A Star Economics (astareconomics.co.uk)
A STAR ECONOMICS
AQA
MULTIPLE CHOICE QUESTIONS
Book 2
Market Failure and government intervention
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Contents Page
Topic
Market Failure
Public and Private Goods
Positive and Negative Externalities
Merit and Demerit Goods
Income and Wealth
Government Intervention
Government Failure
Rationality and behavioural economics
Labour Markets and Monopsony
Answers
2
Page Questions
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Market failure
1) The tragedy of the commons can be applied to the fishing industry. What is the nature of this market
failure? (June 2018 P.3 Q.12)
a) Over-fishing resulting in declining fish populations
b) The imposition of fishing quotas by the European Union
c) The positive externalities associated with fish consumption
d) The third-party effects on dolphins as a result of tuna fishing
2) Immobility of labour may lead to a misallocation of resources and market failure because (June 2017 P.3
Q.13)
a) A change in the pattern of demand results in structural unemployment.
b) The education and training needed to reduce labour immobility is a public good.
c) The government’s target for the rate of inflation is too high.
d) The immobility of factors of production is a negative externality in production.
3) The table below shows possible sources of market failure in current UK markets. Which combination of
example and policy, A, B, C or D, is consistent with the possible source of market failure identified? (June
2016 Q.9)
A
B
C
D
Source of market failure
Example of market failure
Public good
Positive consumption
externalities
Merit good
Negative production
externalities
Healthcare
Education
Policy to correct market
failure
State provision
Minimum Price
Petrol
Electricity generation
Indirect taxation
Pollution permits
4) Complete market failure exists when (June 2016 Q.21)
a) There are negative externalities in production.
b) The free market fails to provide sufficient merit goods.
c) The free market under prices demerit goods.
d) There is a missing market in the provision of public goods.
5) Which one of the following is associated with a missing market? (June 2015 Q.16)
a) A monopoly restricting output
b) The production of a negative externality
c) A firm deciding to produce a private good
d) A government subsidising agricultural production
6) Which one of the following is most likely to reduce market failure? (June 2014 Q.11)
a) Increased economies of scale in production
b) The existence of merit goods
c) A decrease in the mobility of labour
d) Improving the information available to consumers
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7) One reason why the free market fails to achieve an optimal allocation of scarce resources is because
(June 2014 Q.22)
a) Public goods are provided free of charge to users.
b) Positive externalities lead to overproduction of a good.
c) There is underproduction of goods with positive externalities.
d) Individuals’ incomes and wealth are not identical.
8) Which one of the following statements about market failure is correct? (June 2013 Q.16)
a) Small firms are less efficient than large firms due to diseconomies of scale.
b) The existence of free riders will result in the over-production of public goods.
c) The social benefits of some private goods exceed the private benefits.
d) Markets do not supply merit goods.
9) Which one of the following is most likely to be an example of the immobility of a factor of production?
Workers’ unwillingness to (June 2013 Q.22)
a) Change jobs.
b) Accept lower wages.
c) Improve productivity.
d) Attend training courses.
10) Market failure arises when (June 2013 Q23)
a) Prices rise in response to excess demand.
b) No account is taken of positive externalities in consumption.
c) Firms are unprofitable and go out of business.
d) Costs increase as firms expand their production.
11) Where there is partial market failure, (Jan 2013 Q.25)
a) A market exists but there is a misallocation of resources.
b) The product is both non-excludable and non-rival in consumption.
c) The market can only be competitive with government support.
d) There is excess demand in the market at the current market price.
12) Market failure arises whenever firms (June 2012 Q.16)
a) Make a loss.
b) Replace machines with workers.
c) Create externalities.
d) Reduce expenditure on research and development.
13) Market failure results in a misallocation of resources. In some cases, this can be corrected by the
government (June 2012 Q25)
a) Restricting the manufacture of goods that generate positive externalities.
b) Providing public goods.
c) Subsidising all loss-making firms.
d) Placing a tax on merit goods.
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14) Complete market failure always exists when (Jan 2012 Q.6)
a) There are negative externalities in production.
b) The free market fails to provide sufficient merit goods.
c) The free market underprices demerit goods.
d) There is a missing market in the provision of public goods.
