Use this review after studying all five topics or taking the Unit 6 diagnostic.
Big ideas of the unit
- The benchmark is MSB = MSC, where total surplus is largest. A competitive market reaches it only when buyers and sellers bear all the benefits and costs. (Topic 6.1)
- Rational choices can still be inefficient. Market power stops output where P > MC, and people weigh private, not social, benefits and costs.
- Too much and too little both cost surplus. Deadweight loss is the triangle between MSB and MSC.
- Externalities split private and social curves. They arise when property rights are unclear or bargaining is too costly. (Topic 6.2)
- Excludability decides whether people can free ride. Public goods are underprovided; open-access resources are overused. (Topic 6.3)
- Ask what a policy does to MC or MR. Per-unit taxes and subsidies move output; lump-sum ones change only profit. A ceiling can raise a monopoly’s output, and a minimum wage a monopsony’s employment. (Topic 6.4)
- Every policy faces a cost-benefit test: it must restore more surplus than it costs to run or fund.
- Efficiency is not equity. An efficient market can leave incomes very unequal, and the tax structure changes how income is shared. (Topic 6.5)
Key relationships and methods
| Idea | Rule or method | Topic |
|---|---|---|
| Efficient quantity | MSB = MSC; total surplus at its maximum | 6.1 |
| Deadweight loss (straight lines) | ½ × (gap between Q and Q*) × (gap between MSB and MSC at Q) | 6.1 |
| Corrective tax or subsidy | per unit, equal to MEC or MEB at the optimal quantity | 6.2 |
| Types of good | public: non-rival, non-excludable; open access: rival, non-excludable | 6.3 |
| Public good worth providing | sum of everyone’s valuation ≥ cost | 6.3 |
| Tax incidence | the less elastic side bears more | 6.4 |
| Natural monopoly | fair return: P = ATC; efficient: P = MC plus lump-sum subsidy | 6.4 |
| Monopsony and minimum wage | employment rises up to the wage where supply meets MRP | 6.4 |
| Progressive or regressive | compare tax as a share of income across incomes | 6.5 |
These are original Marlbridge practice questions, not past exam questions. The rubrics are a suggested Marlbridge rubric, not official scoring. All firms, places and data are fictional; a four-function calculator is enough.
Question 1 (multiple choice · mixed)
Which policy is correctly matched with the market failure it corrects?
- (A) A monopoly that restricts output: a binding price floor above its current price
- (B) An underprovided public good: a per-unit tax on each person who uses it
- (C) An overused open-access fishery: a per-unit subsidy on each tonne of fish caught
- (D) A natural monopoly regulated at P = MC: a lump-sum subsidy equal to its loss
Answer and explanation
Answer: (D). At P = MC the price is below ATC, so the firm makes a loss. A lump-sum subsidy covers it without changing MC, so output stays efficient.
- (A) Buyers take fewer units at a higher price, so output falls further below the efficient quantity.
- (B) Use of a non-excludable good cannot be charged, and a tax on use would cut use further. Provision funded by general taxes fixes free riding.
- (C) A subsidy makes fishing cheaper, so overuse gets worse. A fee or quota makes users face the cost they impose on others.
Question 2 (multiple choice · mixed)
In a fictional economy, every market produces where MSB = MSC, and the Gini coefficient for income is 0.45. Which statement is correct?
- (A) A Gini coefficient of 0.45 proves that some markets have deadweight loss.
- (B) The economy has no deadweight loss, but income can still be shared unequally, because efficiency concerns the size of total surplus, not its distribution.
- (C) If every market is efficient, the Lorenz curve must lie on the line of equality.
- (D) If factors are paid the value of their marginal product, every household earns the same income.
Answer and explanation
Answer: (B). Efficiency and equity are separate questions. An efficient economy can still have a Lorenz curve far below the line of equality.
- (A) and (C) treat inequality as a sign of inefficiency. The Gini coefficient describes shares, not wasted surplus.
- (D) Marginal products differ, and people own different amounts of capital and land, so paying each factor its value creates income differences.
Question 3 (multiple choice · mixed)
Kestrel Hills is a free, unfenced park (fictional). On summer weekends each extra walker crowds the trails and wears the paths. A charity wants to fund, from voluntary donations, a wildfire watchtower that would protect every village around the park. Which statement is correct?
- (A) The trails are a public good and are underused; the watchtower is an open-access resource and will be overbuilt.
- (B) Both are public goods, so both are underprovided because of free riding.
- (C) The crowded trails act as an open-access resource and are overused; the watchtower is a public good, and donations are likely to fall short because villagers can free ride.
- (D) The trails are a private good because the government owns the park; the watchtower is a private good because donors pay for it.
Answer and explanation
Answer: (C). At busy times the trails are rival and non-excludable, so each walker ignores the cost imposed on others. The watchtower’s protection is non-rival and non-excludable, so each village hopes others will pay.
- (A) swaps the two goods.
- (B) misses that crowded trails are rival, which turns underprovision into overuse.
- (D) classifies by owner or payer, not by rivalry and excludability.
