Cambridge International A Level · Economics (9708)

Reasons for government intervention in markets: Practice Questions

5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Reasons for government intervention in markets.

10 questions24 marksFree, no account

Question 1

1 mark

What is a fundamental economic reason for a government to provide street lighting directly to its citizens?

Question 2

1 mark

In an effort to make essential housing more affordable, a government imposes a maximum price set below the market equilibrium.
What is a certain consequence of this intervention, assuming no other changes in the market?

Question 3

1 mark

A government provides national defense and also subsidises the consumption of fruit and vegetables. Which statement correctly identifies the economic reasons for these two interventions?

Question 4

1 mark

What is a common reason for a government to intervene in the market for merit goods, such as primary education?

Question 5

1 mark

How does the concept of imperfect information justify government intervention in the market for demerit goods?

Question 6

2 marks

State why a government might provide information to consumers regarding the nutritional benefits of consuming fresh vegetables.

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Question 7

4 marks

Explain how imperfect information leads to the over-consumption of demerit goods and why this necessitates government intervention.

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Question 8

5 marks

Using the concepts of non-excludability and non-rivalry, explain why the free-rider problem prevents the private sector from reaching the socially optimal output where \( \text{MSB} = \text{MSC} \), and analyze why this specific failure necessitates direct government provision.

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Question 9

3 marks

(a) Explain the distinction between a maximum price (price ceiling) and a minimum price (price floor).
(b) Identify two specific economic reasons why a government might decide to intervene in the market for staple foods by setting a maximum price during a period of rapidly rising prices.

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Question 10

5 marks

Consider a market for rental housing where the equilibrium rent is determined by demand and supply. The government introduces a rent ceiling (maximum price), denoted as \( P_{max} \), below the current market equilibrium to make housing more affordable.
(a) With the aid of a demand and supply diagram, explain how this intervention leads to a persistent shortage in the housing market.
(b) Analyse two possible methods the government could use to address the resulting shortage in the long run.

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