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Cambridge International A2 Level – Revision

ECONOMICS – Paper 13 September Monthly Test - 2022

Brief Answers and Essay Questions (Market Failure)

1 hour and 15 minutes

You must answer all Questions.

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

INFORMATION
● The total mark for this paper is 110.
● The mark out of 110, is then converted to a percentage out of 100.
● The marks for each question is given at the end of each question in brackets [ ].
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Section A

1. Define Market Failure. (Include the two definitions you have learnt)

Definition 1:
……………………………………………………………………………………..

……………………………………………………………………………………..

Definition 2:
……………………………………………………………………………………..

………………………………………………………………………………… [4]

2. When a freely functioning market .......................... resources it is called Market

Failure.
[1]
3. Name 04 market failures, except Information Failure.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [4]

4. Complete the chart below.

Information Failure

[2]
5. Define Externalities.
• Also mention another name for externalities within your definition.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [3]
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6. Existence of externalities result in not achieving ......................... efficiency as

MSB ≠................

[2]
7. Define Negative Externality Fully.

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………………………………………………………………………………… [3]

8. Write down the Social Cost Formula.

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9. Define Private Cost Fully (with Examples).

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……………………………………………………………………………………..

………………………………………………………………………………… [3]

10. Define External Cost fully with examples.

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [3]

11. Refer the following passage and answer the question following it.

Airport Project – Vision 2025 Plan – Pros and Cons

In the case of airport expansion, people who live on the flight path of the
airport will experience noise pollution problems, they may have to
soundproof their homes at their own expense
(extract)
a) According to the above paragraph what’s the External Cost?

……………………………………………………………………………………..

……………………………………………………………………………………..

………………………………………………………………………………… [2]
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12. Define Social Cost.

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………………………………………………………………………………… [2]

13. Why is the demand curve the benefit curve, explain.

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………………………………………………………………………………… [4]

14. Draw the Negative Externality in Production diagram, and fill in the blanks which
follows it.

Name Q1 as Free Market Level.

Name Q as the Socially Optimum Level of Output.

[5]
a. Firms compare their ..................... cost with ......................... benefit and
produce Q1 units (Free Market Level) but society’s point of view the level of
production should be ................ units (..............................), where the marginal
cost equals ..................................... Firms ignore cost to the 3rd party and hence
..................................... (underestimate/overestimate) cost which leads to
excess production and thereby cause ......................... externalities.
[7]
b. Mark the Welfare Loss Triangle as ABC on your diagram.
[2]
c. What’s the condition in Negative Externalities?

…………………………………………………………………………… [1]
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15. “Negative externalities in production are spill-over effects that occur as

a result of production activity”
Give an Example for the above statement.

……………………………………………………………………………………..

………………………………………………………………………………… [2]

16. What is Positive Externalities and write down the Social Benefit formula.

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………………………………………………………………………………… [3]

17. Distinguish between Private Benefit and External Benefits and write
down the condition for which Positive Externalities exist.

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………………………………………………………………………………… [4]

18. Why is Welfare Gain a Market Failure?

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………………………………………………………………………………… [2]

19. Answer the following questions.

a. Define “Cost Benefit Analysis”

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………………………………………………………………………………… [2]

b. At what condition will a Government proceed with a certain project?

………………………………………………………………………………… [1]
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c. Fill in the process caried out in Cost Benefit Analysis.

Step Number Description

1 Identify all costs and benefits
arising out of the project
(private and external costs and
private and external benefits)
2

[8]
d. Cost Benefit analysis has its own limitations. Support this view using 03
limitations to Cost-Benefit analysis.

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………………………………………………………………………………… [2]

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………………………………………………………………………………… [2]

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………………………………………………………………………………… [2]
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Section B

1) Completely Explain what Negative Externalities in Consumption are,

supporting your answer with a diagram(s).

- Define Negative Externalities in Consumption

- Draw a related diagram
- Explain the diagram fully.

[6]

2) Completely Explain what Positive Externalities in Production are,

supporting your answer with a diagram(s).

- Define Positive Externalities in Production

- Draw a related diagram
- Explain the diagram fully.

[6]
3) Completely Explain what Positive Externalities in Consumption are,
supporting your answer with a diagram(s).

- Define Positive Externalities in Consumption

- Draw a related diagram
- Explain the diagram fully.

[6]
4) Define Information Failure fully.

- Define Information failure itself

- Define Asymmetric Information
- Explain the types of Asymmetric Information

[6]

5) Explain the topic “Monopoly as a Market Failure” with diagram(s).

- Define Monopoly and Market Failure

- Write points supporting monopoly, as to why it’s a market failure (at least 4
points)
- Draw a diagram comparing perfect competition and monopoly (on one diagram
and connect to the points written)

[8]