15) Which combination of example and policy, A, B, C or D, is most likely to be consistent with the source
of market failure identified? (Jan 2012 Q.25 and June 2011 Q.15)
A
B
C
D
Source of market failure
Example of market failure
Missing market
Positive consumption
externalities
Merit good
Negative production
externalities
Health care
Education
Policy to correct
market failure
State provision
Minimum price
Petrol
Electricity generation
Indirect taxation
Pollution permits
16) Which one of the following is a source of market failure? (June 2010 Q.24)
a) An increase in a firm’s profits resulting from excess demand for its product
b) Government intervention to correct a divergence between private and social benefits
c) Increasing diseconomies of scale as a firm increases production
d) Inequalities in the distribution of income and wealth
17) Market failure arises when (Jan 2010 Q.19)
a) Prices rise in response to excess demand.
b) Positive externalities exist in consumption.
c) Firms make zero profits.
d) Costs increase as firms expand production.
18) At current levels of output, the marginal social benefit of a good is greater than its marginal private
benefit. As a result, there are likely to be (Jan 2009 Q.17)
a) Positive externalities in consumption.
b) Positive externalities in production.
c) Negative externalities in consumption.
d) Negative externalities in production.
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Public, private and quasi public goods
1) An essential characteristic of a public good is that it is non-excludable. This means that (June 2016 Q.14)
a) Public goods are of equal benefit to all consumers.
b) There is no opportunity cost in the provision of public goods.
c) People could consume the good without paying for it.
d) The government should not levy a tax for providing public goods.
2) A pure public good is always (June 2015 Q.11)
a) Provided by the government for all consumers.
b) Provided free of charge because there is no opportunity cost.
c) Available for consumption by others when consumed by an additional person.
d) Heavily subsidised by the government.
3) Public goods result in market failure because (June 2015 Q.22)
a) In the absence of government intervention, a working market for the product is unlikely to become
established.
b) Pure public goods are both rival and excludable.
c) The positive externalities in consumption exceed the private benefits.
d) The marginal social cost of providing public goods exceeds the marginal social benefit.
4) Which one of the following is the reason why public goods are supplied by the government? (Spec 2015
Q.12)
a) Sellers of the good or service are unable to prevent consumers from enjoying its benefits without
payment.
b) Producers demand a higher price than some members of the public are prepared to pay.
c) Only governments have the technical knowledge required to produce public goods and services.
d) They can only be produced by a monopoly firm to prevent competition from rival suppliers.
5) A free good has which one of the following characteristics? (June 2014 Q.20)
a) It has no opportunity cost in supply.
b) It is generally supplied by the government because its consumption is considered to
be socially desirable.
c) It has no externalities associated with its consumption or production.
d) It is in perfectly inelastic supply.
6) A free good (Jan 2013 Q.24)
a) Is paid for by the government.
b) Has zero opportunity cost.
c) Is non-excludable and non-rival.
d) Has a perfectly inelastic supply.
7) A pure public good (or service) is always (Jan 2011 Q.25)
a) Provided by the government for all consumers.
b) Provided free of charge for all consumers.
c) Available for consumption by others when consumed by an additional person.
d) Heavily subsidised by the government.
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8) Which one of the following is associated with a missing market? (Jan 2009 Q.16)
a) A monopoly restricting output
b) The production of a negative externality
c) A firm deciding to produce a private good
d) A government subsidising agricultural production
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Positive and negative externalities
1) Smoking cigarettes generates negative consumption externalities. This means that (June 2018 Q.7)
a) The private benefit from smoking includes the consumption externalities.
b) The social benefit from smoking is less than the private benefit.
c) The social benefit from smoking is negative.
d) The social optimum level of smoking is zero.
2) Training provided by firms in a free market economy may be underprovided because some of the
benefits from training may be captured by other firms when the workers change jobs. Which one of the
following best describes this situation? (June 2018 Q.9)
a) A negative production externality and a missing market
b) A negative production externality and partial market failure
c) A positive production externality and a missing market
d) A positive production externality and partial market failure
3) The table below shows the private and external costs for four products. Which product, A, B, C or D, has
a market price which takes least account of negative externalities? (June 2016 Q.6)
Product
A
B
C
D
Private cost per unit of
output £
10
12
16
22
External cost per unit of
output £
2
5
7
8
Market price £
12
15
22
24
4) If the consumption of a product results in a negative externality, it follows that (June 2016 Q.24)
a) An optimum allocation of resources can never be achieved.
b) Non-consumers benefit at the expense of consumers.
c) An optimum allocation of resources can be achieved by placing a tax on the product.
d) Social benefits of consumption exceed social costs.
