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

Introduction

This article supports teaching and curriculum planning for Pearson Edexcel A Level Economics A, specifically Theme 1: Introduction to markets and market failure, with a focus on 1.2.9 Indirect taxes and subsidies.

This topic introduces students to government interventions in markets and how they influence consumer and producer behaviour. It’s a crucial bridge between the theory of supply and demand and the applied analysis of market failure and government policy. Indirect taxes and subsidies not only feature prominently in exams but also connect economics to current affairs, giving students tangible context for their learning.

Key Concepts

As outlined in the Pearson specification, students should be able to:

• Apply supply and demand analysis to illustrate the effects of indirect taxes (like VAT or duties) and subsidies.

• Understand the incidence of indirect taxes — who bears the cost: the consumer or the producer — depending on price elasticity.

• Analyse the impact on stakeholders, including consumers, firms, and the government.

• Identify and calculate the area representing consumer subsidy and producer subsidy using demand-supply diagrams.

• Evaluate the effectiveness and unintended consequences of these interventions.

Students will also link this learning to earlier topics like elasticity of demand and supply, which influence how the burden of a tax or benefit of a subsidy is shared.

Real-World Relevance

This topic is rich with live case studies:

• The UK’s Sugar Tax on soft drinks (introduced in 2018) is a textbook example of using an indirect tax to reduce consumption of a demerit good. Some manufacturers reformulated products to avoid the tax, showing behavioural responses to price signals.

• Fuel duties and their suspension during periods of inflation offer insight into how government responds to external shocks using tax policy.

• Subsidies in agriculture, such as those supporting environmentally friendly farming practices under post-Brexit schemes, demonstrate how governments can correct underconsumption of merit goods.

Encourage students to follow current government budgets or international trade developments, which often include changes to subsidies or indirect tax policies.

How It’s Assessed

Assessment in Paper 1 (Markets and business behaviour) typically includes:

• Data response questions involving extracts with recent policy examples.

• Diagram-based questions requiring students to shift supply/demand curves and annotate the effects of a tax or subsidy.

• Use of command words like:

  • Explain: define and apply a concept.

  • Analyse: develop chains of reasoning (e.g. from tax → higher costs → reduced supply → higher price).

  • Evaluate: assess the impact, including unintended consequences and stakeholder trade-offs.

Questions often ask students to use elasticity data to comment on incidence or effectiveness, reinforcing the need for numeracy and interpretation skills.

Enterprise Skills Integration

This topic lends itself naturally to active learning:

• Students can simulate tax policy decisions using Enterprise Skills’ Business Simulations, where they play roles as producers deciding how to price products under changing tax rates.

• Skills developed include:

  • Decision-making under uncertainty (should firms absorb the tax or pass it on?)

  • Critical analysis of stakeholder impacts

  • Communication and justification of chosen strategies during discussions or group work

Simulations help turn abstract diagrams into lived economic decisions, making theory stick and helping students “learn by doing”.

Careers Links

Understanding indirect taxes and subsidies connects directly to Gatsby Benchmarks 5 and 6:

• Careers in public policy, government finance, NGOs, and economic consultancy all require knowledge of how fiscal tools shape markets.

• Roles such as:

  • Policy analyst (e.g. HM Treasury)

  • Environmental economist

  • Tax adviser

  • Behavioural economist (especially in health policy or nudge units)

These roles rely on skills learned here: interpreting data, evaluating policies, and understanding real-world trade-offs.

Teaching Notes

Planning Tips:

• Start with a recap of elasticity. Use simple examples (e.g. petrol vs chocolate bars) to illustrate who bears the tax.

• Use annotated diagrams in every lesson — drawing the shift in supply and calculating the incidence visually is essential.

• Bring in news articles or Budget summaries as weekly discussion starters.

Common Pitfalls:

• Students often confuse direct and indirect taxes — clarify with clear definitions and examples.

• Misunderstanding of elasticity application — reinforce the link between elasticity and burden-sharing.

• Diagram errors — practice drawing tax wedges clearly and consistently.

Extension Activities:

• Use the Skills Hub platform for interactive tasks where students test predictions using real-world scenarios.

• Debate: “Are subsidies always the best way to promote positive behaviour?”

• Case Study: Analyse the cost and benefit of a current UK subsidy or indirect tax (e.g. green energy or sugar tax).