Economics

1. 1.

   Fictional case: a factory's smoke damages neighbours' laundry without compensation. Explain why this is a negative production externality.

   [2 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The factory pays for its own inputs but not the neighbours' damage. Social cost includes both, so private production choices can ignore part of the cost imposed.

   Marking points

   • An uncompensated cost falls on third parties outside the transaction.
   • The damage arises from production and is excluded from the producer's private cost.

   Examiner tip: A high private cost alone does not constitute an externality.

2. 2.

   Explain why a warning siren audible to an entire town may be underprovided by voluntary payments.

   [3 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Because contributors cannot reserve the siren's benefit for themselves, individuals may wait for others to fund it. Collective financing can address the resulting gap.

   Marking points

   • Hearing the warning is non-rival: one listener does not reduce another's benefit.
   • Non-payers are difficult to exclude from the audible warning.
   • People can free ride, reducing the funds available relative to collective benefit.

   Examiner tip: State both public-good properties before linking them to free riding.

3. 3.

   Fictional model: marginal benefit is 100 - Q, marginal private cost is 20 + Q, and constant marginal external cost is 20, all in currency per unit. Calculate market and socially efficient quantities and the corrective per-unit tax in this model.

   [4 marks]

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Without intervention the producer equates benefit to private cost. Adding the external cost shifts the relevant cost up by 20; a tax of that size reproduces the social optimum under this simplified model.

   Marking points

   • Market: 100 - Q = 20 + Q gives Q = 40.
   • Social marginal cost = 40 + Q.
   • Efficient: 100 - Q = 40 + Q gives Q = 30.
   • Corrective tax = 20 currency units per unit, the external cost at the efficient output.

   Examiner tip: Use marginal external cost, not total external damage, for a per-unit tax.

4. 4.

   Fictional case: insulation creates benefits for neighbours through lower local pollution. Explain why a subsidy may raise efficiency, and identify a reason it might fund activity that would occur anyway.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Trace the gap between private and social benefit, then the price incentive. Assess additionality: subsidised installations are not all new installations caused by the policy.

   Marking points

   • External benefits make social marginal benefit exceed private marginal benefit.
   • Private choices can produce too little insulation relative to the social optimum.
   • A subsidy lowers the effective private price and can increase adoption.
   • Households already planning profitable insulation may receive subsidies without changing behaviour.

   Examiner tip: Distinguish total uptake from extra uptake attributable to the subsidy.

5. 5.

   Fictional case: Sena can tax industrial emissions or set a fixed emissions limit. Damage rises sharply above a known threshold, but firms' abatement costs are uncertain. Evaluate the choice.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. The threshold makes uncontrolled emissions particularly risky, so a monitored cap may be defensible despite uncertain compliance costs. Trading within a cap can reduce those costs. A tax remains attractive where damage changes smoothly.

   Marking points

   • Indicative: a tax supplies a continuing incentive and allows firms to choose least-cost reductions.
   • A limit offers greater quantity certainty where exceeding the threshold is especially damaging.
   • Uncertain costs can make a strict limit expensive; both policies require monitoring.
   • A justified judgement links threshold risk to quantity control while addressing compliance costs.

   Examiner tip: Tie instrument choice to the shape of damage, not just 'taxes raise revenue'.

6. 6.

   Fictional case: a park is free to enter but becomes crowded on weekends. Evaluate calling it a pure public good and the case for a weekend entry charge.

   [4 marks] · no calculator

   Answer explanation

   Draft walkthroughs are based on marking guidance, not independently verified derivations.

   1. Classify consumption properties rather than ownership. At peak times the park is congestible, so a charge or reservation system may improve use; concessions can preserve access. It is not automatically a pure public good merely because government owns it.

   Marking points

   • Indicative: free access does not establish non-excludability; gates could exclude users.
   • Crowding creates rivalry because additional users reduce others' enjoyment.
   • A charge can manage congestion but restrict access for low-income users.
   • A justified conclusion distinguishes off-peak use from congested use and considers exemptions or booking.

   Examiner tip: Government provision and public-good status are separate questions.

Original, unofficial practice questions from SubjectScout — not official past-paper questions.