5) At current levels of output, the marginal social cost of making a good is greater than its marginal private
cost. Also, the marginal social benefit of the good is greater than its marginal private benefit. As a result,
there will probably be (Jan 2013 Q.17)
a) A misallocation of resources.
b) Positive externalities in production.
c) Negative externalities in consumption.
d) Diseconomies of scale in production.
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6) The government is considering four possible capital investment projects. It has the resources to
implement only one of these projects. The table below shows the estimated value of the private and
external costs and benefits that each project is expected to yield. (Jan 2013 Q.10)
Private benefits
Private costs
Positive
externalities
Negative
externalities
New hospitals
(£ million)
600
450
200
90
New roads
(£ million)
500
500
250
80
New railways
(£ million)
1000
2000
1000
200
New housing
(£ million)
150
70
40
120
Which one of the projects should the government adopt if it wishes to maximise the economic welfare of
the whole community?
a) New railways
b) New hospitals
c) New housing
d) New roads
7) Positive externalities exist when (June 2012 Q.15)
a) Production creates private benefits.
b) Private benefits are less than social benefits.
c) Private benefits are greater than private costs.
d) Social costs exceed private costs.
8) The table below shows the private and external costs for four products. Which product A, B, C or D, has
a market price which takes least account of negative externalities? (Jan 2012 Q.14)
Product
A
B
C
D
Private cost per unit External cost per unit Market price (£)
of output (£)
of output (£)
10
2
12
12
5
15
16
7
22
22
8
24
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9) The table below indicates the private and external costs and benefits resulting from building a coalburning power station. (June 2011 Q.18)
£ million
180
190
110
140
Private benefit
Private cost
External benefit
External cost
The social cost minus the social benefit equals
a) £120 million.
b) £40 million.
c) £30 million.
d) £10 million.
10) At current levels of output, the marginal social cost of making a good is greater than its marginal
private cost. Also, the marginal social benefit of the good is greater than its marginal private benefit. As a
result, there will probably be (Jan 2011 Q.14)
a) A misallocation of resources.
b) Positive externalities in production.
c) Negative externalities in consumption.
d) Economies of scale.
11) One reason why the free market fails to achieve an optimal allocation of scarce resources is because
(Jan 2011 Q.20)
a) Public goods are provided free of charge to users.
b) Positive externalities lead to overproduction of a good.
c) There is underproduction of goods with positive externalities.
d) Individuals’ incomes and wealth are not identical.
12) The government is considering four possible capital investment projects. It has the resources to
implement only one of these projects. The table below shows the estimated value of the private and
external costs and benefits that each project is expected to yield. (June 2010 Q.22)
Private benefits
Private costs
Positive externalities
Negative externalities
New hospitals
(£ million)
40
100
140
40
New roads
(£ million)
120
100
60
20
New schools
(£ million)
10
20
100
20
New airport
(£ million)
200
100
50
160
Which one of the projects should the government adopt if it wishes to maximise the economic welfare of
the whole community?
a) New hospitals
b) New roads
c) New schools
d) New airport
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13) Positive externalities exist when (June 2009 Q.2)
a) Production creates private benefits.
b) Private benefits are less than social benefits.
c) Private benefits are greater than private costs.
d) Social costs exceed private costs.
14) Negative externalities exist in a market for a good giving rise to a misallocation of resources. This
misallocation is most likely to have resulted from (Jan 2009 Q.5)
a) The product being over-priced.
b) Over-production of the product.
c) Too little consumption of the product.
d) Too few resources devoted to producing the product.
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Merit and demerit goods
1) Which one of the following applies to merit goods? (June 2018 P.3 Q.1)
a) Their marginal private benefit is greater than their marginal social benefit.
b) They are likely to be provided by the market.
c) They can only be supplied by the government.
d) They have the characteristics of non-excludability and non-rivalry.
2) Demerit goods represent a type of market failure because (June 2017 Q.1)
a) Their consumption results in positive externalities.
b) Their production results in negative production externalities.
c) They are over-consumed in a free market.
d) They are under-consumed when left to free market forces.
3) A key distinction between merit goods and demerit goods is that (Spec 2015 Q.3)
a) The consumption of merit goods usually gives rise to positive externalities and not negative
externalities.
b) In a free market demerit goods will be under-consumed but merit goods will be over-consumed.
c) Merit goods have to be provided by the government but demerit goods do not.
d) Demerit goods are an example of market failure but merit goods are not.
4) A merit good, such as healthcare, is (June 2014 Q.13)
a) Non-rival with positive externalities in consumption.
b) Rival with positive externalities in production only.
c) Non-excludable with positive externalities in production.
d) Excludable with positive externalities in consumption.
