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IB · ECON HL

Economics HL

Government intervention and welfare analysis (HL) — Unit 2 HL

Name: ____________________Date: October 2, 2026
  1. 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]

    Marking points

    • Sets Qd = Qs: 200 − 4P = 6P − 40, and solves to obtain P = $24.
    • Substitutes to obtain the equilibrium quantity Q = 104.
    • Substitutes the ceiling P = 15 into the demand equation: Qd = 200 − 4(15) = 140.
    • Substitutes P = 15 into the supply equation: Qs = 6(15) − 40 = 50.
    • Calculates the shortage as Qd − Qs = 140 − 50 = 90 units.

    Examiner tip: A price ceiling only has an effect if it is set below the free-market equilibrium price — always check this first, since a ceiling set above equilibrium would be non-binding and change nothing.

  2. 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]

    Marking points

    • Recognises credit for the stated point: Sets Qd = Qs: 200 − 4P = 6P − 40, and solves to obtain P = $24.
    • Identifies the missing requirement: Substitutes to obtain the equilibrium quantity Q = 104.
    • Identifies the missing requirement: Substitutes the ceiling P = 15 into the demand equation: Qd = 200 − 4(15) = 140.
    • Identifies the missing requirement: Substitutes P = 15 into the supply equation: Qs = 6(15) − 40 = 50.
    • Identifies the missing requirement: Calculates the shortage as Qd − Qs = 140 − 50 = 90 units.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  3. 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]

    Marking points

    • Substitutes the floor P = 30 into the demand equation: Qd = 200 − 4(30) = 80.
    • Substitutes P = 30 into the supply equation: Qs = 6(30) − 40 = 140.
    • Calculates the surplus as Qs − Qd = 140 − 80 = 60 units.
    • Calculates the government's cost as the floor price multiplied by the surplus quantity: $30 × 60 = $1,800.

    Examiner tip: A price floor only has an effect if it is set above the free-market equilibrium price — this is the mirror image of a price ceiling, which only binds when set below equilibrium.

  4. 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]

    Marking points

    • Recognises credit for the stated point: Substitutes the floor P = 30 into the demand equation: Qd = 200 − 4(30) = 80.
    • Identifies the missing requirement: Substitutes P = 30 into the supply equation: Qs = 6(30) − 40 = 140.
    • Identifies the missing requirement: Calculates the surplus as Qs − Qd = 140 − 80 = 60 units.
    • Identifies the missing requirement: Calculates the government's cost as the floor price multiplied by the surplus quantity: $30 × 60 = $1,800.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  5. 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]

    Marking points

    • Sets Qd = Qs: 100 − 2P = 3P − 20, and solves to obtain the free-market equilibrium P = $24, Q = 52.
    • Sets up the new equation with the tax: 100 − 2P = 3P − 35.
    • Solves to obtain the new price paid by consumers: P = $27.
    • Calculates the price received by producers as P − 5 = $22.
    • Substitutes P = 27 into the demand equation to obtain the new quantity: Qd = 100 − 2(27) = 46.

    Examiner tip: A specific tax imposed on producers shifts the entire supply curve vertically upward by the amount of the tax — solving the new equilibrium always uses this shifted supply curve, not the original one.

  6. 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]

    Marking points

    • Recognises credit for the stated point: Sets Qd = Qs: 100 − 2P = 3P − 20, and solves to obtain the free-market equilibrium P = $24, Q = 52.
    • Identifies the missing requirement: Sets up the new equation with the tax: 100 − 2P = 3P − 35.
    • Identifies the missing requirement: Solves to obtain the new price paid by consumers: P = $27.
    • Identifies the missing requirement: Calculates the price received by producers as P − 5 = $22.
    • Identifies the missing requirement: Substitutes P = 27 into the demand equation to obtain the new quantity: Qd = 100 − 2(27) = 46.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  7. 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]

    Marking points

    • 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.
    • Calculates the price elasticity of supply at the same point using the supply slope of 3: Es = 3 × (24/52) ≈ 1.38.
    • States that demand (|Ed| ≈ 0.92) is relatively less elastic than supply (Es ≈ 1.38) at this point.
    • Concludes that the side of the market with the less elastic response (consumers, in this case) bears the larger share of the tax burden, consistent with the general tax incidence rule.

    Examiner tip: This calculation confirms the general rule with real numbers: tax burden always falls more heavily on whichever side of the market (consumers or producers) is relatively less price elastic at the equilibrium point.

