SECTION 3 PRACTISE QUESTIONS

1. (a) Explain, using examples, why the prices charged for merit goods and demerit goods in a free

market do not reflect the value to consumers. [8]

(b) Discuss the effectiveness of subsidies and indirect taxes in ensuring that the correct prices

for merit and demerit goods are charged in the market. [12]

2. (a) Explain the difference between public goods and private goods. Consider why profit can be

made through the supply of one type of good, but not the other. [8]

(b) Discuss why merit goods may be under-consumed in a mixed economy. Consider whether

maximum prices or education campaigns would be more effective in ensuring that these

goods are supplied in appropriate quantities. [12]

3. (a) Explain what determines the change in equilibrium price and equilibrium quantity of a good

when there is a rise in incomes in an economy. [8]

(b) Discuss the effectiveness of any possible measures to ensure that food would be available to

consumers in an economy where food supplies are frequently disrupted because of drought. [12]

4. (a) The government raises taxes to provide a toll road bridge and streetlights in a country. Explain

how an economist would classify each of these provisions. [8]

(b) Discuss the view that direct taxes are the fairest and the most effective way for governments

to raise revenue. [12]

5. (a) Explain the role of the factor enterprise in allocating resources in a market economy when

there is an increase in the demand for a good. Use a diagram to support your answer. [8]

(b) Discuss two methods of increasing the provision of merit goods in a mixed economy. Consider

which is more likely to be effective. [12