School / Cambridge IGCSE / 0455 / Market failure and externalities Practice set under review
Market failure and externalities Negative externalities, public goods and government intervention for Papers 1 and 2.
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Specific topic Select a topic Private and external costs Market failure Government responses Another topic Economics Market failure and externalities
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1 Which of the following is an example of a negative externality of production? A A firm's profits fall after a tax increase B Factory pollution damages the health of nearby residents C A firm's costs rise due to higher wages D Consumers switch to a cheaper substitute product AI checked Paper 1 style Easy 1 marks No calculator + 2 Which good is best described as a public good, in the economic sense of being non-excludable and non-rivalrous? A Ice cream B A private car C A national street-lighting system D A haircut AI checked Paper 1 style Easy 1 marks No calculator + 3 A factory produces goods but also releases pollution that harms nearby residents. Analyse two ways a government could reduce this negative externality. AI checked Paper 2 style Medium 4 marks No calculator + 4 Discuss whether taxing a negative externality is likely to be more effective than banning the activity outright. AI checked Paper 2 style Hard 4 marks No calculator + 5 Which of the following is best described as a merit good, likely to be under-consumed if left entirely to the free market? A Cigarettes B Education C Alcohol D A luxury car AI checked Paper 1 style Easy 1 marks No calculator + 6 Which of the following is a demerit good, typically over-consumed if left entirely to the free market? A Vaccination B A public park C Tobacco products D Basic healthcare AI checked Paper 1 style Easy 1 marks No calculator + 7 A buyer of a used car cannot tell whether it has hidden mechanical faults, while the seller knows its full condition. Analyse how this information failure could lead to a market failure. AI checked Paper 2 style Enrichment Medium 4 marks No calculator + 8 A city subsidises bus operators so they can lower fares. Many additional bus passengers would otherwise travel by private car. Analyse how the subsidy could reduce under-use of public transport and the external costs of car travel. AI checked Paper 2 style Medium 4 marks Calculator + 9 An unfenced public park has many open entrances, making it impractical to exclude non-paying users. Explain how this could create a free-rider problem for a private provider relying on voluntary payments. AI checked Paper 1 style Medium 2 marks No calculator + 10 Several fishing fleets share access to the same open ocean fishing ground, with no limits on how much each can catch. Explain, using this example, what is meant by the ‘tragedy of the commons’. AI checked Paper 2 style Medium 2 marks No calculator + 11 Assume a vaccine reduces infection or onward transmission of a contagious disease. Explain how widespread vaccination can create a positive externality for people who are not vaccinated. AI checked Paper 1 style Easy 2 marks No calculator + 12 Explain one positive externality that an educated workforce can provide to the wider economy, beyond the higher wages the educated individuals themselves earn. AI checked Paper 1 style Easy 2 marks No calculator + 13 Explain the purpose of a congestion charge on vehicles entering a busy city centre during peak hours. AI checked Paper 2 style Medium 2 marks No calculator + 14 Explain how a carbon tax on fossil fuels is intended to reduce a country's greenhouse gas emissions. AI checked Paper 2 style Medium 2 marks No calculator + 15 Explain how a cap-and-trade (tradeable permit) scheme could be used to reduce total pollution from a group of factories. AI checked Paper 2 style Enrichment Medium 2 marks No calculator + 16 Explain what is meant by moral hazard, using a person with comprehensive car insurance as an example. AI checked Paper 2 style Enrichment Medium 2 marks No calculator + 17 Explain, using an example, what is meant by government failure in the context of correcting a market failure. AI checked Paper 2 style Medium 2 marks No calculator + 18 Explain the difference between the private cost and the social cost of producing a good that generates pollution. AI checked Paper 1 style Medium 2 marks No calculator + 19 Explain the purpose of a government subsidy for households installing solar panels on their roofs. AI checked Paper 2 style Medium 2 marks No calculator + 20 Explain why national defence is considered a public good, referring to both non-excludability and non-rivalry. AI checked Paper 1 style Easy 2 marks No calculator + 21 A factory's pollution is seriously harming a nearby river's ecosystem. Discuss whether a strict legal ban would be more effective than a pollution tax in this specific case. AI checked Paper 2 style Hard 4 marks No calculator + 22 Explain why health insurance companies often struggle to accurately price policies for customers whose true health risk they cannot fully observe. AI checked Paper 2 style Enrichment Medium 2 marks No calculator + 23 Explain, in simple terms, why economists consider a market failure to involve a loss of overall economic welfare, even if the firms involved are still making a profit. AI checked Paper 1 style Medium 2 marks No calculator + 24 Explain why a government might offer a subsidy to employers who provide technical skills training for their workers, rather than leaving training decisions entirely to individual firms. AI checked Paper 2 style Medium 2 marks No calculator + Self-assessed 0 / 0
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