A LevelEconomicsAQAExam QuestionsIndividuals, Firms, Markets & Market Failure8. The Market Mechanism, Market Failure & Government Intervention

The Market Mechanism, Market Failure & Government Intervention (AQA A Level Economics): Exam Questions

Exam code: 7136

4 hours36 questions

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8. The Market Mechanism, Market Failure & Government Intervention

1
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Which one of the following distinguishes a private good from a pure public good?

  • A private good can only be provided by private firms and not the government

  • Consumption of a private good creates negative externalities for other consumers

  • Consumers of a private good have full knowledge of any externalities in its production

  • One person’s consumption of a private good reduces the amount available for other consumers

Choose your answer

2
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Which one of the following government policies is most likely to reduce market failure and to improve the allocation of resources?

  • A higher rate of tax on all firms earning profit

  • A minimum price for demerit goods above their free market price

  • Free market pricing for the provision of public goods

  • Subsidies paid to all loss-making firms to maintain full employment

Choose your answer

3
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Figure 6 shows the marginal private and social benefit (MPB and MSB) curves and the marginal private and social cost (MPC and MSC) curves in the market for domestically produced solar panels. The initial market equilibrium is at E1.

q23-paper-3-june-2020-aqa-a-level-economics

 

To correct the market failure, the government introduces a subsidy to domestic manufacturers of solar panels of £200 per unit produced. Which one of the following represents the total amount of subsidy payments made by the government in the first year of the scheme?

  • £20 million.

  • £25 million.

  • £75 million.

  • £100 million.

Choose your answer

4
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Which one of the following is most likely to result in complete market failure? 

  • Negative externalities in production and consumption 

  • Non-excludability and no enforceable property rights

  • The existence of demerit goods in some markets

  • The government setting maximum prices for excludable and rival goods 

Choose your answer

5
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A rational, utility maximising consumer is considering the purchase of a used car.   Her final choice is between two cars which are identical in all respects except for the  differences shown below. 

 

Price

Period of guarantee against faults

Car 1

£8000

3 months

Car 2

£10000

12 months

Based on the above information, which one of the following is the most likely explanation for the customer’s purchase of Car 2?  She 

  • has £10 000 of savings available to buy herself a used car 

  • has a positive income elasticity of demand for used cars. 

  • has a price inelastic demand curve for used cars. 

  • wants to reduce the risks from asymmetric information. 

Choose your answer

6
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The existence of negative externalities in consumption results in a misallocation of  resources.  This is because at the free market level of output the  

  • marginal private benefit is greater than the marginal private cost

  • marginal private cost is greater than the marginal social cost

  • marginal social benefit is less than the marginal social cost

  • marginal social cost is less than the marginal private benefit

Choose your answer

7
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Which one of the following applies to merit goods? 

  • Their marginal private benefit is greater than their marginal social benefit. 

  • They are likely to be provided by the market. 

  • They can only be supplied by the government. 

  • They have the characteristics of non-excludability and non-rivalry

Choose your answer

8
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The diagram below shows the demand curve(D) and two supply curves (S1 and S2) in the market for renewable energy.

q5-june-2018-aqa-a-level-economics

The renewable energy market is initially in equilibrium at a price of OH.  The government then introduces a subsidy for renewable energy.  

After the introduction of the subsidy, the total amount of money received by the producers from both consumers and the government is 

  • OGME2  

  • OHLE2

  • OHNME2

  • OJKE2

Choose your answer

9
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Which one of the following provides a reason for government intervention in a market? 

  • Firms in an oligopolistic market may limit price competition. 

  • Market failures can only be corrected by using regulations.

  • Monopolistically competitive firms earn abnormal profits in the long run.

  • Public goods are excludable and rival. 

Choose your answer

10
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The diagram below shows the original market demand and supply curves (D and S) for loft insulation. Loft insulation reduces energy consumption.  

q2-paper-3-june-2017-aqa-a-level-economics

The government wishes to meet its energy efficiency target by shifting the market  demand curve for loft insulation from D1  to D2 .  Which one of the following policies is  most likely to enable the government to achieve its objective? 

  • A decrease in the rate of VAT on domestic gas and electricity used for home heating 

  • A ‘nudge’ to households to install loft insulation by offering to clear lofts of unwanted items if insulation is installed.

  • The introduction of a maximum price for loft insulation 

  • The introduction of a subsidy paid to the firms installing loft insulation

Choose your answer

11
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The tragedy of the commons can be applied to the fishing industry.  What is the  nature of this market failure? 

