AQA A-level Economics: Competition, ownership, regulation and government failure (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the AQA AS and A-level Economics specification (version 1.3, 29 June 2022, first taught from September 2015), sections 3.1.8.7, 3.1.8.8 and 3.1.8.10 (printed as 4.1.8.7, 4.1.8.8 and 4.1.8.10 in the combined PDF). All firms, countries and figures are invented. Learn the content from the study guide and the revision notes. The course hub is AQA A-level Economics and the printable checklist tracks progress.

Questions

1. Define government failure. [2]

2. State two features that UK and EU competition policy have in common. [2]

3. A regulator caps the price of a utility at inflation minus X, with X = 1.5 percentage points. The price is £80 and inflation is 3.5%.

(a) Calculate the permitted price rise as a percentage. [1] (b) Calculate the new price. [1] (c) In the next year inflation is 2.5% and X is unchanged. Calculate the price. [1] (d) Explain one reason why the regulator might set X wrongly. [1]

4. A state-owned firm earns £18 million profit a year, expected to continue indefinitely. The government sells it for £280 million. The discount rate is 4%. Calculate the value of the profit stream, the amount by which the sale price is below it, and give two comments on this calculation. [4]

5. In a market, shares are 35%, 25%, 15%, 10%, 8% and 7%. The firms with 25% and 15% propose to merge.

(a) Calculate the three-firm concentration ratio before and after the merger. [2] (b) Explain two reasons why a higher ratio does not prove the merger harms consumers. [2]

6. A cartel gains £9 million a year for 4 years. The fine is 10% of one year’s turnover of £80 million. The chance of being caught is 30%. Calculate the total gain, the fine and the expected fine, then state the net expected gain and one change that would improve deterrence. [4]

7. Demand for local deliveries is P = 120 − 2Q (Q in thousand parcels a week, P in £). Before a merger, competition sets price equal to marginal cost of £70. The merged firm says its marginal cost will fall to £60 and it will act as a monopolist.

(a) Find the output and consumer surplus before the merger. [2] (b) Find the monopolist’s output and price. [3] (c) Find consumer surplus, profit and total surplus after the merger. [2] (d) Evaluate whether the merger should be allowed. [2]

8. A scheme pays firms £500 for each trainee hired. It makes 12,000 payments and costs £1.5 million to administer. In 25% of cases the firm would have hired anyway. Each extra trainee gives a social benefit of £700. Calculate the net benefit and identify one source of government failure shown. [4]

9. In a market for training courses, marginal private benefit is P = 80 − Q and marginal private cost is P = 20 + Q (Q in thousands, P in £). Each unit gives an external benefit of £10. The government pays a subsidy of £24 per unit, because it overestimates the external benefit. Find the market and socially optimal output, the output with the subsidy, and the welfare loss with and without the subsidy. Comment on the result. [6]

10. Explain why a natural monopoly might be publicly owned. [4]

11. Evaluate the view that privatising a state-owned monopoly always improves economic performance. [9]

12. Evaluate whether regulation of a privatised monopoly is better than deregulation of its market. [9]

Answers

1. Government intervention in the economy [1] leads to a misallocation of resources, so welfare is lower than it could be [1]. [2] Examiner insight: Credit goes to a definition that names the outcome, misallocation or lower welfare, and not merely a policy that “does not work”.

2. Both ban anti-competitive agreements such as cartels [1]. Both prevent abuse of a dominant position, or both review mergers that reduce competition [1]. [2] Examiner insight: A specification-level answer needs two distinct features. Naming the same idea twice in different words is weaker, and detailed legal cases are not needed.

3. (a) 3.5 − 1.5 = 2.0% [1]. (b) 80 × 1.02 = £81.60 [1]. (c) Permitted rise is 2.5 − 1.5 = 1.0%, so 81.60 × 1.01 = £82.42 [1]. (d) The regulator lacks full information about the firm’s true costs, so X may be too low and leave excess profit, or too high and squeeze investment [1]. [4] Examiner insight: Show the percentage rise before applying it to the price. In part (d), link the error to the information problem rather than just saying the regulator “makes a mistake”.

4. Value of profit stream = 18/0.04 = £450 million [1]. Sale price is £170 million below this [1]. Comment: the calculation assumes profit continues unchanged and that the discount rate is correct [1]. The state also gains cash now and may not match private efficiency, so a lower price is not conclusive [1]. [4] Examiner insight: A calculation followed by a bare number leaves comment marks unclaimed. Use the figures to make a judgement about the assumptions.

5. (a) Before: 35 + 25 + 15 = 75% [1]. After: merged firm is 40%, so 40 + 35 + 10 = 85% [1]. (b) Entry barriers may be low, so rivals can enter if prices rise [1]. The merger may produce cost savings or economies of scale passed on to consumers [1]. [4] Examiner insight: Naming a factor is weaker than saying what it does to price or choice. State the effect for each reason.

