Economics HL
Government intervention and welfare analysis (HL) — Unit 2 HL
- 1.
In a market, demand is Qd = 200 − 4P and supply is Qs = 6P − 40. (a) Calculate the free-market equilibrium price and quantity. (b) The government imposes a price ceiling of $15. Calculate the resulting quantity demanded, quantity supplied, and the size of the shortage.
[5 marks] - 2.
Marking analysis: A learner attempts the following task: “In a market, demand is Qd = 200 − 4P and supply is Qs = 6P − 40. (a) Calculate the free-market equilibrium price and quantity. (b) The government imposes a price ceiling of $15. Calculate the resulting quantity demanded, quantity supplied, and the size of the shortage.” Their response addresses only this point: “Sets Qd = Qs: 200 − 4P = 6P − 40, and solves to obtain P = $24.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 3.
Using the same market as the previous question (Qd = 200 − 4P, Qs = 6P − 40, free-market equilibrium P = $24), the government instead imposes a price floor at $30. Calculate the resulting surplus, and calculate the total cost to the government if it agrees to purchase the entire surplus at the floor price.
[4 marks] - 4.
Marking analysis: A learner attempts the following task: “Using the same market as the previous question (Qd = 200 − 4P, Qs = 6P − 40, free-market equilibrium P = $24), the government instead imposes a price floor at $30. Calculate the resulting surplus, and calculate the total cost to the government if it agrees to purchase the entire surplus at the floor price.” Their response addresses only this point: “Substitutes the floor P = 30 into the demand equation: Qd = 200 − 4(30) = 80.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 5.
In a market, demand is Qd = 100 − 2P and supply is Qs = 3P − 20. (a) Calculate the free-market equilibrium price and quantity. (b) The government imposes a specific tax of $5 per unit on producers, so the new supply curve becomes Qs = 3(P − 5) − 20. Calculate the new equilibrium price paid by consumers, the price received by producers (after tax), and the new equilibrium quantity.
[5 marks] - 6.
Marking analysis: A learner attempts the following task: “In a market, demand is Qd = 100 − 2P and supply is Qs = 3P − 20. (a) Calculate the free-market equilibrium price and quantity. (b) The government imposes a specific tax of $5 per unit on producers, so the new supply curve becomes Qs = 3(P − 5) − 20. Calculate the new equilibrium price paid by consumers, the price received by producers (after tax), and the new equilibrium quantity.” Their response addresses only this point: “Sets Qd = Qs: 100 − 2P = 3P − 20, and solves to obtain the free-market equilibrium P = $24, Q = 52.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 7.
Using the tax scenario from the previous question (pre-tax price $24; consumers now pay $27; producers now receive $22), explain why consumers bear a larger share of the $5 tax burden ($3 per unit) than producers ($2 per unit), with reference to the relative price elasticities of demand and supply.
[4 marks] - 8.
Marking analysis: A learner attempts the following task: “Using the tax scenario from the previous question (pre-tax price $24; consumers now pay $27; producers now receive $22), explain why consumers bear a larger share of the $5 tax burden ($3 per unit) than producers ($2 per unit), with reference to the relative price elasticities of demand and supply.” Their response addresses only this point: “Calculates the price elasticity of demand at the original equilibrium (P = 24, Q = 52) using the demand slope of −2: Ed = −2 × (24/52) ≈ −0.92.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 9.
Using the tax scenario from two questions ago (pre-tax equilibrium Q = 52; post-tax equilibrium Q = 46; tax = $5 per unit), calculate (a) the government's tax revenue, and (b) the deadweight welfare loss created by the tax.
[4 marks] - 10.
Marking analysis: A learner attempts the following task: “Using the tax scenario from two questions ago (pre-tax equilibrium Q = 52; post-tax equilibrium Q = 46; tax = $5 per unit), calculate (a) the government's tax revenue, and (b) the deadweight welfare loss created by the tax.” Their response addresses only this point: “Calculates tax revenue as the tax per unit multiplied by the new (post-tax) quantity: $5 × 46 = $230.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 11.