5) Merit goods are likely to be underprovided in a free market economy because their (Jan 2013 Q.16)
a) Private benefits exceed their social benefits.
b) Social benefits exceed their social costs.
c) Private costs exceed their private benefits.
d) Social benefits exceed their private benefits.
6) One reason why UK governments provide education is because (June 2012 Q.20)
a) The private benefit from education is less than the social benefit.
b) Education cannot be provided by the free market.
c) All education is both a merit good and a public good.
d) This ensures that the provision of education is maximised.
7) Government provision of a merit good can be justified because (Jan 2012 Q.19)
a) Without government intervention there would be a missing market.
b) Merit goods are non-rival and non-excludable.
c) Without government intervention partial market failure would result.
d) The provision of merit goods has an opportunity cost.
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8) A good is excludable if (Jan 2012 Q.22)
a) It is possible to prevent someone from enjoying its benefits.
b) It is supplied by the government rather than through the free market.
c) One person’s use has no effect on the quantity available for someone else.
d) It is supplied at a zero price.
9) Which one of the following statements referring to a market economy is correct? (June 2011 Q.22)
a) Monopolists take no account of consumer preferences.
b) Prices do not always reflect social costs.
c) Efficiency is always indicated by high profits.
d) Large firms are more efficient than small firms.
10) Which one of the following statements about a merit good is true? (Jan 2011 Q.3)
a) It may be provided by the free market but not in sufficient quantities.
b) Once the good has been supplied to one consumer, there is no extra cost in supplying it to others.
c) It is always provided free to consumers.
d) It tends to be provided by the government because it is non-excludable.
11) A free good has which one of the following characteristics? (Jan 2011 Q.7)
a) It has no opportunity cost in supply.
b) It is generally supplied by the government because its consumption is considered to be socially
desirable.
c) It has no externalities associated with its consumption or production.
d) It is in perfectly inelastic supply.
12) The state provides some merit goods free of charge because (June 2010 Q.6)
a) They can only be produced by monopolists.
b) It is considered unacceptable that people on low incomes may be unable to afford them.
c) The consumption of merit goods results in negative externalities.
d) Merit goods are both non-excludable and non-rival.
13) Merit goods are likely to be under-provided in a free market economy because their (Jan 2010 Q.22)
a) Private benefits exceed their social benefits.
b) Social benefits exceed their social costs.
c) Private costs exceed their private benefits.
d) Social benefits exceed their private benefits.
14) Which one of the following, A, B, C or D, distinguishes merit goods from public goods? (Jan 2010 Q.24)
A
B
C
D
Merit goods
Provided by governments
Provided at a cost
Limited in supply
Consumption reduces
availability
Public goods
Provided by companies
Provided at no cost
Have an infinite supply
Consumption does not reduce
availability
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Unequal distribution of income and wealth
1) The table below shows the wealth distribution for an economy in 2008 and 2012.
Percentage of wealth owned by
Most wealthy 1%
Most wealthy 5%
Most wealthy 10%
Most wealthy 25%
Most wealthy 50%
2008
20
35
45
70
90
2012
25
40
50
75
95
Between 2008 and 2012, it may be concluded that (June 2014 Q.14)
a) There has been a reduction in inequality of income.
b) There has been an increase in the wealth of all individuals.
c) There has been a reduction in inequality of wealth.
d) Market failure is likely to have got worse.
2) The table below shows the shares of total income of different income groups in 2005 and 2010 for an
economy. (June 2011 Q.6)
% share of total income
% Income Group
2005
2010
Bottom 10%
4.1
2.5
Bottom 20%
9.8
6.8
Bottom 30%
16.0
12.0
Top 30%
47.0
54.0
Top 20%
35.0
41.0
Top 10%
20.0
26.0
From the data, it may be concluded that over the period in question
a) The bottom income groups experienced a fall in their income.
b) The distribution of income became more unequal.
c) The distribution of wealth became more unequal.
d) Everyone became better off because total income increased.
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3) The table below shows the shares of disposable income in an economy for five income groupings, as a percentage
of the total, for the period 2004 to 2009. (Jan 2011 Q.22)
Year
2004
2005
2006
2007
2008
2009
Lowest
20 %
10
9
6
7
6
6
Next
20 %
14
13
10
11
10
10
Middle
20 %
18
16
15
16
16
16
Next
20 %
23
23
23
23
23
23
Top
20 %
35
39
46
43
45
45
Total
(%)
100
100
100
100
100
100
From the data it can be concluded that
a) Over the period shown all income groups, except the Top 40%, experienced a fall in their disposable
income.
b) Between 2007 and 2009 there was a small increase in inequalities of disposable income.
c) Between 2004 and 2009 the rich became poorer and the poor became richer.
d) Total disposable income remained constant over the entire period shown.
