Economics
Market failure and externalities — Syllabus topic 2.10
- 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
[1 mark] · 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
[1 mark] · 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.
[4 marks] · no calculator - 4.
Discuss whether taxing a negative externality is likely to be more effective than banning the activity outright.
[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
[1 mark] · 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
[1 mark] · 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.
[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.
[4 marks] - 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.
[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’.
[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.
[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.
[2 marks] · no calculator - 13.
Explain the purpose of a congestion charge on vehicles entering a busy city centre during peak hours.
[2 marks] · no calculator - 14.
Explain how a carbon tax on fossil fuels is intended to reduce a country's greenhouse gas emissions.
[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.
[2 marks] · no calculator - 16.
Explain what is meant by moral hazard, using a person with comprehensive car insurance as an example.
[2 marks] · no calculator - 17.
Explain, using an example, what is meant by government failure in the context of correcting a market failure.
[2 marks] · no calculator - 18.
Explain the difference between the private cost and the social cost of producing a good that generates pollution.
[2 marks] · no calculator - 19.
Explain the purpose of a government subsidy for households installing solar panels on their roofs.
[2 marks] · no calculator - 20.
Explain why national defence is considered a public good, referring to both non-excludability and non-rivalry.
[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.
[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.
[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.
[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.
[2 marks] · no calculator