In the market Qd = 100 − 2P, Qs = 3P − 20 (free-market equilibrium P = $24, Q = 52), the government instead provides a subsidy of $5 per unit to producers, so the new supply curve becomes Qs = 3(P + 5) − 20. Calculate the new equilibrium price paid by consumers, the price received by producers (including the subsidy), the new quantity, and the total cost of the subsidy to the government.
[5 marks] - 12.
Marking analysis: A learner attempts the following task: “In the market Qd = 100 − 2P, Qs = 3P − 20 (free-market equilibrium P = $24, Q = 52), the government instead provides a subsidy of $5 per unit to producers, so the new supply curve becomes Qs = 3(P + 5) − 20. Calculate the new equilibrium price paid by consumers, the price received by producers (including the subsidy), the new quantity, and the total cost of the subsidy to the government.” Their response addresses only this point: “Sets up the new equation with the subsidy: 100 − 2P = 3P − 5.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 13.
In a labor market, labor demand is Ld = 100 − 2W and labor supply is Ls = 3W − 50, where W is the hourly wage. (a) Calculate the free-market equilibrium wage and level of employment. (b) The government sets a minimum wage of $40. Calculate the resulting quantity of labor demanded, quantity supplied, and the size of the resulting unemployment.
[4 marks] - 14.
Marking analysis: A learner attempts the following task: “In a labor market, labor demand is Ld = 100 − 2W and labor supply is Ls = 3W − 50, where W is the hourly wage. (a) Calculate the free-market equilibrium wage and level of employment. (b) The government sets a minimum wage of $40. Calculate the resulting quantity of labor demanded, quantity supplied, and the size of the resulting unemployment.” Their response addresses only this point: “Sets Ld = Ls: 100 − 2W = 3W − 50, and solves to obtain the free-market wage W = $30 and employment L = 40.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] - 15.
Explain why a minimum wage set in a monopsony labor market (a market with a single dominant employer) might increase employment, in contrast to the usual prediction that a minimum wage causes unemployment in a competitive labor market.
[3 marks] · no calculator - 16.
Marking analysis: A learner attempts the following task: “Explain why a minimum wage set in a monopsony labor market (a market with a single dominant employer) might increase employment, in contrast to the usual prediction that a minimum wage causes unemployment in a competitive labor market.” Their response addresses only this point: “States that a monopsony employer, having wage-setting power, pays a wage below the competitive level and hires below the competitive level of employment, since its marginal cost of labor exceeds the wage it pays.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 17.
A monopsony employer faces a labor supply curve of W = 10 + 0.5L (so its marginal cost of labor is MCL = 10 + L) and a labor demand (marginal revenue product) curve of MRP = 50 − L. (a) Calculate the employment level and wage the monopsonist chooses, where MRP = MCL. (b) Calculate the employment level and wage that would occur if the market were instead perfectly competitive, where MRP = W (the supply curve).
[5 marks] - 18.
Marking analysis: A learner attempts the following task: “A monopsony employer faces a labor supply curve of W = 10 + 0.5L (so its marginal cost of labor is MCL = 10 + L) and a labor demand (marginal revenue product) curve of MRP = 50 − L. (a) Calculate the employment level and wage the monopsonist chooses, where MRP = MCL. (b) Calculate the employment level and wage that would occur if the market were instead perfectly competitive, where MRP = W (the supply curve).” Their response addresses only this point: “Sets MRP = MCL: 50 − L = 10 + L, and solves to obtain the monopsony employment level L = 20.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 19.
Two firms must each reduce their pollution, with a combined required reduction of 30 units. Firm A's marginal abatement cost is MAC_A = 2Q_A (where Q_A is units reduced by Firm A), and Firm B's marginal abatement cost is MAC_B = Q_B. Calculate the cost-minimizing allocation of the 30-unit reduction between the two firms, where MAC_A = MAC_B, and state the resulting market price of a tradeable pollution permit.
[5 marks] - 20.