Question 4 (constructed response · mixed)
Cement kilns around Corran Bay (fictional) form a perfectly competitive market. Dust from the kilns damages homes nearby, costing $20 per tonne. Q is thousand tonnes per year and P is dollars per tonne.
Demand: P = 120 − 2Q (no external benefit). Supply: MPC = 20 + 2Q.
(a) Find the market and the socially optimal quantity and price. (b) Draw a correctly labelled graph showing Qm, Qs and the deadweight loss. (c) Calculate the deadweight loss. (d) The government sets a per-unit tax of $20. Find the quantity, the price buyers pay, the price sellers keep and the revenue. Who bears the tax? (e) A classmate says a $30 tax would be “even better”. Find the quantity and the deadweight loss with a $30 tax.
Worked solution and suggested Marlbridge rubric
(a) Market: 120 − 2Q = 20 + 2Q, so Qm = 25 thousand tonnes at $70. MSC = 40 + 2Q, so the optimum is Qs = 20 thousand tonnes at $80.
(b) Label the axes with units. D = MPB = MSB slopes down; S = MPC slopes up; MSC lies $20 above it. Qm is where D meets MPC; Qs, to the left, where D meets MSC. Shade the triangle between MSC and D from Qs to Qm.
(c) At Qm, MSC = 90 and MSB = 70. DWL = ½ × (25 − 20) × (90 − 70) = $50 thousand per year.
(d) Sellers face 40 + 2Q, so Q = 20 thousand. Buyers pay $80; sellers keep $60. Revenue = 20 × 20 = $400 thousand. Buyers pay $10 more and sellers keep $10 less: the burden is shared equally.
(e) Sellers face 50 + 2Q, so Q = 17.5 thousand, below the optimum. There MSB = 85 and MSC = 75, so DWL = ½ × 2.5 × 10 = $12.5 thousand: the bigger tax overcorrects.
| Point | What earns it |
|---|---|
| 1 | Qm = 25 at $70 and Qs = 20 at $80 |
| 1 | Graph: labelled axes, MSC above MPC, Qs < Qm, DWL triangle between Qs and Qm |
| 1 | DWL = $50 thousand |
| 1 | Q = 20, $80 and $60, revenue $400 thousand, burden shared $10 and $10 |
| 1 | $30 tax: Q = 17.5 and DWL $12.5 thousand, with the reason |
Total: 5 points.
Question 5 (constructed response · mixed)
Tallis Gas (fictional) is a natural monopoly. Demand is P = 80 − Q, so MR = 80 − 2Q. MC is constant at $20, and fixed cost is $800 thousand per month, so ATC = 20 + 800 ÷ Q (Q in thousand households, P in $ per month).
(a) Find the unregulated quantity, price, profit and deadweight loss. (b) Find the fair-return quantity and price, and the deadweight loss. (c) Find the socially optimal quantity and the firm’s loss there. Explain what kind of subsidy is needed. (d) Collecting taxes to pay any subsidy costs $0.30 for every $1 raised (administration and lost surplus elsewhere). Use cost-benefit analysis to choose between the fair-return price and the socially optimal price.
Worked solution and suggested Marlbridge rubric
(a) MR = MC: 80 − 2Q = 20, so Q = 30, P = $50. Profit = 50 × 30 − (20 × 30 + 800) = $100 thousand. The efficient quantity (P = MC) is 60, so DWL = ½ × (60 − 30) × (50 − 20) = $450 thousand.
(b) P = ATC at Q = 40: P = $40 and ATC = 20 + 20 = $40, so economic profit is zero. DWL = ½ × (60 − 40) × (40 − 20) = $200 thousand.
(c) Q = 60, P = $20. Loss = total cost − revenue = (20 × 60 + 800) − 20 × 60 = $800 thousand, the whole fixed cost. The government must pay a lump-sum subsidy of $800 thousand; a per-unit subsidy would lower MC and push output past 60.
(d) Moving from fair return to P = MC removes $200 thousand of DWL, but raising $800 thousand costs 0.30 × 800 = $240 thousand. Net change = −$40 thousand, so the fair-return price is better here.
| Point | What earns it |
|---|---|
| 1 | Q = 30, P = $50, profit $100 thousand |
| 1 | Unregulated DWL $450 thousand |
| 1 | Fair return: Q = 40, P = $40 = ATC, DWL $200 thousand |
| 1 | Q = 60 and loss $800 thousand |
| 1 | Lump-sum subsidy, because a per-unit subsidy would change MC and output |
| 1 | $200 thousand gain against $240 thousand cost, so fair return |
Total: 6 points.
Question 6 (constructed response · mixed)
Ellery, a fictional district, has 600 households. Lighting every street would cost $24,000 per year.
| Group | Households | Income per household | Value of lighting per household |
|---|---|---|---|
| Low | 200 | $20,000 | $30 |
| Middle | 300 | $50,000 | $45 |
| High | 100 | $150,000 | $70 |
(a) Classify the street lighting, with a reason for each test. (b) Is the scheme efficient? Explain with numbers. (c) Plan A charges every household $40. Plan B charges $6, $28 and $144 to the low, middle and high groups. Show that both raise $24,000. Find each group’s net gain under each plan and the total net gain. (d) Classify each plan as progressive or regressive, and explain what (c) shows about efficiency and equity.