4) The table below shows the distribution of total income in an economy in 2002 and 2008.
Quintile groups of households
Year
Bottom fifth % Next fifth % Middle fifth % Next fifth % Top fifth %
2002
10
14
18
23
35
2008
7
11
17
24
41
From the table it may be concluded that, over the period in question, (Jan 2010 Q.16)
a) There was an improvement in resource allocation.
b) The distribution of income became more unequal.
c) There was a decline in the productivity of low-income households.
d) The distribution of wealth became more unequal.
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Government intervention in markets
1) Which one of the following provides a reason for government intervention in a market? (June 2018 P.3
Q.6)
a) Firms in an oligopolistic market may limit price competition.
b) Market failures can only be corrected by using regulations.
c) Monopolistically competitive firms earn abnormal profits in the long run.
d) Public goods are excludable and rival.
2) In an economy, competitive firms supply electricity that is generated using coal-fired power stations. If
the government tries to reduce pollution by imposing an indirect tax on the firms, this would (June 2018
Q.2)
a) Shift the market demand curve to the left.
b) Shift the market demand curve to the right.
c) Shift the market supply curve to the left.
d) Shift the market supply curve to the right.
3) The free market equilibrium price for a merit good is £50 per unit. At present, the government does not
intervene in the market for this good. The government is most likely to correct the market failure
associated with this merit good if it (June 2016 Q.4)
a) Imposes a maximum price of above £50 per unit.
b) Sets a minimum price of £50 per unit.
c) Taxes the free market price.
d) Subsidises the free market price.
4) Which one of the following provides a reason why governments should intervene in a market economy?
(June 2016 Q.7)
a) Small firms are less efficient than large firms due to economies of scale.
b) The existence of free riders will result in the overproduction of public goods.
c) The social benefits of some private goods exceed the private benefits.
d) Private firms are unable to produce merit goods in a free market.
5) An indirect tax on the production of a good will have no effect on its market price if demand is (June
2016 Q.20)
a) Inversely related to price.
b) Unit elastic.
c) Perfectly elastic.
d) Perfectly inelastic.
6) Which one of the following is the most likely reason for government intervention in a market to correct
a misallocation of resources? (June 2015 Q.6)
a) A low price elasticity of supply of a good
b) Immobility of factors of production
c) Diseconomies of scale in production of a good
d) An excess market demand for a good
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7) A government subsidy would cause the largest fall in the price of a product if its price elasticity of
demand (defined as a positive number) were (June 2015 Q.14)
a) Less than 1.
b) 1.
c) Greater than 1.
d) Infinity.
8) A market is initially in equilibrium. The government then intervenes in the market, creating excess
supply at the initial equilibrium price. Other things being equal, which one of the following types of
intervention would most likely have been carried out by the government? (June 2014 Q.3)
a) A tax on production
b) A subsidy on production
c) A minimum price set below the initial equilibrium price
d) A maximum price set below the initial equilibrium price
9) Government intervention in a market economy is most likely to lead to an increase in economic welfare
if (June 2014 Q.7)
a) The market mechanism fails to take account of externalities.
b) It leads to an increase in the consumption of demerit goods.
c) The price elasticity of supply of private goods is high.
d) The demand for inferior goods rises as income increases.
10) The table below shows the marginal private and external benefits and the marginal private and
external costs of a product at the free market equilibrium level of output.
Marginal private benefit
Marginal external benefit
Marginal private cost
Marginal external cost
£
12
9
12
0
Government intervention in this market could improve the allocation of resources because the product is
most likely to be (June 2014 Q.9)
a) A public good.
b) A demerit good.
c) An inferior good.
d) A merit good.
