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1. Multiple Choice Questions for AQA AS Economics Click here to Commence quiz UNIT 1 Markets & Market Failure 1.5 Government Failure Test 1

2. AQA AS Economics Unit 1 – Markets & Market Failure Question 1 In order to correct market failure, a government may intervene if… businesses have more information about its products than its consumers Correct This is market failure through information failure. Because of lack of information consumers are unable to make rational decisions. The rationale for government intervention is to correct market failure. the consumption of merit goods reduces economic welfare Incorrect negative externalities are being addressed by the businesses generating them Incorrect public goods are being financed through taxation Incorrect Next question APT Initiatives Ltd

3. AQA AS Economics Unit 1 – Markets & Market Failure Question 2 Indirect tax is sometimes used by governments to address market failure because… it enables governments to pay for public services Incorrect Indirect taxes on negative externalities (eg pollution taxes) are designed to force economic agents to take external costs into account. In other words they are designed to internalise the externality. it forces consumers and businesses to take account of negative externalities Correct it reduces external benefits arising from economic activity Incorrect it has little impact on the macroeconomic environment Incorrect Next question APT Initiatives Ltd

4. AQA AS Economics Unit 1 – Markets & Market Failure Question 3 As a means of addressing market failure, a government may use subsidies in order to… reduce the price of a product which generates external benefits Correct A subsidy will encourage consumers to buy more of the product which then generates an external benefit for third parties. fund the provision of more or better merit goods Incorrect reduce the price of a product which is over-produced Incorrect impose a minimum price Incorrect Next question APT Initiatives Ltd

5. AQA AS Economics Unit 1 – Markets & Market Failure Question 4 The diagram below illustrates the impact of negative externalities which the production of a product can impose on costs, benefits and output. Left to the market, equilibrium would be at J, with output at Q1. To secure a more economically efficient outcome, the government could… provide a subsidy of OG-OF for each unit bought The tax is shown as the vertical difference between the two supply curves. By imposing this tax, a new equilibrium is established at a price of OG and therefore a quantity of OQ2. Incorrect S1 = MSC Costs & Benefits set a minimum price of OE S = MPC Incorrect G J F E impose a tax per unit manufactured of OG-OE MPB = MSB Correct regulate the quantity available on the market through rationing O Q2 Q1 Output Incorrect Next question APT Initiatives Ltd

6. AQA AS Economics Unit 1 – Markets & Market Failure Question 5 The government wants to reduce the external costs associated with congestion. Which one of the following combinations would be most likely to achieve this objective? Reduce the amount of off-street parking and reduce road capacity Incorrect We need to take note of the objective of government in this question. A switch to fuel efficient cars will not reduce congestion. A reduction in road capacity will add to congestion, as will a reduction in off street parking. The combination of increased road capacity and subsidised transport is the surest way of reducing congestion. Increase the road capacity and subsidise public transport fares Correct Reduce the tax on car ownership and reduce the amount of off-street parking Incorrect Increase petrol / diesel tax and subsidise the development of fuel-efficient vehicles Incorrect Next question APT Initiatives Ltd

7. AQA AS Economics Unit 1 – Markets & Market Failure Question 6 Price controls may be used by government where… they wish to encourage production Incorrect The purpose of any government microeconomic measure is to improve economic efficiency. We can also conclude that C is the correct answer by eliminating the other responses - price controls do not encourage production, do not tackle the problem of externalities and are imposed in the market for goods rather than factors of production. the operation of factor markets lead to increasing income inequalities Incorrect they may lead to more economically efficient outcomes Correct negative externalities are too high Incorrect Next question APT Initiatives Ltd

8. AQA AS Economics Unit 1 – Markets & Market Failure Question 7 The UK government is concerned about income inequality, and responds by increasing the minimum wage significantly. Which of the following is not a potential consequence of this decision? A fall in unemployment slowing down Incorrect One argument against the national minimum wage is that it adds to business costs and makes UK businesses less competitive. Businesses employ more capital goods Incorrect Business costs rise Incorrect UK businesses are more competitive Correct Next question APT Initiatives Ltd

9. AQA AS Economics Unit 1 – Markets & Market Failure Question 8 An advantage of a buffer stock scheme, as a means of addressing market failure, is that… it raises the price of commodities Incorrect The main purpose of a buffer stock scheme is to stabilise producer incomes. At times it will raise price and at times there will be incentives for producers to reduce output, but these are not the purpose of a buffer stock scheme. it stabilises price Correct it encourages producers to reduce output Incorrect it reduces negative externalities Incorrect Next question APT Initiatives Ltd