  8. 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]

    Marking points

    • Recognises credit for the stated 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.
    • Identifies the missing requirement: Calculates the price elasticity of supply at the same point using the supply slope of 3: Es = 3 × (24/52) ≈ 1.38.
    • Identifies the missing requirement: States that demand (|Ed| ≈ 0.92) is relatively less elastic than supply (Es ≈ 1.38) at this point.
    • Identifies the missing requirement: Concludes that the side of the market with the less elastic response (consumers, in this case) bears the larger share of the tax burden, consistent with the general tax incidence rule.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  9. 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]

    Marking points

    • Calculates tax revenue as the tax per unit multiplied by the new (post-tax) quantity: $5 × 46 = $230.
    • Uses the deadweight loss formula for a linear market: DWL = (1/2) × tax × (change in quantity).
    • Calculates the change in quantity as 52 − 46 = 6 units.
    • Calculates the deadweight loss as (1/2) × 5 × 6 = $15.

    Examiner tip: The deadweight loss triangle's base is always the fall in quantity traded due to the tax, and its height is always the tax per unit — this simple triangle-area formula works whenever supply and demand are linear.

  10. 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]

    Marking points

    • Recognises credit for the stated point: Calculates tax revenue as the tax per unit multiplied by the new (post-tax) quantity: $5 × 46 = $230.
    • Identifies the missing requirement: Uses the deadweight loss formula for a linear market: DWL = (1/2) × tax × (change in quantity).
    • Identifies the missing requirement: Calculates the change in quantity as 52 − 46 = 6 units.
    • Identifies the missing requirement: Calculates the deadweight loss as (1/2) × 5 × 6 = $15.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  11. 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]

    Marking points

    • Sets up the new equation with the subsidy: 100 − 2P = 3P − 5.
    • Solves to obtain the new price paid by consumers: P = $21.
    • Calculates the price received by producers as P + 5 = $26.
    • Substitutes P = 21 into the demand equation to obtain the new quantity: Qd = 100 − 2(21) = 58.
    • Calculates the total subsidy cost as the subsidy per unit multiplied by the new quantity: $5 × 58 = $290.

    Examiner tip: A subsidy works exactly like a tax in reverse: it shifts the supply curve vertically downward by the subsidy amount, lowering the price paid by consumers while raising the effective price received by producers.

  12. 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]

    Marking points

    • Recognises credit for the stated point: Sets up the new equation with the subsidy: 100 − 2P = 3P − 5.
    • Identifies the missing requirement: Solves to obtain the new price paid by consumers: P = $21.
    • Identifies the missing requirement: Calculates the price received by producers as P + 5 = $26.
    • Identifies the missing requirement: Substitutes P = 21 into the demand equation to obtain the new quantity: Qd = 100 − 2(21) = 58.
    • Identifies the missing requirement: Calculates the total subsidy cost as the subsidy per unit multiplied by the new quantity: $5 × 58 = $290.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  13. 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]

    Marking points

    • Sets Ld = Ls: 100 − 2W = 3W − 50, and solves to obtain the free-market wage W = $30 and employment L = 40.
    • Substitutes the minimum wage W = 40 into the labor demand equation: Ld = 100 − 2(40) = 20.
    • Substitutes W = 40 into the labor supply equation: Ls = 3(40) − 50 = 70.
    • Calculates the resulting unemployment as Ls − Ld = 70 − 20 = 50.

    Examiner tip: A minimum wage is simply a price floor applied to the labor market — the mechanics of calculating the resulting surplus (here, unemployment) are identical to a price floor in a goods market.

  14. 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]

    Marking points

    • Recognises credit for the stated point: Sets Ld = Ls: 100 − 2W = 3W − 50, and solves to obtain the free-market wage W = $30 and employment L = 40.
    • Identifies the missing requirement: Substitutes the minimum wage W = 40 into the labor demand equation: Ld = 100 − 2(40) = 20.
    • Identifies the missing requirement: Substitutes W = 40 into the labor supply equation: Ls = 3(40) − 50 = 70.
    • Identifies the missing requirement: Calculates the resulting unemployment as Ls − Ld = 70 − 20 = 50.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  15. 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

    Marking points

    • 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.
    • Explains that a minimum wage set between the monopsony wage and the competitive wage effectively becomes the employer's new marginal cost of labor for all workers up to that wage, removing the employer's incentive to restrict hiring to keep the wage low.
    • Concludes that within this range, the employer can be induced to hire more workers at the higher, legally mandated wage than it would voluntarily choose to hire at its own profit-maximizing (lower) monopsony wage.

    Examiner tip: This monopsony result is a genuine exception to the standard competitive market prediction, and is a favorite HL exam topic precisely because it challenges the simple 'price floors always cause unemployment' intuition.

