A Level H2 Economics Market Failure Quiz

A-Level Economics H2 Quiz - Market Failure: Answer Key

Topic: Market Failure
Total Marks: 40
Duration: 60 minutes

Section A: Short Structured Questions (1–8)

1. [2 marks]
A negative externality of consumption occurs when the consumption of a good by an individual imposes a cost on third parties not involved in the transaction, and this cost is not reflected in the market price.
Teaching note: Example – second-hand smoke from cigarettes. Mark: 1 mark for "cost on third party", 1 mark for "not reflected in price / external cost".

2. [1 mark]
Example: Vaccination (reduces disease spread to others); or education (more informed society); or beekeeping (pollination for neighbouring farms).
Any one correct example earns the mark.

3. [2 marks]
A merit good is a good that is under-consumed in the free market because individuals underestimate its private benefits; it also generates positive externalities.
Mark: 1 for under-consumption due to undervaluation, 1 for positive externality / social benefit > private benefit.

4. [2 marks]
A demerit good is over-consumed in the free market because consumers overestimate its private benefits or ignore its harm, and it creates negative externalities. A private good is both excludable and rivalrous with no external effect.
Mark: 1 for over-consumption / underestimation of harm, 1 for externality contrast.

5. [1 mark]
Any one: public goods, information failure, asymmetric information, market power/monopoly, factor immobility, common pool resources.

6. [1 mark]
Socially optimal quantity = 70 (Qs).
From image: MSC = MPB at Qs=70; market overproduces at Qm=100.

7. [2 marks]
Deadweight loss is the net loss of social welfare when the market produces at a quantity where marginal social cost exceeds marginal social benefit (or vice versa), resulting in a triangle between MSC and MSB from Qs to Qm.
Mark: 1 definition, 1 link to over/under production.

8. [1 mark]
A subsidy lowers the private cost, encouraging producers/consumers to increase output/consumption closer to the socially optimal level where MSC = MSB.

Section B: Data and Diagram-Based Questions (9–14)

9. [1 mark]
External cost = MSC – MPC = $70 –$50 = $20 per MWh.
Working shown; unit stated.

10. [3 marks]

• Draw MPC, MSC, MPB; market equilibrium at Qm where MPC=MPB. [1]
• Tax shifts MPC to MPC+tax (=MSC), new equilibrium Q* where MSC=MPB. [1]
• Output falls from Qm to Q*, external cost reduced, DWL shrinks. [1]
  Marking: diagram 1, explanation of shift 1, outcome 1.

11. [2 marks]
The levy internalises the externality: patrons previously ignored disposal cost (external cost on society). $0.10 levy raises private cost, reducing takeaway demand and food waste. [1] Corrects information/externality failure. [1]

12. [3 marks]

• EV demand rises (D_EV → D_EV') due to preferences/Policy. [1]
• Higher EV output increases derived demand for lithium (D_Li → D_Li'). [1]
• Lithium price and quantity rise; diagram shows both shifts. [1]

13. [2 marks]

• Total permits capped at socially optimal pollution level.
• Permits tradable so low-cost reducers sell to high-cost, achieving target at least cost.
  (Any two valid conditions, 1 each.)

14. [1 mark]
Consumers lack info on long-term benefits (e.g., health screening), so they consume less than socially optimal; MPB < MSB.

Section C: Extended Response and Evaluation (15–20)

15. [4 marks]
Content: Max price below equilibrium reduces rent but causes shortage (excess demand). [1] May help tenants short-run but reduces supply, quality, black market. [1] If set above external cost / with public housing, failure reduced. [1] Evaluation: not necessarily; needs complementary supply policies. [1]
Descriptors: 2 for analysis, 2 for evaluation.

16. [4 marks]
For: Consumer choice drives demand, reduces waste via behaviour. [1]
Against: Info failure, free-rider, collective action; govt needed for bans/levy. [2]
Conclusion: Shared responsibility; pure consumer fix insufficient. [1]

17. [2 marks]
Diagram: MPB, MSB (above MPB), MPC. Subsidy shifts MPB to MSB; Q rises to Qs. [1] Welfare gain = triangle between MPB and MSB. [1]

18. [2 marks]
Sellers know defects (asymmetric info); buyers pay high price for "lemons", good cars exit market (Akerlof). [1] Market fails: under-provision of quality used cars. [1]

19. [2 marks]
Tax: price mechanism, flexible, revenue. [1] Regulation: direct ban, certain, less flexible. [1] Both correct negative externality but differ in efficiency.

20. [2 marks]
Unlikely: positive externality means MPB < MSB, market produces Qm < Qs. [1] Without intervention, under-consumption persists; only if voluntary giving/internalise, rare. [1]