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11) The table below indicates various types of market failure, the consequence of each of these failures
and examples of possible intervention. (June 2013 Q.6)
Situation Type of market
failure
A
Factor immobility
B
C
D
Public goods
Demerit goods
Merit goods
Consequence of market failure
Example of intervention
Inefficient allocation of
resources
Not provided
Over-consumed
Under-provided
Increase in indirect taxation
Government provision
Maximum price controls
Minimum price controls
In which one of these situations is the example of intervention most appropriate?
a) Situation A
b) Situation B
c) Situation C
d) Situation D
12) The UK Government currently subsidises the building of social housing. Social housing is provided to
low income households at rents which are lower than the free market rent. Which one of the following
would provide an economic justification for these subsidies? (June 2013 Q.9)
a) The unequal distribution of income and wealth caused by the free market results in an
unsatisfactory allocation of resources.
b) Subsidising low cost housing reduces inequalities in the distribution of wealth.
c) Social housing is a public good because it is both non-rival and non-excludable.
d) There is market failure in the housing market because of the existence of missing markets.
13) A government wishing to reduce firms’ carbon emissions through the use of pollution permits may fail
to achieve such a reduction because (June 2013 Q.25)
a) Firms would need permits if their production processes pollute the environment.
b) Firms which do not use all of their permits can sell some of them to other firms.
c) Permits issued to firms do not impose strict enough limits on their carbon emissions.
d) Firms improve their technology to reduce the number of permits they require.
14) The free market equilibrium price of a merit good is £50 per unit. At present, the government does not
intervene in the market for this good. The government is most likely to correct the market failure
associated with this good if it (Jan 2013 Q.6)
a) Imposes a maximum price of above £50 per unit.
b) Sets a minimum price of £50 per unit.
c) Taxes the free market price.
d) Subsidises the free market price.
15) Which one of the following is an appropriate form of government intervention for the problem
identified? (Jan 2013 Q.18)
a) The introduction of pollution permits to limit negative externalities
b) The use of a buffer stock to stabilise the price of a public good
c) The imposition of a maximum price for a merit good above its free market price
d) The provision of a subsidy for a product which generates negative externalities
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16) ‘Electricity suppliers are required to buy a growing amount of electricity from renewable energy
generators. Green energy generators are paid more for their electricity because there is a scarcity of supply
of electricity generated from renewable resources.’ It can be deduced from the data above that (Jan 2012
Q.13)
a) The government pays a subsidy to generators of renewable energy.
b) The social cost of electricity generated from renewable resources is greater than the private cost.
c) The government is subsidising the negative externalities arising from the generation of ‘green
energy’.
d) Electricity suppliers are paying higher average prices for their electricity because some of the
electricity is generated from ‘green sources’.
17) Government intervention to correct market failure may make the situation worse because (Jan 2012
Q.15)
a) The information needed to make sound economic decisions is widely dispersed amongst individuals
and firms.
b) The government is unable to provide private goods since they are both rival and excludable.
c) Positive externalities resulting from the consumption of merit goods means that they will be
underprovided by the state.
d) Competition amongst firms in the private sector will inevitably result in an optimum allocation of
resources.
18) Left to the free market, Good X would not be produced at all. Yet the production and consumption of
at least some of Good X increases the welfare of society. The government therefore has an incentive to
intervene to ensure its provision. Good X is most likely to be a (June 2011 Q.8)
a) Public good.
b) Free good.
c) Merit good.
d) Demerit good.
19) Which one of the following is a reason for government intervention to correct a market failure? The
existence of (June 2011 Q.20)
a) Inferior goods
b) Diseconomies of scale
c) Externalities in consumption and production
d) Goods in composite demand
20) A tradeable pollution permit (Jan 2011 Q.15)
a) Is needed to equalise positive and negative externalities in production.
b) Will be bought by a firm if its price is less than the social cost of the pollution it creates.
c) Is designed to reduce the negative externalities arising from pollution.
d) Can be used only by the firm to which it is issued.
21) Government intervention in a free market economy is most likely to improve the allocation of
resources if (June 2010 Q.1)
a) A shortage has led to a rise in the price of a product.
b) The price of a product has been increased as a result of an increase in production costs.
c) The market is under-supplying a product that produces a positive externality.
d) Firms cut back on production in response to a fall in demand.
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22) Government intervention in a market economy can lead to an increase in economic welfare if (June
2009 Q.7)
a) The market mechanism fails to allow for externalities.
b) It leads to an increase in the consumption of demerit goods.
c) The price elasticity of supply of private goods is high.
d) The demand for inferior goods rises as incomes increase.