  16. 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

    Marking points

    • Recognises credit for the stated 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.
    • Identifies the missing requirement: Explains that a minimum wage set between the monopsony wage and the competitive wage effectively becomes the employer's new marginal cost of labor for all workers up to that wage, removing the employer's incentive to restrict hiring to keep the wage low.
    • Identifies the missing requirement: Concludes that within this range, the employer can be induced to hire more workers at the higher, legally mandated wage than it would voluntarily choose to hire at its own profit-maximizing (lower) monopsony wage.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  17. 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]

    Marking points

    • Sets MRP = MCL: 50 − L = 10 + L, and solves to obtain the monopsony employment level L = 20.
    • Substitutes L = 20 into the supply curve to obtain the monopsony wage: W = 10 + 0.5(20) = $20.
    • Sets MRP = W (the competitive condition): 50 − L = 10 + 0.5L, and solves to obtain the competitive employment level L ≈ 26.7.
    • Substitutes to obtain the competitive wage: W = 10 + 0.5(26.7) ≈ $23.33.
    • Concludes that the monopsonist hires fewer workers (20 versus 26.7) at a lower wage ($20 versus $23.33) than a perfectly competitive labor market would produce.

    Examiner tip: The key distinction for a monopsonist is that its marginal cost of labor curve lies above its labor supply curve (since hiring one more worker requires raising the wage paid to all workers), unlike a wage-taking firm where the supply curve and MCL curve are identical.

  18. 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]

    Marking points

    • Recognises credit for the stated point: Sets MRP = MCL: 50 − L = 10 + L, and solves to obtain the monopsony employment level L = 20.
    • Identifies the missing requirement: Substitutes L = 20 into the supply curve to obtain the monopsony wage: W = 10 + 0.5(20) = $20.
    • Identifies the missing requirement: Sets MRP = W (the competitive condition): 50 − L = 10 + 0.5L, and solves to obtain the competitive employment level L ≈ 26.7.
    • Identifies the missing requirement: Substitutes to obtain the competitive wage: W = 10 + 0.5(26.7) ≈ $23.33.
    • Identifies the missing requirement: Concludes that the monopsonist hires fewer workers (20 versus 26.7) at a lower wage ($20 versus $23.33) than a perfectly competitive labor market would produce.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  19. 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]

    Marking points

    • Sets up the condition for cost-minimization: MAC_A = MAC_B, giving 2Q_A = Q_B.
    • Uses the total reduction constraint: Q_A + Q_B = 30.
    • Substitutes Q_B = 2Q_A into the constraint: Q_A + 2Q_A = 30, giving Q_A = 10.
    • Calculates Q_B = 30 − 10 = 20.
    • States the resulting permit price as MAC_A = 2(10) = $20 (equal to MAC_B = 20, confirming the allocation is cost-minimizing).

    Examiner tip: A tradeable permit market naturally achieves this cost-minimizing allocation without a regulator needing to calculate it directly: firms with higher abatement costs will buy permits from firms that can reduce pollution more cheaply, until marginal abatement costs are equalised.

  20. 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]

    Marking points

    • Recognises credit for the stated point: Sets up the condition for cost-minimization: MAC_A = MAC_B, giving 2Q_A = Q_B.
    • Identifies the missing requirement: Uses the total reduction constraint: Q_A + Q_B = 30.
    • Identifies the missing requirement: Substitutes Q_B = 2Q_A into the constraint: Q_A + 2Q_A = 30, giving Q_A = 10.
    • Identifies the missing requirement: Calculates Q_B = 30 − 10 = 20.
    • Identifies the missing requirement: States the resulting permit price as MAC_A = 2(10) = $20 (equal to MAC_B = 20, confirming the allocation is cost-minimizing).

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  21. 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

    Marking points

    • 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).
    • Explains that because the good is non-excludable, individuals have an incentive to 'free ride' by benefiting from the good without paying for it, since they cannot be prevented from using it anyway.
    • Explains that if enough people free ride, private firms cannot generate enough revenue from voluntary payment to cover the cost of providing the good, so profit-seeking firms choose not to supply it, or supply too little of it.
    • Concludes that this market failure justifies government provision of public goods, funded through compulsory taxation rather than voluntary payment.

    Examiner tip: Non-excludability is the root cause of the free rider problem, while non-rivalry is the separate property that explains why, once the good is provided, it is efficient for everyone to consume it — keep these two properties distinct in your explanation.

