compete on price and quantity. The core characteristics of a perfectly competitive market are a lot of producrs, undifferentiated products, low prices, and low barriers to entry. Companies in a perfectly competitive market must compete primarily on price so perfect competition tends to result in lower prices for consumers. Lower prices mean companies in perfectly competitive markets generally make lower profits than companies operating in less competitive markets.
Question 1: Edexcel A-Level Economics 9EC0 November 2021 Paper 1
In many industries, such as banking, health insurance, internet search engines, pharmaceuticals, social media and telecommunications, there have been increases in market concentration.
Evaluate the possible consequences for business decision-making of increased market concentration. Refer to the industries of your choice in your answer. (25 points)
Question 2: Edexcel A-Level Economics 9EC0 November 2020 Paper 1
Extract A
The case for nationalisation
Privatisation has not made the rail industry cheaper to operate, despite the promise from one government source that it would see private companies bringing: “more competition, greater efficiency and a wider choice of services”.
One reason, suggest the critics, is fragmentation. Instead of pushing British Rail into the private sector as a single supplier the government chose to break it into three components of track, train operators and rolling stock i.e. the trains and carriages. This has encouraged each part of the rail industry to prioritise its own profits rather than collaborating to improve the system.
Privatisation, meanwhile, never really worked. The rail network of 2 500 stations and 32 000 km of tracks was renationalised in 2001. This has encouraged the government’s transport secretary, a supporter of private sector involvement, to argue that the state Network Rail monopoly should be removed so that companies can bid to build new rail lines to upgrade the railway.
The privately-owned train operators are now the subject of fierce criticism, due to overcrowding and cancelled services. Private companies are supposed to compete to win a bid to be the train operator for a region for a short number of years. However in recent years the number of private companies bidding or renewing their contract as rail operators has fallen. In May 2018 the government rescued the East Coast line by renationalising it. The line had been run by the private rail operator Virgin Rail, which was suffering lower passenger numbers and revenue than forecast.
Some argue that there is a simple solution: reunite track and train in the only feasible manner, nationalisation.
Extract B
Southern Rail boss paid £495 000
The Chief Executive of Southern Rail, the private-sector train operator that has become associated with delays, losses, cancellations and strikes, was paid £495 000 last year. This increased calls for nationalisation and a maximum wage for executives at companies with government contracts. In contrast the average base pay for a train driver in the UK is £47 705, although they can earn up to £63 000.
Nearly a third of Southern Rail trains were late in 2016 as it tried to deal with a labour dispute that involved extensive strike action. The rail trade unions are opposed to planned changes to the role of train guards, which they claim will put passenger safety at risk.
(a) Refer to Figure 1. Explain the likely effect of the change in subsidy levels between 2017 and 2018 on rail fares. Include a supply and demand diagram in your answer. (5 points)
(b) With reference to Figure 2, examine two possible factors which may have influenced demand for rail travel since 2008. (8 points)
(c) Assess whether complete nationalisation of the rail industry might protect employees. (10 points)
(d) With reference to Extract A, paragraph 3, discuss whether the rail network can be considered to be a natural monopoly. (12 points)
(e) Discuss the likely benefits of price discrimination to rail passengers. Use a diagram to support your answer. (15 points)
Question 3: Edexcel A-Level Economics 9EC0 November 2020 Paper 1
‘Amazon.com, the giant online retailer, has too much power.’ It uses its market power to put a squeeze on publishers, in effect driving down the prices it pays for books. If a publisher refuses, Amazon may take action by ‘delaying their delivery, raising their prices, and steering customers to other publishers’.
Evaluate the likely costs of a monopsony operating in a market such as book retailing. (25 points)
Question 4: Edexcel A-Level Economics 9ECJune 2019 Paper 1
In 2016, the insurance group Esure undertook a demerger with its GoCompare price comparison website.
(a) The most likely reason for this demerger was to: (1 point)
A benefit from external economies of scale
B benefit from internal economies of scale
C focus more on its core business
D increase its market share
Following the demerger, GoCompare announced in 2017 a profit of £17.5 million, up 21.5% on 2016. Total revenue in 2017 was £75.8 million, up 4.1% on 2016.