23) The government wants to reduce the amount of air pollution arising from petrol and diesel used in
transport. Which one of the following combinations of policies would be most likely to achieve this
objective? (June 2009 Q.14)
a) Subsidise the production of fuel-efficient cars and subsidise the prices of petrol and diesel
b) Increase new motorway building and the number of city centre car parks
c) Tax the purchase of cars which are less fuel-efficient and use the receipts to subsidise the
development of vehicles which are more fuel-efficient
d) Tax cars going into town and city centres and use the receipts to lower taxes on petrol and diesel
24) The table below indicates various types of market failure, the consequences of such failure and
examples of possible intervention strategies. In which one of the situations, A, B, C or D, is the intervention
not appropriate? (June 2009 Q.12)
Situation Type of market
failure
A
Factor immobility
B
Public goods
Consequence of
failure
Inefficient allocation
of resources
Not provided
C
Demerit goods
Over-consumed
D
Merit goods
Under-provided
Example of
intervention
Improved
information flows
Government
provision
Maximum price
controls
Government
subsidies
25) The government is considering the building of three new runways in south-east England to cope with
the boom in air travel. The proposal is bound to cause an outcry from environmentalists, but will be
welcomed by business and tourism groups, which have warned that failure to build more runways would
lead to higher prices and longer delays. If the three runways were built, all other things being equal, which
one of the following is most likely to be true? (June 2009 Q.20)
a) The overall impact would necessarily create more positive externalities than negative externalities.
b) The demand for air travel in the south-east would become price elastic.
c) The supply curve for air travel in the south-east would shift to the right.
d) The new runways would be examples of public goods.
26) In a buffer-stock scheme (Jan 2009 Q.6)
a) An organisation might buy in the open market to maintain a minimum price in the market for a
product.
b) Governments restrict supplies of a product coming onto an open market in order to lower prices of
the product.
c) Buffer stocks are kept to sell if the price of a product starts to fall.
d) Buffer stocks are sold when there are surpluses in the market.
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27) Which one of the following is an appropriate form of government intervention for the problem
identified? (Jan 2009 Q.15)
a) The introduction of pollution permits to limit positive externalities
b) The use of a buffer-stock scheme to stabilise the price of a public good
c) The imposition of a maximum price for a merit good
d) The provision of a subsidy for a product which generates negative externalities
28) ‘Electricity suppliers are required to buy a growing amount of electricity from renewable energy
generators. By 2010, this must amount to at least 10 per cent of total electricity bought from all
generators. Green energy generators are paid more for their electricity because there is a scarcity of supply
of electricity generated from renewable resources.’ It can be deduced from the data above that (Jan 2009
Q.20)
a) The government is subsidising the production of renewable energy.
b) The social cost of electricity generated from renewable resources is greater than the private cost.
c) The government is subsidising the negative externalities arising from the production of ‘green
energy’.
d) Electricity suppliers are paying higher average prices for their electricity because some of the
electricity is generated from ‘green sources’.
29) The table below gives information on the supply of, and demand for, potatoes over a range of market
prices. The market is managed through a buffer-stock scheme. (Jan 2009 Q.23)
Price (£/kilo)
6
9
12
Quantity demanded
000 kilos per week
6
4
3
Quantity supplied
000 kilos per week
3
4
5
If the manager of the buffer-stock scheme for potatoes decided to establish a minimum price of £12 per
kilo, this would require that
a) The production of potatoes be subsidised.
b) A tax be imposed on consumers of potatoes.
c) Potatoes be released from the buffer stock.
d) Potatoes be purchased for the buffer stock.
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Government failure
1) A government builds a new road to reduce traffic congestion on existing roads. This project would
inevitably result in government failure if (June 2017 Q.13)
a) Local residents raised environmental objections to the new road.
b) The cost of the new road was twice as large as the original estimate.
c) The reduction in traffic congestion was smaller than forecast.
d) Total benefits from the new road were less than the cost of the new road.
2) Which one of the following is most likely to be a reason for government failure? (June 2016 Q.25)
a) The negative externalities that result from the production of some goods and services
b) The difficulties in determining the true social costs and benefits of merit goods
c) Missing markets for public goods and merit goods
d) Excessive consumption of demerit goods
3) Which one of the following is an example of government failure? (Jan 2013 Q.5)
a) The government overproducing a merit good
b) Government provision of national defence
c) All subsidies given to private sector firms
d) The government allowing free market forces to raise the price of oil
4) Government failure may result directly from (June 2012 Q.11)
a) The high cost of administering government policy.
b) Under consumption of merit goods by the public.
c) A failure of market prices to reflect social costs.
d) Goods being provided through the market mechanism.
5) In July 2007, smoking in enclosed public places in England became illegal. Such a policy would inevitably
lead to government failure if (Jan 2011 Q.17)
a) The government’s tax revenue from cigarette sales fell.
b) The economic benefits arising from the ban were outweighed by its costs.
c) Some people continued to smoke cigarettes in their own homes.
d) Jobs were lost in the tobacco industry.