10. AQA AS Economics Unit 1 – Markets & Market Failure Question 9 Tradable Pollution permits are designed to address market failure by… A pollution permit allows a business to pollute up to a set amount, but it can sell any unused permit quantities to other businesses who cannot manage on the quantities their own permits allow. This provides an incentive to reduce pollution. It does not eliminate it altogether and neither would it increase pollution. It is seen as a market based measure since the permit can be bought and sold. encouraging producers to reduce the pollution they are responsible for Correct eliminating pollution among businesses with permits Incorrect allowing businesses to increase pollution Incorrect imposing regulation of pollution created by manufacturing businesses Incorrect Next question APT Initiatives Ltd

11. AQA AS Economics Unit 1 – Markets & Market Failure Question 10 Governments manage the provision of public services and, thereby, directly address market failure by… taxing negative externalities Incorrect The direct provision of services by government (e.g. education and health care) is designed to ensure that these services remain free at the point of consumption. subsidising positive externalities Incorrect delegating control over their business decisions to providers Incorrect ensuring that some services remain free at the point of consumption Correct Next question APT Initiatives Ltd

12. AQA AS Economics Unit 1 – Markets & Market Failure Question 11 Governments may use regulations to address some market failures because… businesses are keen to address their wider social responsibilities Incorrect Market based measures (taxes, subsidies, pollution permits) are the preferred methods of dealing with market failure. However, there are some circumstances where it is felt that a market solution is inadequate and some form of regulation is needed, eg regulation of alcohol sales via licensing and the prohibition of trade in certain drugs. they make use of market forces to improve resource allocation Incorrect it may be the most efficient means of ensuring a better allocation of resources Correct they encourage businesses to reduce the price of products which generate negative externalities Incorrect Next question APT Initiatives Ltd

13. AQA AS Economics Unit 1 – Markets & Market Failure Question 12 Government failure occurs when… government reduces spending on public services Incorrect In simple terms, the government acts to reduce market failure but an unintended by-product effect may result in a misallocation of resources ie government failure. consumer decisions lead to a misallocation of resources Incorrect government makes decisions which lead to a misallocation of resources Correct public sector businesses make a loss Incorrect Next question APT Initiatives Ltd

14. AQA AS Economics Unit 1 – Markets & Market Failure Question 13 The most significant reason why governments may fail to address market failure is because… they have to address conflicting objectives Correct Conflicting objectives is a major cause of government failure. Hence, there might be a reluctance to act to reduce inequality if it endangers incentives in the economy. the measures needed may clash with EU commitments Incorrect governments are concerned only with long run issues Incorrect externalities can be accurately calculated Incorrect Next question APT Initiatives Ltd

15. AQA AS Economics Unit 1 – Markets & Market Failure Question 14 A “black market” may exist where… C and D refer to what many people call the black economy and which is more accurately called the “hidden economy”. A black market, on the other hand, is the illegal selling of goods at other than a controlled price. A black economy only exists when prices are regulated and are not permitted to find their equilibrium level in the market. In a freed and unregulated market there can be no black market. goods and services are sold at prices above controlled prices Correct goods are sold at market price Incorrect transactions take place that are not recorded in national income accounting Incorrect buyers and sellers are not paying taxes associated with their transaction Incorrect Next question APT Initiatives Ltd

16. AQA AS Economics Unit 1 – Markets & Market Failure Question 15 Examples of government failure would exclude… rent controls which reduce the supply of low cost housing Incorrect A, B and D are instances of government failure. The actions of a well-meaning government have led to unfortunate consequences. C, on the other hand, is government action that corrects a market failure without producing a government failure. a minimum wage rate which results in higher unemployment Incorrect a congestion charge which internalises the negative externality Correct a tobacco tax which increases smuggling from overseas Incorrect Next question APT Initiatives Ltd

17. AQA AS Economics Unit 1 – Markets & Market Failure Question 16 Which one of the following best illustrates the Law of Unintended Consequences? A “Pay as you throw” scheme for refuse leads to increased recycling Incorrect The law of unintended consequences is one aspect of government failure. A well intentioned measure has perverse consequences and this is clearly the case with a measure designed to reduce waste going to landfill, but which leads to an unsocial act. A “Pay as you throw” scheme for refuse leads to flytipping Correct A rise in the tax on tobacco reduces smoking Incorrect A rise in the tax on petrol leads to increased sale of fuel efficient cars Incorrect Next question APT Initiatives Ltd

18. AQA AS Economics Unit 1 – Markets & Market Failure Question 17 Which one of the following represents a case of government failure? A national minimum wage raises income levels for low income families Incorrect A buffer stock scheme is usually designed to stabilise prices (or incomes). Surplus production is an undesirable outcome of the scheme and, as such, constitutes government failure. Even without knowing the objectives of the measures in the other responses, it is clear that the outcomes specified are desirable. The CAP Single Farm Payment improves the living standards of poorer farmers Incorrect Control of monopoly reduces the monopoly power Incorrect A state buffer stock scheme leads to surplus production Correct Next question APT Initiatives Ltd