(b) Calculate, using the information provided, the total costs of GoCompare in 2016. (4 points)
Question 5: Edexcel A-Level Economics 9EC0 June 2019 Paper 1
Extract A
Energy price cap to fix ‘broken’ market in UK
The Prime Minister recently said that the regulator Ofgem (Office of Gas and Electricity Markets) should limit electricity and gas suppliers’ most expensive tariffs. Under the planned new legislation, the energy bills of 11 million households will be capped for as long as five years. The government claimed this cap could save households up to £100 a year. This legislation would force Ofgem to change the licence conditions for energy suppliers so that they are required to cap electricity and gas prices. The measure will apply to anyone on a standard variable tariff, the expensive plans that customers are moved to when cheaper, fixed-price deals end. Ofgem will need to consult energy companies on how the cap is calculated, the government said. The Prime Minister repeated her claim that she had to act because the ‘market is broken’, a charge the big energy companies reject. “I have been clear that our broken energy market has to change – it has to offer fairer prices for millions of loyal customers who have been paying hundreds of pounds too much,” she said.
However, Michael Lewis, chief executive of E.ON said “the government must guard against any unintended consequences that undermine customer service and push up prices as a whole. A price cap will not be good for customers. It will reduce competition and innovation”. Smaller suppliers such as First Utility said the Big Six had only themselves to blame for the cap, because they had kept millions of people on standard variable tariffs.
Extract B
BT profit rises
BT Group, which includes BT Openreach and BT Retail, reported a rise in profit as revenue increased following the integration of the consumer mobile business, EE. BT finalised the takeover of EE in August 2016, and the integration has resulted in BT controlling 35% of the mobile consumer market. The profit of the UK-based telecommunication group in its second quarter 2017 rose to £566 million.
BT Group chief executive Gavin Patterson said: “We will operate a multi-brand strategy with UK customers being able to choose a mix of BT, EE or Plusnet services, depending on which suits them best. The acquisition enables us to offer great value bundles of services and customers are set to be the winners as we compete for their business”.
Extract C
BT to slash landline charges for 1 million customers
Rental charges for landline-only customers – households with a telephone-only contract but no BT broadband – will fall from £18.99 to £11.99 per month after the regulator attacked existing deals as ‘poor value for money’. This rental reduction will save a million landline-only customers £84 a year.
The regulator Ofcom (Office of Communications) said it stepped in because these bills for landline-only customers – nearly two-thirds of whom are over 65 – have “soared” in recent years. This is despite BT and other landline providers benefiting from significant cuts in the wholesale line rental cost of providing the service by BT Openreach. Many landline-only customers are elderly, and have been with BT for decades. Ofcom has focused on BT because it accounts for two-thirds of the UK’s 1.5m landline-only customers.
A spokesperson for Ofcom said “This position [of dominance] has allowed BT to increase prices without much risk of losing customers, and other providers have followed BT’s pricing lead. We expect BT’s price cut to mean other providers will follow suit”. Ofcom said that over three-quarters of BT’s landline-only customers have never switched provider, which has left them a prime target for price rises. The regulator said that all major landline providers have increased their line rental charges by between 23% and 47% in recent years, while their own costs for providing the service have fallen about 27%. Ofcom said it is also looking at measures to help people shop around for better deals with more confidence.
(a) With reference to Extract A, explain the difference between a positive statement and a normative statement. (5 points)
(b) With reference to Extract B, examine the likely benefits to consumers of the integration between BT and EE. (8 points)
(c) With reference to Extract C, assess possible reasons why many ‘landline-only’ customers do not switch to a cheaper telephone provider. (10 points)
(d) Discuss one likely reason for the rise in BT’s profit (Figure 2, Extracts B and C). Use a cost and revenue diagram to support your answer. (12 points)
(e) Discuss methods of government intervention to protect consumers within the utilities markets, such as energy and telecommunications. (15 points)
Question 6: Edexcel A-Level Economics June 2019 Paper 1
In October 2017 Scania, the Volkswagen-owned truck maker, was fined €880 million (£771 million) by the European Commission for colluding with five other truck manufacturers over a 14-year period. The firms had agreed to coordinate prices after experiencing additional costs of meeting emission regulations.
With reference to an industry of your choice, evaluate why some firms engage in collusive behaviour (25 points).
Question 7: Edexcel A-Level Economics 9EC0 June 2018 Paper 1
Emily owns and operates a nail ink salon. The diagram shows the cost and revenue curves for treatments at her nail ink salon. Initially, Emily sets her price to maximise profits.
Costs, Revenue per treatment (£)
(a) Calculate the change in total supernormal profit if Emily changes her objective from profit maximisation to revenue maximisation. You are advised to show your working. (4 points)
(b) Emily now decides to change her objective from revenue maximisation to sales maximisation. This change will lead to: (1 point)
A a decrease in the number of customers
B a decrease in the price of treatments
C an increase in productive efficiency
D an increase in the level of profit
Question 8: Edexcel A-Level Economics 9EC0 June 2018 Paper 1
The following graph shows the global sales of personal computers (PCs) between 2011 and 2015.