  • Over-fishing resulting in declining fish populations 

  • The imposition of fishing quotas by the European Union 

  • The positive externalities associated with fish consumption 

  • The third-party effects on dolphins as a result of tuna fishing 

Choose your answer

12
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Immobility of labour may lead to a misallocation of resources and market failure because 

  • a change in the pattern of demand results in structural unemployment. 

  • the education and training needed to reduce labour immobility is a public good. 

  • the government’s target for the rate of inflation is too high. 

  • the immobility of factors of production is a negative externality in production

Choose your answer

13
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The diagram below shows the marginal private and social benefit (MPB and MSB)  curves and the marginal private and social cost (MPC and MSC) curves in a market  where there are positive externalities in production. 

q29-june-2017-aqa-a-level-economics

At the free market equilibrium, market failure occurs.  Which one of the following is  correct? 

  • As a result of this market failure, consumer surplus is reduced by ZXY 

  • As a result of this market failure, there is a deadweight loss to society of P3 P1 XZ 

  • P1 minus P3  is the subsidy per unit that is required to correct the market failure and achieve the social optimum 

  • The diagonal distance XY shows the amount by which marginal private cost     exceeds marginal social cost at OQ2  

Choose your answer

141 mark

Figure 1 shows the marginal private benefit and marginal social benefit (MPB and MSB) curves and the marginal private cost and marginal social cost (MPC and MSC) curves in the market for a good.

Graph showing economic equilibrium; y-axis is price (£), x-axis is quantity. Lines: MSC, MPC, MSB, MPB intersect at point E (Pe, Qe).

The diagram represents a good with

  • negative externalities in production and consumption.

  • negative externalities in production and positive externalities in consumption.

  • positive externalities in production and consumption.

  • positive externalities in production and negative externalities in consumption.

Choose your answer

151 mark

The free-rider problem in economics means that government intervention is necessary to prevent market failure in the supply of

  • inferior goods.

  • merit goods.

  • private goods.

  • public goods.

Choose your answer

161 mark

Figure 5 shows the marginal private and social benefit (MPB and MSB) curves and the marginal private and social cost (MPC and MSC) curves for a product.

Graph showing supply and demand curves labelled MSC, MPC, MPB, MSB. Quantity on x-axis, price in pounds on y-axis, with intersections and vertical lines.

The socially optimal level of output for this product is

  • 2 units

  • 3 units

  • 4 units

  • 5 units

Choose your answer

171 mark

Figure 6 represents the market for sugar in a country. It shows the demand (D) curve and two supply (S1 and S2) curves in the market for sugar before and after the imposition of an indirect tax on sugar.

Supply and demand graph showing original supply (S1) and shifted supply (S2), with price levels at £12, £10, and £8, and quantities at 100 and 120.

According to Figure 6, which one of the following combinations: A, B, C, or D, is correct?

Table showing change in price percentages (20%, 50%) and corresponding government tax revenue (£200, £400) for categories A to D.

    Choose your answer

    181 mark

    Which one of the following is a reason why the extension of property rights is likely to reduce market failure?

    • Merit goods will no longer be underconsumed in a free market.

    • Producers will be more likely to have to pay compensation for pollution.

    • Public goods will no longer be subject to the free-rider problem.

    • The inequality in the distribution of income and wealth will be reduced.

    Choose your answer

    191 mark

    Unemployed workers in the south of a country are unable to take up jobs in the north of the country due to higher housing costs. This is an example of

    • cyclical unemployment.

    • frictional unemployment.

    • geographical immobility of labour.

    • occupational immobility of labour.

    Choose your answer

    201 mark

    Regulatory capture describes a situation in which

    • firms suffer a fall in supernormal profit due to the actions of regulators.

    • government regulations reduce the impact of monopoly power.

    • government removes regulations that have been acting as a barrier to entry.

    • ndustry regulators grow too close to the firms they are regulating

    Choose your answer

    211 mark

    A profit-maximising firm, in the service sector, needs to recruit a new employee. Which one of the following explains why asymmetric information could mean that the most suitable person is not chosen

    • It is difficult to calculate the marginal revenue productivity of workers in the service sector

    • Occupational immobility of labour means that there is a limited supply of workers with the right skill set

    • The firm may have to recruit the worker from the local area because labour is often geographically immobile

    • The firm is unlikely to know everything about job applicant’s skills, abilities and motivation

    Choose your answer

    221 mark

    In 2015, the UK government introduced a tax on firms using landfill sites to dispose of waste. After the tax was introduced, there was a significant rise in illegal dumping of waste. This is most likely to be an example of

    • a negative externality in consumption.

    • government failure due to unintended consequences

    • market failure resulting from imperfect information.

    • the tragedy of the commons

    Choose your answer