Sample Exam Question for Chapter 16.

This is a sample question for you to practice on regarding your final ECON 101 exam. Please bear in
mind you will have to answer 3 essays out of 5. The 3 essays are worth 24 marks, i.e. a massive 60% of
your final exam. It is important to answer them properly to increase your chance of securing higher
marks eventually.
Here are some guidelines:
1. Introduce what you are going to write in your essay (One small paragraph)
2. Definition of terms/concepts. For e.g. Perfect Competition is a market structure where they are
many buyers and selling, an identical goods, and free barriers of entry and exit.
3. Include diagram(s) – Make sure they are relevant to the question
4. Explain your diagram(s) - Label your diagrams properly.
5. Apply your economic understanding (For example a increase in Consumer Income would shift
the demand to the right, hence increase the price and quantity of the goods, other things being
equal. Depending on the elasticity of supply, consumer surplus will increase.)
6. End your essay with your conclusion and/or recommendations.
Following these steps will result in a bigger chance of scoring higher. Understanding and not
memorizing, and Quality and not Quantity, are absolutely important to do well in Microeconomic
Analysis 101.
Good luck!
Sample Question:
By using examples, explain the differences between the two market failures: Negative Consumption
Externality and Positive Production Externality. In each market failure, explain why the market fails
and recommend at least one possible policy action to correct the market failure.
One Possible Solution (Chapter 16):
Define externality and state there are 4 possible types (p374).
Explain the difference between Negative Cons. Ext & Positive Prod. Ext (p376) and include examples.
Market fails due to Inefficiency. Draw Fig 16.2 (Inefficiency with external cost) & Fig 16.6 (Inefficiency
with external benefit) and Explain both diagrams.
Possible policy actions to reduce external costs from Negative Consumption Externality include taxes,
emission charges, marketable permits. You need to explain at least only one. (p.380)
Possible policy actions to encourage external benefits from positive production externalities include
Public Provision, private subsidies, vouchers, patents and copyrights. You need to explain only one.
Top essays would include proper readability and a smooth flow of ideas throughout the essay. Do not
forget to explain your diagram(s).