(a) The percentage decrease in sales of PCs between 2011 and 2015 is: (1 point)
A 21.5
B 27.3
C 31.5
D 75.7
(b) Explain one likely reason for the decrease in sales of PCs. (2 points)
The following table shows global sales of PCs by company in 2015.
(c) Calculate the five-firm concentration ratio. You are advised to show your working. (2 points)
Question 9: Edexcel A-Level Economics 9EC0 June 2018 Paper 1
Extract A
Competition and Markets Authority (CMA) report into the UK energy market
An investigation into the UK energy market by the CMA concluded that customers have been paying £1.4 billion a year more than they would in a fully competitive market. It found that 70% of domestic customers of the six largest energy firms were on an expensive standard rate. These customers could each save over £300 a year by switching to a cheaper deal but appear reluctant to do so.
However, the CMA investigation found no evidence of anti-competitive practices by firms. There has even been an increase in new entrant energy suppliers over recent years and their combined market share has reached 12% in both gas and electricity supply. To protect consumers, the CMA has introduced various measures to open up and increase competition in the UK energy market. These include:
- the creation of a database designed to help consumers switch energy suppliers – rivalsuppliers can directly contact these customers
- the conversion of all homes to smart energy meters making it easier for customers to measure energy consumption and switch supplier
- new rules to protect the four million vulnerable customers using prepaid meters – this includes a temporary price cap until smart meters have been installed.
Extract B
Proposals to regulate profits in the UK energy market
Currently energy retail companies make an average profit of 7% of total revenue. The Chairman of the Competition and Markets Authority (CMA) suggested that these profits are as much as five times higher than they should be, given the companies’ limited role in marketing, metering and billing customers. He recommended a profit cap of 1.25% of total revenue.
However, Scottish Power criticised proposals for regulating profits saying that it would reduce investment in the energy industry and undermine long-term energy provision. The firm claimed that such a low rate of return is below the profit margin made by supermarkets.
All six large energy firms are vertically integrated – producing as well as distributing gas and electricity. This can provide efficiency benefits but also harm competition.
Extract C
Skills shortages in the UK energy sector
The energy sector is facing a skills shortage of engineers and technicians. Some 29% of employers in the gas and electricity industries report unfilled job vacancies compared with an average of 18% across all industries.
A lack of information and advice on career prospects for young people is partly to blame – many graduates have a negative image of the work involved. There is also a lack of students taking science, technology, engineering and maths-based subjects at school and university. Less than one-fifth of the energy sector’s workforce are women.
The energy sector is characterised by an ageing workforce – data from the UK Labour Force Survey reveal that around two-thirds of workers are aged over 50. These cannot easily be replaced as a long time period is required for training and developing workers’ skills in a highly regulated industry.
Urgent action is required by businesses and the government to reduce labour immobility to benefit the energy sector. This action could include policies to increase investment in training programmes, recruit skilled workers from overseas, change the industry image and deal with its ageing workforce.
(a) With reference to Figure 1, explain one likely reason for the overall trend in the real price of gas and electricity. (5 points)
(b) With reference to Extract A, discuss the likely effectiveness of ‘measures to open up and increase competition’ in the UK energy market. (12 points)
(c) With reference to Extract B, assess how the regulation of energy suppliers’ profits is likely to affect consumers and suppliers in the energy market. (10 points)
The price elasticity of demand for electricity in the UK is estimated to be –0.35 in the short run and –0.85 in the long run.
(d) With reference to Extract A and your own knowledge, examine two possible reasons for the change in price elasticity of demand for electricity over time. (8 points)
(e) With reference to Extract C and your own knowledge, discuss policies businesses and government might implement to reduce labour immobility to benefit the energy sector. (15 points)
Question 10: Edexcel A-Level Economics 9EC0 June 2018 Paper 1
In July 2016 Apple’s share of the UK market for smartphones was 38%. Evaluate whether such a high market share for one company is in the consumer interest. Use appropriate diagrammatic analysis in your answer. (25 points)
Question 11: Edexcel A-Level Economics 9EC0 June 2017 Paper 1
Extract A
Supermarket price war puts pressure on their food suppliers
The number of food suppliers (to supermarkets) struggling to remain in business has increased by more than 50% over the past year as supermarkets engage in an intense price war. It has never been tougher for the UK’s food suppliers according to a study by accountants Begbies Traynor. It blames aggressive price-cutting by the supermarkets and delays in payments to food suppliers as the main causes of the difficulties. Further problems include food suppliers being forced to pay excessive amounts for packaging specified by supermarkets and funding in-store promotions. Almost 90% of struggling food suppliers are small and medium-sized businesses. The price war has contributed to food prices paid by consumers falling by 1.7% over the past two years.