6) Government failure is most likely to arise directly from (June 2010 Q.11)
a) Inadequate information.
b) The forces of demand and supply.
c) Market failure.
d) Diseconomies of scale.
7) Government failure always occurs when (Jan 2010 Q.3)
a) Government intervention leads to a net welfare loss compared to the free market solution.
b) Social costs in a market are greater than social benefits.
c) The government fails to intervene in the market.
d) Externalities exist in a market.
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8) Which one of the following is an example of government failure? (June 2009 Q.18)
a) The government over-producing a merit good
b) All government provision of national defence
c) All subsidies given to private sector firms
d) The government allowing free market forces to raise the price of oil
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Rationality and Behavioural Economics
1) Which one of the following is most likely to be associated with behavioural economic theory? (June 2018
P.3 Q.10)
a) All consumer behaviour is based on rational utility-maximising decisions.
b) An individual’s economic decisions may be biased.
c) Price changes cannot explain how competitive markets achieve equilibrium.
d) The behaviour of firms is based on their desire to maximise profit.
2) A person eats six biscuits a day to maximise their total utility from the consumption of biscuits. The price
of biscuits increases by 50%, leading to a change in the individual’s daily consumption of biscuits. Which
one of the following combinations, A, B, C or D, shows the most likely changes in the individual’s total
utility and marginal utility? (June 2018 P.3 Q.16)
A
B
C
D
Total utility derived from their
daily consumption of biscuits
Decrease
Increase
Decrease
Increase
Marginal utility derived from their
daily consumption of biscuits
Decrease
Decrease
Increase
Increase
3) The law of diminishing marginal utility states that (June 2017 P.3 Q.3)
a) As more of a product is consumed, the extra satisfaction will decline.
b) As more of all factors are employed, the additional output produced will fall.
c) As more variable factors are added to a fixed factor, the additional output produced will decline.
d) The total satisfaction from consuming a product will be maximised when marginal utility starts to
fall.
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Labour Markets and Monopsony
1) In a labour market dominated by a monopsonist, wages and employment are usually lower than in a
competitive labour market. This is because a monopsonist (June 2018 P.3 Q.28)
a) Employs workers up to the point where the marginal revenue product of labour is equal to the
wage rate.
b) Is a monopoly supplier of labour.
c) Equates the marginal revenue product of labour with its marginal cost not the wage rate.
d) Restricts output to raise the price of the product sold.
2) The marginal revenue product of labour is the (June 2017 P.3 Q.9)
a) Addition to total revenue when the firm produces and sells an extra unit of output.
b) Amount produced per worker per time period.
c) Change in total output that is produced when one extra worker is employed.
d) Revenue gained by selling the extra output produced by employing one more worker.
3) All other things being equal, which one of the following situations always results in a rise in labour
productivity? (June 2016 Q.10)
a) Output falls at a slower rate than the fall in the number of workers employed
b) Output falls at a faster rate than the fall in the number of workers employed
c) Output rises at a slower rate than the rise in the number of workers employed
d) Output always rises as the number of workers employed increases
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AQA Book 2 MCQ Answers
Market Failure
1
2
3
4
5
A
A
D
D
B
6
7
8
9
10
D
C
C
A
B
11
12
13
14
15
A
C
B
D
D
Public, private and quasi-public goods
1
2
3
4
5
C
C
A
A
A
6
7
8
B
C
B
6
7
8
9
10
B
B
D
B
A
11
12
13
14
C
C
B
B
6
7
8
9
10
A
C
A
B
A
11
12
13
14
A
B
D
D
Positive and negative externalities
1
2
3
4
5
B
D
D
C
A
Merit and demerit goods
1
2
3
4
5
B
C
A
D
D
Unequal distribution of income and wealth
1
2
3
4
D
B
B
B
26
16
17
18
D
B
A
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Government intervention in markets
1
2
3
4
5
6
7
A
C
D
C
C
B
A
8
9
10
11
12
13
14
B
A
D
B
A
C
D
D
B
A
A
B
6
7
8
A
A
A
15
16
17
18
19
20
21
Government failure
1
2
3
4
5
Rationality and Behavioural Economics
1
2
3
B
C
A
Labour Market and Monopsony
1
2
3
C
D
A
27
A
D
A
A
C
C
C
22
23
24
25
26
27
28
29
A
C
C
C
A
C
D