Syllabus: Pearson - AS Level Economics
Module: 1.2 How Markets Work
Lesson: 1.2.9 Indirect Taxes and Subsidies

Introduction

This topic, part of Pearson Edexcel AS Level Economics A Theme 1: Introduction to markets and market failure, gives students the tools to explore how government interventions like indirect taxes and subsidies shape markets. It builds directly on prior understanding of supply and demand, elasticity, and market failure.

For teachers, this section is rich with opportunities to develop students’ analytical skills and apply economic models to live policy debates. It also supports cross-theme progression, helping students make connections with government intervention and market failure (Theme 1.4), and wider microeconomic theory in later units.

Key Concepts

Students must be able to:

• Use supply and demand analysis to examine the effects of indirect taxes (specific and ad valorem) and subsidies.

• Understand and interpret diagrams showing the incidence of taxes on consumers and producers.

• Explain how elasticity affects the distribution of tax burden or benefit from subsidies.

• Identify areas on a diagram that represent the consumer and producer impacts of both taxes and subsidies.

• Evaluate the intended and unintended consequences of government intervention in markets.

This is about more than knowing where to draw the lines. It’s about getting students to ask: Who really pays? Who really benefits? And does this policy work?

Real-World Relevance

The UK’s sugar tax (Soft Drinks Industry Levy) is a standout example. Introduced to reduce childhood obesity, it didn’t just raise prices—it prompted reformulation of products and shifted market behaviour. Some brands reduced sugar content to avoid the tax, which brings elasticity and incentives into clear focus.

Another case: government subsidies for electric vehicles (EVs) have influenced both supply (manufacturer investment) and demand (consumer uptake). The plug-in car grant, for example, helped grow a market that was initially limited to early adopters.

These real examples bring the abstract theory of indirect taxes and subsidies to life—and help students critique both successes and trade-offs.

How It’s Assessed

Expect data-driven and diagram-based exam questions, often requiring explanation, analysis, and evaluation. Common command words include:

• Explain: Describe cause and effect (e.g. “Explain how an indirect tax affects the equilibrium price and quantity”).

• Analyse: Use economic models to show chains of reasoning.

• Evaluate: Assess the overall effectiveness or impact of a policy, often using a case study.

Students may need to:

• Accurately draw and label supply and demand diagrams showing indirect tax or subsidy impacts.

• Use elasticity values to comment on incidence.

• Interpret data and provide reasoned policy judgements.

Assessment typically includes structured questions moving from lower to higher tariff, so scaffolding is crucial.

Enterprise Skills Integration

This lesson is a strong fit for building:

• Critical thinking: Students must weigh up trade-offs, not just state definitions.

• Decision-making: Encourages evaluation of policy effectiveness using real evidence.

• Problem-solving: Students are asked to diagnose market failures and suggest appropriate interventions.

For enterprise education, it’s a chance to help students think like policymakers and business leaders—who’s affected, what might the unintended outcomes be, and how do we weigh social vs financial costs?

Careers Links

This topic supports Gatsby Benchmark 4 (Linking curriculum to careers) and Benchmark 5 (Encounters with employers via case study inputs).

Relevant pathways include:

• Public policy and civil service: Understanding how taxation and subsidy policies shape markets is central to economic policy roles.

• Business strategy and consultancy: Pricing decisions, market entry, and government incentives all tie back to this topic.

• Finance and economics: Analysts need to forecast the market effects of fiscal policies—especially in sectors like energy, transport, and healthcare.

Invite local professionals or former students who work in these fields to talk about how government policy shapes decision-making in their role.

Teaching Notes

Tips for teaching:

• Use relatable, local examples (e.g. council congestion charges, bus subsidies).

• Start with visual demos—show price shifts via live supermarket data or government infographics.

• Encourage students to “argue with the diagram”: who’s worse off? What might firms do in response?

Common pitfalls:

• Students often forget to account for elasticity when analysing incidence.

• Diagrams are sometimes mislabelled—rehearse this visually and repetitively.

• Evaluation tends to be surface-level without prompting. Push for deeper reasoning: what makes a subsidy successful or not?

Extension activities:

• Mini research task: compare UK vs another country’s fuel tax or EV subsidies.

• Run a classroom simulation where students act as consumers, producers, and government.

• Explore behavioural economics: do these policies always work as intended?