  22. 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

    Marking points

    • Recognises credit for the stated 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).
    • Identifies the missing requirement: Explains that because the good is non-excludable, individuals have an incentive to 'free ride' by benefiting from the good without paying for it, since they cannot be prevented from using it anyway.
    • Identifies the missing requirement: Explains that if enough people free ride, private firms cannot generate enough revenue from voluntary payment to cover the cost of providing the good, so profit-seeking firms choose not to supply it, or supply too little of it.
    • Identifies the missing requirement: Concludes that this market failure justifies government provision of public goods, funded through compulsory taxation rather than voluntary payment.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  23. 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

    Marking points

    • 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.
    • Explains that this leads consumers to value the good less than its true, fully-informed value, causing them to demand and consume less than the socially optimal quantity.
    • States a valid policy response that directly addresses the information gap, such as a public information or education campaign about the benefits of preventative healthcare, rather than only a tax or subsidy.

    Examiner tip: Information failure is a distinct cause of under-consumption from a positive externality, even though both merit good arguments often get discussed together — information campaigns address the former, while subsidies address the latter.

  24. 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

    Marking points

    • Recognises credit for the stated 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.
    • Identifies the missing requirement: Explains that this leads consumers to value the good less than its true, fully-informed value, causing them to demand and consume less than the socially optimal quantity.
    • Identifies the missing requirement: States a valid policy response that directly addresses the information gap, such as a public information or education campaign about the benefits of preventative healthcare, rather than only a tax or subsidy.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  25. 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

    Marking points

    • 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.
    • Explains that an agricultural price floor set above the equilibrium price creates a persistent surplus, since quantity supplied exceeds quantity demanded at that price.
    • Explains that the government then bears the ongoing cost of storing or destroying this surplus, which represents a waste of resources (an opportunity cost) that could have been avoided without the price support, while also keeping food prices artificially high for consumers.

    Examiner tip: Government failure does not mean intervention is always bad — it means a specific policy's unintended costs can exceed its intended benefits, which is why cost-benefit analysis of any intervention is important before and after implementation.

  26. 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

    Marking points

    • Recognises credit for the stated 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.
    • Identifies the missing requirement: Explains that an agricultural price floor set above the equilibrium price creates a persistent surplus, since quantity supplied exceeds quantity demanded at that price.
    • Identifies the missing requirement: Explains that the government then bears the ongoing cost of storing or destroying this surplus, which represents a waste of resources (an opportunity cost) that could have been avoided without the price support, while also keeping food prices artificially high for consumers.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  27. 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]

    Marking points

    • Calculates the tax as a percentage of Taxpayer A's income: 500/5,000 × 100 = 10%.
    • Calculates the tax as a percentage of Taxpayer B's income: 500/50,000 × 100 = 1%.
    • States that since the tax takes a smaller percentage of income from the higher earner (1%) than the lower earner (10%), the flat tax is regressive.

    Examiner tip: A tax is regressive, proportional, or progressive based on whether the percentage of income paid falls, stays the same, or rises as income increases — a fixed dollar amount is always regressive, since it is a larger share of a smaller income.

  28. 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]

    Marking points

    • Recognises credit for the stated point: Calculates the tax as a percentage of Taxpayer A's income: 500/5,000 × 100 = 10%.
    • Identifies the missing requirement: Calculates the tax as a percentage of Taxpayer B's income: 500/50,000 × 100 = 1%.
    • Identifies the missing requirement: States that since the tax takes a smaller percentage of income from the higher earner (1%) than the lower earner (10%), the flat tax is regressive.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

  29. 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]

    Marking points

    • Sets MPC = MSB: 10 + Q = 50 − Q, and solves to obtain the free-market quantity Q = 20.
    • Sets MSC = MSB: 15 + Q = 50 − Q, and solves to obtain the socially optimal quantity Q = 17.5.
    • States that the free market overproduces (Q = 20) relative to the social optimum (Q = 17.5), consistent with a negative externality.
    • States that the Pigouvian tax should equal the marginal external cost at the socially optimal output, which is the constant $5 per unit, so that MPC + tax = MSC.

    Examiner tip: A Pigouvian tax set exactly equal to the marginal external cost makes the polluter 'internalize' the externality, since MPC plus the tax becomes identical to MSC — this shifts the market equilibrium exactly to the socially optimal quantity.

  30. 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]

    Marking points

    • Recognises credit for the stated point: Sets MPC = MSB: 10 + Q = 50 − Q, and solves to obtain the free-market quantity Q = 20.
    • Identifies the missing requirement: Sets MSC = MSB: 15 + Q = 50 − Q, and solves to obtain the socially optimal quantity Q = 17.5.
    • Identifies the missing requirement: States that the free market overproduces (Q = 20) relative to the social optimum (Q = 17.5), consistent with a negative externality.
    • Identifies the missing requirement: States that the Pigouvian tax should equal the marginal external cost at the socially optimal output, which is the constant $5 per unit, so that MPC + tax = MSC.

    Examiner tip: Treat each marking point as a separate requirement. Do not award the same idea twice, and do not infer work the learner did not show.

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