2023 C2 H2 Economics

Additional Revision Lectures

The switch to online shopping has meant an increase in demand for packaging such as plastic
and cardboard. Some governments are imposing a tax on plastic packaging that does not
include recycled plastic. Even with cardboard manufacturers operating at close to full capacity,
there has been a large increase in the price of cardboard in some countries.
(a) Explain two reasons why there was a large increase in the price of cardboard in some
countries. [10]

(b) Using demand and supply analysis, discuss whether consumers buying products online are
more likely to be adversely affected by the imposition of a tax on plastic packaging than
firms selling products online. [15]
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(a) Explain two reasons why there was a large increase in the price of cardboard in some
countries. [10]

R1 and R2 can be from any of these 2 factors below:

1. An increase in the derived demand for cardboard

From the preamble ‘The switch to online shopping has meant an increase in demand for
packaging such as plastic and cardboard.’ which means with an increase in demand for online
shopping, there is an increase in the derived demand for cardboard as cardboard is used for
packaging for online shopping

2. Imposition of taxes on plastic packaging

Based on the preamble ‘some governments are imposing a tax on plastic packaging that does
not include recycled plastic’, the tax will increase the cost of production of plastic, increasing the
price of plastic packaging. As cardboard is the substitute for plastic, increase in the price of
plastic packaging will cause the users to switch from plastic to cardboard, increasing the
demand for cardboard.

3. Rejection of plastic packaging by consumers and producers

With increased environmental awareness, consumers and producers may consider
environmental concerns in their decisions. Consumers may demand less use of plastic by
suppliers and producers may want to reduce the usage of plastic. Hence, they might switch to
using cardboard instead of plastic, increasing the demand for cardboard.

On top of R1 and R2 explanations, the following has to be explained too:

Explain a large increase in the price of cardboard:

The increase in demand for cardboard will lead to a rightward shift of demand curve from D1 to
D2, leading to increase in price of cardboard.
2023 C2 H2 Economics
Additional Revision Lectures

Figure 1: Market for cardboard

The extent of the increase in the price of cardboard depends on the PES value of cardboard.
When supply is price elastic (S1), a rise in demand from D1 to D2 will result in a small increase in
price from P0 to P1 . When supply is price inelastic (S2), a rise in demand from D1 to D2 will result
in a significant increase in price from P0 to P2 . As suggested in the preamble, the cardboard
manufacturers are operating at close to full capacity which indicates that the supply is highly
price inelastic. Hence, an increase in demand will lead to a large increase in the price of
cardboard.

(b) Using demand and supply analysis, discuss whether consumers buying products
online are more likely to be adversely affected by the imposition of a tax on plastic
packaging than firms selling products online. [15]
Explain the effect of the imposition of a tax on plastic packaging:
The tax on plastic packaging will increase the unit cost of production of plastic. This will lead to
the leftward shift of the supply curve from S0 to S1, resulting in the rise of the price of plastic
packaging from P0 to P1.

Figure 2: Market for plastic packaging

2023 C2 H2 Economics
Additional Revision Lectures

R1: Effect on consumers buying products online

As the price of plastic packaging increases, the cost of online products will increase as well
since plastic packaging is required to post the products to consumers. This will result in the
decrease in supply of online products. As shown in figure 3 below, the leftward shift of the
supply curve from S0 to S1 will lead to an increase in the price of online products from P0 to P1
and decrease in quantity from Q0 to Q1. The increase in price will reduce the consumer surplus
from ABP0 to ACP1.
Total expenditure of consumers will also fall. Since demand for online products are relatively
price elastic due to the large number of close substitutes available, the increase in price will
lead to a more than proportionate decrease in quantity demanded. The increase in total
expenditure due to increase in price (shown by area P0P1CG) is less than the decrease in total
expenditure due to decrease in quantity (shown by area GBQ0Q1).

Figure 3: Market for online products

Furthermore, with an increase in the prices of online products, consumers might switch back to
buying from physical stores. This could be due to saliency bias in which the consumers tend to
focus on information that is more prominent and over other less prominent but equally relevant
pieces of information. In this case, consumers who are more environmentally conscious will
switch back to buying from physical shops but they could experience further loss in consumer
surplus if higher prices are charged in physical shops.
(Note: the point on saliency bias is optional)
Therefore, despite the fall in total expenditure which can have a positive effect on consumers,
consumers can still be adversely affected because of a fall in consumer surplus. Also, since
they most likely switch to buying the products from physical stores which could be sold at higher
prices due to other costs, such as rental and labour.
2023 C2 H2 Economics
Additional Revision Lectures

Ev1: Extent of effect on consumers

The effect will be greater for low value items where packaging makes up a large proportion of
total price. For example, if consumers pay $1 for online products but $0.50 actually goes to
packaging, the negative effect experienced by these consumers will be greater. Conversely, for
high value items (especially those that are large and bulky), the effect is less significant as
packaging only makes up a small proportion of total price.
Furthermore, some online products might have price inelastic demand, especially for products
that are sold exclusively online. In this case, the increase in price will lead to a less than
proportionate fall in quantity demanded, resulting in the rise in total expenditure. For this group
of consumers, the adverse effect experiences will be greater.

R2: Effect on producers who sell products online

Referring to figure 3, producer surplus will also fall from P0BF to P1CE. Since demand for online
products are relatively price elastic due to the large number of close substitutes available, the
increase in price will lead to a more than proportionate decrease in quantity demanded. Hence,
the total revenue will fall from 0P0BQ0 to 0P1CQ1. Furthermore, even though price increases due
to fall in supply, some producers might decide to absorb the rise in cost due to tax and not
increase price. This increase in cost will lead to a fall in profit level.

Ev2: Extent of effect on producers

Cardboard packaging is the substitute for plastic packaging and producers might choose to
switch to using cardboard packaging as it is not affected by tax. However, cardboards are in
short supply as suggested by preamble ‘cardboard manufacturers operating at close to full
capacity’. If they are unable to get the cardboard packaging in time, they might delay their
posting of products which might drive consumers to switch to other competitors. Hence,
producers might also face decrease in revenue due to decrease in demand if they do not
manage to get the cardboard packaging in time.
However, for producers who sell exclusively online, they might experience an increase in total
revenue instead, as explained in the previous paragraph.

Summative Conclusion
● In general, most consumers and producers will be adversely affected by the imposition
of a tax on plastic packaging due to the fall in consumer surplus, producer surplus, as
well as lower profit earned by producers.
● However, the extent of the effect depends on the products sold. If it is an ‘online
exclusive only’ product with price inelastic demand, the adverse effect experienced by
producers will be less significant while these consumers will be negatively affected to a
large extent.
● Some consumers might experience a positive effect because the fall in total expenditure
outweighs the fall in consumer surplus as they cut down on their overall spending.
2023 C2 H2 Economics
Additional Revision Lectures

● Comparing producers and consumers, producers are more adversely affected because
of the limited substitutes available for packaging (i.e. difficulty in getting cardboard
packaging) and packaging is an important aspect of online businesses whereas
consumers can still have the option to purchase the same products directly from the
physical stores as the prices from physical stores might still be comparable. Consumers
can compare the increase in cost of packaging and higher prices of products sold in the
physical stores to decide whether they should switch to buying from physical stores or
not.