AQA A Level Β· Economics 7136
5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on The market mechanism, market failure and government intervention in markets.
In a market for a demerit good, the marginal social cost (MSC) exceeds the marginal private cost (MPC) due to negative externalities in production. If the government internalises the externality by imposing a Pigouvian tax, which of the following represents the most likely outcome in the long run?
Why might the extension of property rights be a more effective method of correcting market failure from pollution than a simple indirect tax?
In a market for a merit good, such as education, market failure typically occurs because:
A merit good is often under-consumed in a free market. This is primarily because:
Which of the following identifies a source of government failure?
In the context of merit goods, explain why a positive externality in consumption leads to a misallocation of resources in a free market, and identify the point of allocative efficiency using social and private benefit curves.
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Evaluate the effectiveness of using tradable pollution permits compared to a carbon tax in correcting a market failure. Consider the certainty of the quantity of pollution reduction versus the certainty of the price for firms.
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Distinguish between a pure public good and a quasi-public good by applying the characteristics of non-rivalry and non-excludability to a local toll road compared to national defense.
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Identify and explain three distinct reasons why government intervention in a market might lead to a net welfare loss (government failure). In your answer, refer to the concepts of unintended consequences, excessive administrative costs, and information gaps.
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Consider the market for demerit goods such as tobacco.
a) Use a marginal private and social benefit diagram to illustrate why tobacco is over-consumed in a free market.
b) Evaluate the relative merits of using indirect taxation versus regulation (such as a ban on advertising) to correct this market failure. Which policy is likely to be more effective if the price elasticity of demand for tobacco is highly inelastic?
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