Worked solution and suggested Marlbridge rubric
(a) Non-rival: one more person using a lit street does not dim it for others. Non-excludable: non-payers cannot be kept off lit streets. It is a public good.
(b) Total benefit = 200 × 30 + 300 × 45 + 100 × 70 = 6,000 + 13,500 + 7,000 = $26,500, more than $24,000. It is efficient: net gain $2,500.
(c) Plan A: 600 × 40 = $24,000. Plan B: 1,200 + 8,400 + 14,400 = $24,000.
| Group | Plan A net gain | Plan B net gain |
|---|---|---|
| Low | 30 − 40 = −$10 | 30 − 6 = +$24 |
| Middle | 45 − 40 = +$5 | 45 − 28 = +$17 |
| High | 70 − 40 = +$30 | 70 − 144 = −$74 |
| Total | −2,000 + 1,500 + 3,000 = $2,500 | 4,800 + 5,100 − 7,400 = $2,500 |
(d) Tax per $1,000 of income: Plan A $2.00, $0.80 and $0.27 (falling, so regressive); Plan B $0.30, $0.56 and $0.96 (rising, so progressive). Total surplus is $2,500 either way: the plans are equally efficient but differ in equity, that is, who gains and who loses.
| Point | What earns it |
|---|---|
| 1 | Public good, with both tests explained |
| 1 | $26,500 > $24,000, efficient, net gain $2,500 |
| 1 | Both plans raise $24,000 and the six net gains are correct |
| 1 | Total net gain $2,500 under both plans |
| 1 | A regressive and B progressive, using tax as a share of income |
| 1 | Same efficiency, different distribution |
Total: 6 points.
Question 7 (constructed response · mixed)
Rowan Quarry (fictional) is the only employer in a remote town. L is hundreds of workers; W is dollars per hour. Labour supply: W = 6 + 0.5L, so MRC = 6 + L. Marginal revenue product: MRP = 30 − L.
(a) Find the employment and wage the quarry chooses, and the MRP of the last worker hired. (b) Find the employment and wage if this labour market were perfectly competitive. Calculate the deadweight loss of the monopsony outcome. (c) Find employment with a minimum wage of $14, and with one of $16. At $16, how many people want work but cannot get it? (d) Using two sources of inequality from Topic 6.5, explain why the quarry’s workers earn less than the value they add, and how a labour union could change this.
Worked solution and suggested Marlbridge rubric
(a) MRC = MRP: 6 + L = 30 − L, so L = 12 hundred. The wage comes from supply: W = 6 + 6 = $12. MRP of the last worker = 30 − 12 = $18.
(b) Supply = MRP: 6 + 0.5L = 30 − L, so L = 16 hundred and W = $14. DWL = ½ × (16 − 12) × (18 − 12) = 12 hundred dollars = $1,200 per hour.
(c) At $14, MRC is flat at $14 up to the 16 hundred willing to work, and MRP = 14 at L = 16. Employment = 16 hundred: wage and employment both rise. At $16, the quarry hires until MRP = 16: L = 14 hundred. But 20 hundred want work at $16, so 6 hundred cannot get it.
(d) Bargaining power: with one employer, workers have nowhere else to go, so the quarry pays $12 although the last worker adds $18. Mobility: remote workers cannot easily move to better-paid jobs. A union bargains for all workers at once, so it can set a wage floor that, like the $14 minimum, raises both pay and employment.
| Point | What earns it |
|---|---|
| 1 | L = 12 hundred from MRC = MRP, and W = $12 from supply |
| 1 | Competitive L = 16 hundred and W = $14 |
| 1 | DWL $1,200 per hour (12 hundred dollars) |
| 1 | $14 minimum: L = 16 hundred, with the flat-MRC reason |
| 1 | $16 minimum: L = 14 hundred and 6 hundred unable to get work |
| 1 | Two sources named and linked to pay below MRP |
| 1 | Union raises bargaining power, acting like a wage floor |
Total: 7 points.
How did you do?
Questions 1 to 3 are worth 1 point each and Questions 4 to 7 are worth 5, 6, 6 and 7: 27 in all.
- MSB = MSC, deadweight loss and cost-benefit tests (Q2, Q4, Q5): the Topic 6.1 checklist.
- Externalities and corrective taxes (Q4): the Topic 6.2 checklist.
- Public goods, open access and free riding (Q1, Q3, Q6): the Topic 6.3 checklist.
- Policy in different market structures (Q1, Q4, Q5, Q7): the Topic 6.4 checklist.
- Efficiency against equity, and sources of inequality (Q2, Q6, Q7): the Topic 6.5 checklist.
Not taken the Unit 6 diagnostic yet? It shows which topic to revisit first.