The market shares of the big four supermarkets – Tesco, Asda, Sainsbury’s and Morrisons – are under pressure as shopping habits change. Many consumers are switching from one main weekly shop to shopping more frequently at local discount stores such as Aldi and Lidl or purchasing goods online from other grocery retailers.
The big four supermarkets have responded by putting more pressure on their suppliers despite an investigation by the Groceries Code Adjudicator (GCA). The GCA has the power to fine supermarkets up to 1% of their annual sales revenue if they break the Groceries Code of Conduct. A YouGov study found considerable differences between the supermarkets in meeting the Code with Aldi performing well but Tesco badly. Despite the Groceries Code, many food suppliers are reluctant to complain for fear of losing contracts with the supermarkets.
Extract B
Food waste in the supply chain
A report from the British Retail Consortium reveals that supermarkets are directly responsible for around 0.2 million tonnes of food waste every year. This is due to the expiry of use-by-dates and poor handling of stock.
However, 4.1 million tonnes of food waste occurs annually in the food supply chain before it even reaches the supermarkets, indicating the existence of information gaps. The supermarkets are cooperating with food suppliers and farmers to try to reduce this waste. This involves improving forecasts for supply and demand of food and increasing the reliability of transportation and storage.
Consumers, the final stage of the supply chain, waste a further 7 million tonnes of food each year. This suggests irrational behaviour. Supermarkets are also working with consumers to reduce the waste by providing advice on how to store and use leftover food. The development of packaging designs to keep food fresher for longer is one of the innovations under way to reduce waste.
Extract C
Proposed merger activity in the supermarket sector
Analysts at Société Générale, an investment bank, have recommended a merger between
Sainsbury’s and Morrisons. They claim it would lead to increased economies of scale and market power for the combined business. Such a merger between the third and fourth largest supermarkets in Britain would have been unrealistic a few years ago due to concerns of its impact in reducing competition. However, the chances of getting permission from the Competition and Markets Authority have increased following the growth of Aldi and Lidl. Giant mergers have been approved in other sectors such as Lloyds-HBOS (banking) and British Telecom-EE (telecommunications).
The suggested merger would have its challenges. There is considerable overlap between the locations of the stores and the enlarged company would require the rationalisation and co-ordination of hundreds of thousands of employees. A new expensive IT system is likely to be required and the underlying difficult market trends would remain in the food retailing industry.
(a) With reference to Figure 1 and Extract A, explain one likely reason for the change in the four-firm concentration ratio of the supermarket sector between 2010 and 2015. (5 points)
(b) With reference to Figure 2 and Extract A, discuss the possible impact of supermarket monopsony power on both food suppliers and consumers. (12 points)
(c) Examine measures the government might use to restrict the monopsony power of supermarkets. (8 points)
(d) Assess the extent to which ‘information gaps’ (Extract B, lines 5 and 6) and ‘irrational behaviour’ (Extract B, line 11) are the main causes of food waste in the UK. (10 points)
(e) Discuss the likely problems for Sainsbury’s and Morrisons if the suggested merger between them goes ahead. Refer to Figure 1, Extract C and your own knowledge in your answer. (15 points)
Question 12: Edexcel A-Level Economics 9EC0 June 2019 Paper 3
Extract A
The effects of a total ban on advertising of HFSS foods
Food and drinks which 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 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 opted 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.
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.
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.
(a) With reference to Figure 1 and Extract A, explain what is meant by a ‘highly concentrated’ market for potato crisps (Extract A, lines 2–3). (5 points)
(b) Apart from changes in indirect taxes and subsidies, examine two causes of income inequality within a developed economy such as the UK. (8 points)
(c) In Extract A, lines 15–16, it was suggested that some firms may respond to the advertising ban by cutting the prices of their products.
Using game theory and the information provided in Figure 1 and Extract A, discuss the effects on firms of cutting prices in an oligopolistic market. (12 points)
EITHER
(d) Evaluate the microeconomic and macroeconomic effects of increased government spending on education to promote healthy eating in the UK. (25 points)
OR
(e) Evaluate the likely microeconomic and macroeconomic effects of imposing a tax on HFSS foods. (25 points)
Question 13: Edexcel A-Level Economics 9EC0 June 2018 Paper 3
Extract A
Starbucks in Britain – a loss-making business?
