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Cambridge International A2 Level – Revision

ECONOMICS – Paper 13 September Monthly Test - 2022

Brief Answers and Essay Questions (Government Policies to Correct Market Failure)

2 Hours

You must answer all Questions.

INSTRUCTIONS
● Answer all Questions.
● You may use a Calculator.

INFORMATION
● The total mark for this paper is 90.
● The mark out of 90, is then converted to a percentage out of 100.
● The marks for each question is given at the end of each question in brackets [ ].
● Includes MCQs from Efficiency, as the lesson is closely linked to the lesson.
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SECTION A
• Circle the most suitable answer from the 4 choices given (A,B,C,D).
• There are 15 MCQs here.

1. What need not pose a potential threat to allocative efficiency in a market

economy? (9708/32/M/J/15 – Q1)

A. externalities
B. differentiated products
C. monopolistic elements
D. perfect knowledge

2. The diagram shows the production possibility curve for a successful transition
economy that moves from point X to point Y over time. (9708/32/O/N/15 – Q1)

During the transition process the population of the country expressed a strong
preference for increased privatisation.

What happens to economic efficiency as a result of the transition from point X to

point Y?
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3. Which government microeconomic policy is not usually aimed at correcting

allocative inefficiency in an economy? (9708/32/O/N/15 – Q16)

A. anti-monopoly legislation
B. congestion charges for the use of roads in cities
C. pollution taxes imposed on various firms
D. subsidies for agricultural producers

4. What is an example of market failure? (9708/32/F/M/16 – Q1)

A. difficulties in allocating property rights

B. diseconomies of scale
C. high prices caused by increased demand
D. the existence of scarcity

5. Why would an economy wish to achieve economic efficiency?

(9708/32/F/M/16 – Q2)

A. to achieve an equal distribution of income

B. to achieve full employment
C. to ensure international competitiveness
D. to ensure resources are not wasted

6. What will happen if a firm is taxed by an amount equal to the external costs that
it imposes on the rest of society? (9708/32/F/M/16 – Q3)

A. Production will be increased.

B. Resource allocation will be improved.
C. Resource allocation will be maximised.
D. There will be no effect upon production.

7. What action by a firm is most likely to raise its dynamic efficiency?

(9708/32/M/J/16 – Q1)

A. distributing all its current profit to its existing shareholders

B. maximising the labour productivity of its current workers
C. minimising the average cost of producing its current output
D. retaining its current profit for product research and development
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8. The concept of allocative efficiency assumes that each individual in society is

the best judge of their own economic welfare.
Which example of government intervention is based on an argument which
rejects this assumption? (9708/32/M/J/16 – Q3)

A. pollution controls
B. subsidies for merit goods
C. the provision of public goods
D. the regulation of monopolies

9. What is the purpose of trying to achieve economic efficiency?

(9708/32/O/N/16- Q3)

A. to achieve full employment

B. to achieve the cheapest possible price for products
C. to ensure resources are not wasted
D. to use as many resources as possible

10. A proposal for a new power station was rejected by the government because
it was not socially beneficial.

The government calculated that the private costs would be $800m, private
benefits $900m and external benefits $300m.

What must have been true about the external costs of the power station?

A. External costs were equal to external benefits.

B. External costs were greater than $400m.
C. External costs were less than external benefits.
D. There were no external costs.

[10]
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SECTION B

1. Name 03 Common methods used by the Government to Correct Externalities.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [3]

2. Define “Regulation”.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [2]

3. What’s “Regulation Capture” and circle the topic in which this term can
be included.

……………………………………………………………………………………..

………………………………………………………………………………… [2]

“Regulation Capture” is best fit for the topic:

A. Regulatory Commodity
B. Benefits of Regulation
C. Drawbacks of Regulation

[1]

4. Explain “Property Rights” using an example.

……………………………………………………………………………………..

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [3]

5. What are “Price Controls” and give an Evaluation point for it.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [3]
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6. Fill in the blanks and then draw an appropriate diagram by reading the
passage once again.

• If the blank cannot be filled, still you could draw the diagram with the
appropriate information given.

Due to Underproduction, benefits that society gains is less. Granting a

subsidy may encourage firms to produce at socially optimum level.
Subsidy granted should be equal to ..............................

As a result quantity produced increased to socially optimum level and

lower price to P1. Subsidy per unit is “YZ” and total subsidy P1P2YZ.

Diagram

[7]
7. Granting Subsidy is a way to correct market failure caused by positive
production externalities. Name another way to do so.

………………………………………………………………………………… [2]

8. Define Nudge Theory.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [2]

9. Define Government Failure.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [2]

10. Deregulation is a form of ............................

[1]
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SECTION C

1. Is Environmental Tax charged by Government to correct Negative

Externalities of Production always effective? Discuss.

Answer Plan
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[12]

2. Fully Explain Pollution Permits (with a diagram).

[6]

3. Name 03 Ways in which the Government can clear Negative Consumption

Externalities (with diagram(s)).
[8]

4. Name and explain 02 ways in which government can correct market failure
caused by positive consumption externalities.
[6]

5. Name and Explain 03 tools to correct Market Failure with examples.

[8]

6. Name and give a detailed explanation 03 reasons as to why Government

Failure Exists.
- Define Government Failure
- Name and explain the 03 reasons

[12]
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