19. AQA AS Economics Unit 1 – Markets & Market Failure Question 18 Which one of the following pairs of government objectives would not be said to be conflicting? To reduce inequality and to provide incentives to work Incorrect Improvement in educational standards will improve the quality of new entrants to the labour force. To raise revenue yield from tobacco and eliminate tobacco consumption Incorrect To provide affordable housing in rural areas and to protect the green belt Incorrect To improve educational standards and improve the quality of the future labour supply Correct Next question APT Initiatives Ltd

20. AQA AS Economics Unit 1 – Markets & Market Failure Question 19 The diagram below shows supply and demand for a product which is given a subsidy. The subsidy per unit is equal to… Price P2 Incorrect The subsidy per unit is the vertical difference between the two supply curves. The supply is displaced by this amount and suppliers are now willing to supply OQ1 rather than the original equilibrium quantity of OQ. Price S P2 S (with subsidy) Price P1 Incorrect P P1 Price P2 minus price P1 P3 Correct D O Q Q1 Quantity Price P minus price P1 Incorrect Next question APT Initiatives Ltd

21. AQA AS Economics Unit 1 – Markets & Market Failure Question 20 Which of the following government actions will not reduce inequality? VAT is a regressive tax which means that it disproportionately affects the less well off; therefore, this measure will increase inequality. Conversely, a rise in JSA assists those who are unemployed, and therefore among the poorest. A rise in the higher rate of tax will mean the better off will pay more tax. A rise in the tax threshold will remove low income earners from the tax net. A rise in VAT Correct An increase in Job Seekers’ Allowance Incorrect A rise in the higher rate of income tax Incorrect A rise in the income tax threshold to £10,000 per year Incorrect Next question APT Initiatives Ltd

22. AQA AS Economics Unit 1 – Markets & Market Failure Question 21 Rent controls reduced the amount of rented accommodation in the UK. This was because… they reduced the demand for rented accommodation Incorrect Rent controls are a form of price control. By limiting rents they reduced the return on owning property to let and, as a result, reduced the supply of rented accommodation. This is an example of government failure. they reduced the return on owning houses to rent Correct they encouraged the development of council or social housing Incorrect they taxed landlords Incorrect Next question APT Initiatives Ltd

23. AQA AS Economics Unit 1 – Markets & Market Failure Question 22 Tax on tobacco will reduce smoking in each of the following situations except… when the demand for tobacco is relatively price inelastic Incorrect It should be remembered that in all situations except perfect inelasticity a rise in price will lead to a contraction of demand. The degree of elasticity simply concerns the extent of the contraction. when the demand for tobacco is perfectly price inelastic Correct when the demand for tobacco is perfectly price elastic Incorrect when the demand for tobacco has a price elasticity of unitary Incorrect Next question APT Initiatives Ltd

24. AQA AS Economics Unit 1 – Markets & Market Failure Question 23 The Common Agricultural Policy is an example of government failure because… it applies across all members of the EU Incorrect The CAP is designed to protect farmers and maintain their incomes at a higher level than would otherwise be the case. This means that consumers are forced to pay more for their food and, as such, this interference in the market system can be regarded as government failure. farmers are encouraged to amalgamate their farms Incorrect farmers produce as efficiently as they can Incorrect as a result, the food we eat is more expensive than it could be Correct Next question APT Initiatives Ltd

25. AQA AS Economics Unit 1 – Markets & Market Failure Question 24 Subsidies to train operating companies are least likely to… reduce rail fares Incorrect Subsidies to train operators encourage more services to be offered and at lower prices, assuming there is spare capacity. If people switch from road to rail, it will reduce the negative externality of road congestion. However, an increase in rail transport will not reduce the positive externalities associated with rail transport. improve rail services Incorrect reduce congestion on the roads Incorrect reduce externalities from rail travel Correct Next question APT Initiatives Ltd

26. AQA AS Economics Unit 1 – Markets & Market Failure Quiz Completed Question 25 The government is beginning to give serious consideration to charging motorists for the congestion they cause by their decision to drive. This intervention could best be described as… using a charge to reduce the loss of welfare arising from a negative externality Correct It is a charge and is designed to force drivers to shoulder the cost of the negative externality inflicted on the community. It is clearly not a subsidy, nor a price control. It is not a regulation since it uses rather than overrides the price mechanism. a subsidy which will encourage motorists to use public transport instead of their cars Incorrect a price control in response to the loss of welfare arising from unstable prices Incorrect a regulation which will force the motorist to internalise the positive externality associated with driving Incorrect Exit APT Initiatives Ltd