Cambridge IGCSE and O Level Economics

Chapter 24: The role of

government
Suggested answers to individual and group activities
Group activities
1 a A
 government may subsidise a national champion and it may impose trade restrictions on
foreign competitors.
b For example, the IT industry in India. It has a good supply of workers skilled in IT and who
speak English, the main language used in the global industry.
2 a Books, computers and furniture.
b Increasing annual leave may make workers less tired and more motivated. This would be
likely to increase their productivity. If the increase in output per hour is greater than the loss of
output on the days of extra leave, the country’s output will increase. Reducing discrimination
is likely to mean that the most productive workers are employed.
c For example, Indonesia is a member of ASEAN (Association of Southeast Asian Nations).

Individual activities
1 a i The state is likely to be prepared to deliver to remote communities and it is likely to
consider the postal service as an essential service.
1
ii Private sector firms, driven by the profit motive, may cut costs, which may enable them to
charge lower prices.
b Working for a state-owned enterprise may provide more job security. This is because it may
continue to produce even if it makes a loss, since the state may subsidise it. Those working in
a state-owned enterprise may also enjoy good working conditions as the state may seek to
set an example.

Suggested answers to multiple choice questions and

four-part question
1 B
In a natural monopoly, the start-up costs can be high, average cost can fall over a large output.
This is why it is most efficient to have just one firm in the industry.
2 D
In a planned economy, most people work for state-owned enterprises.
3 B
L imiting public sector wages will reduce price rises, if products are produced by state-owned
enterprises. It may also keep down wage rises and hence the prices in the private sector. This is
because firms in the private sector will be able to attract workers without having to raise wages
significantly. Keeping down public sector pay rises may protect employment. Workers are less
likely to be made redundant, in order to keep public expenditure under control.
4 B
 ost people in a planned economy are employed in the public sector whereas a market
M
economy will have a relatively small public sector.

© Cambridge University Press 2018

Cambridge IGCSE and O Level Economics

Four-part question
a A private good is rival and excludable. One person consuming the product will stop someone
else consuming the product. Consumption of the product can be made dependent on payment
and so free-riders can be excluded.
b A government may run hospitals to ensure that everyone has access to the essential services. It
is likely to provide these services free of cost or at a reduced price, whereas private sector health
care providers may charge a higher price. It may also run hospitals to encourage everyone to
make sufficient use of these services. Healthcare tends to be underconsumed if left to market
forces, as it is a merit good.
c Government intervention is at its highest in countries operating a planned economic system
where most capital and land is owned by the government and most workers are employed
in state-owned enterprises. Government intervention is at its lowest in countries operating a
market economic system. In these countries, market forces allocate most of the resources. The
level of government intervention in countries operating a mixed economic system comes in the
middle between the level in a planned and a market economic system.
d There are arguments for a government banning the production of cigarettes. A strong one is that
cigarettes are a demerit good. They generate higher private costs on consumers than they may
realise. As well as the cost of purchasing cigarettes, smoking can damage the health of smokers.
The production and consumption of cigarettes can also generate external costs. Non-smokers’
health may be damaged by inhaling the smoke, their medical treatment may be delayed
because smokers are being treated and they may have to pay higher taxes to finance the medical
treatment of smokers. The factories producing the cigarettes may also cause air pollution.
If a government thinks that other governments may ban or restrict the consumption of cigarettes,
it may decide that the industry will decline in the near future and this might strengthen its view to
ban its production. 2
Some people may argue about the extent to which cigarettes are a demerit good. They may
suggest that consumers are informed about the risks of smoking and they should be allowed to
judge whether the pleasure they gain from smoking is greater than the risks involved.
A government would also be concerned that a ban that would force the closure of a large
industry would reduce the country’s output and employment. These costs may be experienced
without any benefit, if the closure of the domestic industry does not reduce the consumption
of cigarettes in the country. What might happen is that people may smoke the same number of
cigarettes but just buy them from industries in other countries.
If a government is going to ban the production of cigarettes, it should think about how the
resources used to produce cigarettes can be smoothly transferred to other industries. This may
require the government to provide training to the workers and provide investment subsidies to
speed up the expansion of growing industries.

© Cambridge University Press 2018