Coffee shops are among the most profitable parts of the food and drink industry, and few are doing quite as well as Starbucks, a US-based transnational company. Starbucks may be complaining of adverse global market conditions but that did not stop the world’s biggest coffee chain from reporting record annual profits in 2016. It made a profit of almost US$4.2 billion for the year, up 16% on 2015. That was mainly the result of a strong performance in its biggest market, America, where revenue rose 11%. The fastest growth was in the China and Asia Pacific region, with revenue up 23%. Howard Schultz, the CEO of Starbucks, said its Chinese coffee shops were the most efficient and profitable. While Starbucks still makes most of its profit in the US, Mr Schultz has said expansion in China will secure its future for “decades to come” and announced plans to more than double the number of shops in China to 5 000 by 2021.
However its British subsidiary, at first glance, appears to be doing less well. It has announced its first ever profit in Britain in 2015 – of just £1 million – despite opening its first coffee shop in the UK in 1998. It now has 849 UK outlets. The main reason why Starbucks has reported persistent losses in the UK is not due to a lack of demand for its coffee, but to minimise its tax bill. It is claimed that some of Starbucks’ revenue earned in the UK is transferred to its Dutch subsidiary, which is charged lower rates of tax.
Starbucks is not finding life as easy in Britain as in the USA. It faces competition from home-grown chains such as Costa and Caffè Nero. Accusations of tax avoidance have also damaged Starbucks’ sales to the benefit of its competitors. A survey found that a third less people rated Starbucks as their preferred coffee shop than they did before the tax- avoidance allegations were first published.
These issues have forced Starbucks to change its strategy. It has slowed down its expansion plans in the UK and has closed 67 underperforming coffee shops over the past year. It has also tried to repair its reputation by transferring its European headquarters from Amsterdam to London.
Extract B
Tax on disposable coffee cups?
Two and a half billion disposable cups are thrown away every year in the UK, that is, seven million every day. Only one in 400 is recycled. The UK Environment Minister has suggested that a coffee cup tax could work in a similar manner to the plastic bag charge. The 5 pence a bag charge has led to an 85% reduction in the number of bags being given out since October 2015. It is estimated that introducing a tax on disposable coffee cups would cut usage by two billion every year. One environment spokesperson, Kate Parminter, said: “We’ve seen how dramatically a small charge has affected public behaviour when it comes to the plastic bags and it is clearly time to extend it to coffee cups. Most people purchase a tea or coffee and throw away the cup without even thinking about it, but a charge would increase our awareness of the environmental impact.”
In response, another MP welcomed her comments but said he did not believe a tax was the solution. He said: “My initial reaction is charging 5p or 10p for the cup will not work. It will not encourage people to take their own cups in if a coffee goes up from £2.60 to £2.65. I suspect a more technological answer is what we need – either the composition of the disposable cups being changed so they’re more easily recyclable, or changing the technology in the recycling.”
Disposable coffee cups contain a plastic coating inside the cups which prevent them from becoming soggy, making them difficult to recycle. There are just two specialist facilities in the UK that have the required equipment to separate plastic from paper for recycling. Almost no recycled paper is used in the production of disposable cups, meaning that some 43 000 trees must be cut down annually to keep up with the demand. CO emissions of around 83 000 tonnes are generated every year for their production.
Extract C
German city of Freiburg takes action on cutting the use of disposable coffee cups
The ‘Freiburg cup’, made from dishwasher-proof plastic, can be reused hundreds of times. Cups are issued with a one-euro deposit, and can be returned to any of the participating coffee shops in the German city. The cups, which are provided to coffee shops by local councils, are washed in the cafés and bakeries that have signed up to the scheme before being reused. 56 coffee retailers have signed up, and 10 000 cups are being used.
One of the main obstacles facing a wider-reaching scheme, however, is the number of café chains in Germany that are unwilling to use unbranded multi-use cups, particularly Starbucks and McDonald’s. Starbucks already offers a discounted coffee for customers with a multi-use cup, but only if it is bearing the unmistakable Starbucks logo.
(a) With reference to Figure 1, briefly explain the market structure that best describes the UK branded coffee shop market. (5 points)
(b) With reference to Figure 3 and other information provided, discuss the price and non-price strategies that Starbucks may use to increase profitability. (12 points)
(c) Examine the advantages of using an indirect tax as a means of reducing the use of disposable coffee cups. (8 points)
EITHER
(d) Evaluate the microeconomic and macroeconomic factors that may influence Starbucks’ decision whether to expand in a particular country. (25 points)
OR
(e) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of increased UK demand for coffee at branded coffee shops. (25 points)
Mark is an A-Level Economics tutor who has been teaching for 6 years. He holds a masters degree with distinction from the London School of Economics and an undergraduate degree from the University of Edinburgh.