Exam code: 7136
1 markWhich 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
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1 markWhich 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
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1 markFigure 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.
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.
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1 markWhich 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
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1 markA 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.
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1 markThe 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
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1 markWhich 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
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1 markThe diagram below shows the demand curve(D) and two supply curves (S1 and S2) in the market for renewable energy.
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
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1 markWhich 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.
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1 markThe diagram below shows the original market demand and supply curves (D and S) for loft insulation. Loft insulation reduces energy consumption.
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
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1 markThe 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
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1 markImmobility 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
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1 markThe 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.
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
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