Marking analysis: A learner attempts the following task: “Two firms must each reduce their pollution, with a combined required reduction of 30 units. Firm A's marginal abatement cost is MAC_A = 2Q_A (where Q_A is units reduced by Firm A), and Firm B's marginal abatement cost is MAC_B = Q_B. Calculate the cost-minimizing allocation of the 30-unit reduction between the two firms, where MAC_A = MAC_B, and state the resulting market price of a tradeable pollution permit.” Their response addresses only this point: “Sets up the condition for cost-minimization: MAC_A = MAC_B, giving 2Q_A = Q_B.” Evaluate the response against the complete 5-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[5 marks] - 21.
Explain the 'free rider problem' associated with public goods, and explain why this problem means a free market will tend to under-provide public goods such as national defense or street lighting.
[4 marks] · no calculator - 22.
Marking analysis: A learner attempts the following task: “Explain the 'free rider problem' associated with public goods, and explain why this problem means a free market will tend to under-provide public goods such as national defense or street lighting.” Their response addresses only this point: “States that public goods are non-excludable (once provided, no one can be prevented from consuming them) and non-rivalrous (one person's consumption does not reduce the amount available to others).” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks] · no calculator - 23.
Explain how imperfect information can lead to under-consumption of a merit good such as preventative healthcare, and state one government policy that could address this specific cause.
[3 marks] · no calculator - 24.
Marking analysis: A learner attempts the following task: “Explain how imperfect information can lead to under-consumption of a merit good such as preventative healthcare, and state one government policy that could address this specific cause.” Their response addresses only this point: “Explains that consumers may underestimate the future private benefits of a merit good (such as the long-term health benefits of preventative care) because they lack full information about these benefits at the time of the consumption decision.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 25.
Explain the concept of 'government failure', using the example of agricultural price supports that create persistent, costly surpluses that must be stored or destroyed.
[3 marks] · no calculator - 26.
Marking analysis: A learner attempts the following task: “Explain the concept of 'government failure', using the example of agricultural price supports that create persistent, costly surpluses that must be stored or destroyed.” Their response addresses only this point: “States that government failure occurs when a government intervention intended to correct a market failure instead results in a net loss of economic welfare, making the outcome worse than if the government had not intervened.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] · no calculator - 27.
A government is deciding between a flat (lump-sum) tax of $500 on every income earner and a progressive income tax. Taxpayer A earns $5,000 per year, and Taxpayer B earns $50,000 per year. (a) Calculate the flat tax as a percentage of each taxpayer's income. (b) Explain whether the flat tax is regressive, proportional, or progressive, based on your calculation.
[3 marks] - 28.
Marking analysis: A learner attempts the following task: “A government is deciding between a flat (lump-sum) tax of $500 on every income earner and a progressive income tax. Taxpayer A earns $5,000 per year, and Taxpayer B earns $50,000 per year. (a) Calculate the flat tax as a percentage of each taxpayer's income. (b) Explain whether the flat tax is regressive, proportional, or progressive, based on your calculation.” Their response addresses only this point: “Calculates the tax as a percentage of Taxpayer A's income: 500/5,000 × 100 = 10%.” Evaluate the response against the complete 3-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[3 marks] - 29.
In a market, the marginal private cost of production is MPC = 10 + Q, and the marginal external cost is a constant $5 per unit, so the marginal social cost is MSC = 15 + Q. Marginal social benefit (demand) is MSB = 50 − Q. (a) Calculate the free-market equilibrium quantity, where MPC = MSB. (b) Calculate the socially optimal quantity, where MSC = MSB. (c) State the size of the Pigouvian tax per unit needed to correct this externality.
[4 marks] - 30.
Marking analysis: A learner attempts the following task: “In a market, the marginal private cost of production is MPC = 10 + Q, and the marginal external cost is a constant $5 per unit, so the marginal social cost is MSC = 15 + Q. Marginal social benefit (demand) is MSB = 50 − Q. (a) Calculate the free-market equilibrium quantity, where MPC = MSB. (b) Calculate the socially optimal quantity, where MSC = MSB. (c) State the size of the Pigouvian tax per unit needed to correct this externality.” Their response addresses only this point: “Sets MPC = MSB: 10 + Q = 50 − Q, and solves to obtain the free-market quantity Q = 20.” Evaluate the response against the complete 4-mark task. Identify what earns credit and state every additional requirement needed for full marks.
[4 marks]