6. Total gain = 9 × 4 = £36 million [1]. Fine = 0.10 × 80 = £8 million [1]. Expected fine = 0.3 × 8 = £2.4 million, so net expected gain is £33.6 million [1]. Deterrence would improve with a larger fine linked to the length of the offence, a higher detection chance or personal penalties [1]. [4] Examiner insight: Compare like with like: the expected fine, not the full fine, is set against the gain. Name a specific change, not just “bigger penalties”.

7. (a) Q = (120 − 70)/2 = 25 thousand [1]. Consumer surplus = ½ × 25 × (120 − 70) = £625 thousand [1]. (b) MR = 120 − 4Q [1]. Setting MR = MC of 60 gives Q = 15 thousand [1]. P = 120 − 30 = £90 [1]. (c) Consumer surplus = ½ × 15 × (120 − 90) = £225 thousand [1]. Profit = (90 − 60) × 15 = £450 thousand, so total surplus = £675 thousand [1]. (d) Total surplus rises by £50 thousand but consumer surplus falls by £400 thousand and price rises by 28.6% [1]. A consumer-protection test blocks it, a total-surplus test allows it, and the cost saving is a forecast the firm has reason to overstate [1]. [9] Examiner insight: Part (d) gains credit for using your figures, stating whose welfare you count, and reaching a conclusion. A list of general pros and cons with no reference to the numbers is less convincing.

8. Payments = 12,000 × £500 = £6 million; with administration, cost = £7.5 million [1]. Extra trainees = 75% × 12,000 = 9,000 [1]. Benefit = 9,000 × £700 = £6.3 million, so net = 6.3 − 7.5 = −£1.2 million [1]. Sources: administrative costs, or deadweight from poor targeting caused by inadequate information [1]. [4] Examiner insight: The deadweight share must be removed before benefits are valued. Identify the source with reference to the scheme rather than listing all sources.

9. Market: 80 − Q = 20 + Q gives Q = 30 [1]. Social optimum: 90 − Q = 20 + Q gives Q = 35 [1]. With subsidy: 80 − Q = 20 + Q − 24 gives Q = 42 [1]. Without subsidy, at 30 social benefit is 60 and cost is 50, so loss = ½ × 10 × 5 = £25 thousand [1]. With subsidy, at 42 social benefit is 48 and cost is 62, so loss = ½ × 14 × 7 = £49 thousand [1]. The subsidy leaves society worse off than doing nothing, because of inadequate information, and it also costs £1,008 thousand [1]. [6] Examiner insight: For the welfare triangle, use the social curves at each output. Reading the private curves instead gives the wrong triangle.

10. Large fixed costs mean a single firm reaches the lowest average cost [1]. Competition would duplicate those costs [1]. A private monopolist would set price above marginal cost for profit [1]. A public owner can price closer to marginal cost, or serve all areas for social benefit [1]. [4] Examiner insight: A four-mark explanation is a chain of linked steps. Start with the cost structure and end with the outcome for consumers.

11. Argument for: profit motive and shareholder pressure cut costs [1], leading to lower unit cost and possibly price [1]. Sale revenue helps public finances [1]. Against: a private monopoly can raise price and cut output [1], so owners may capture the gain [1]. Underpricing the sale loses value [1]. Context: the effect depends on competition and regulation [1]. Judgement: gains are more likely with competition or a well-set cap [1], and it is not “always” [1]. [9] Examiner insight: “Always” invites a counter-example. Credit goes to answers that name the conditions under which the claim holds and reach a supported judgement.

12. Regulation: limits monopoly price [1] and protects quality [1]. Weakness: information gap, so caps are wrong [1] and compliance costs arise [1]. Capture: regulator dependent on firm information or staff moves between them, so rules favour the firm [1]. Deregulation: more entry, competition and lower costs [1], but only if natural monopoly features allow it [1] and safety may suffer [1]. Judgement: depends on entry barriers and the strength of safeguards [1]. [9] Examiner insight: A balanced answer compares the two options rather than describing each in turn. A conclusion that names the deciding condition is stronger than a statement that “it depends”.

Where marks are usually lost

• Defining government failure as “policy that does not work” with no mention of misallocation.
• Using the full fine instead of the expected fine when judging deterrence.
• Calculating consumer surplus from the wrong price or the wrong output.
• Treating a higher concentration ratio as proof of harm.
• Forgetting to remove deadweight or add administrative costs in net benefit.
• Listing regulation arguments with no chain from cause to effect.
• Ending with a vague “it depends” and no named condition.
• Using real-world figures from memory in place of those given.

Next steps

• Review the revision notes and the study guide.
• Check progress on the course hub and the printable checklist.
• Take the free 10-minute diagnostics to see which topics need work next.
• Prefer to talk answers through with a tutor? Book a free trial class.

Official syllabus

AQA, AS and A-level Economics specification (7135 and 7136), version 1.3, 29 June 2022, first teaching from September 2015: sections 3.1.8.7, 3.1.8.8 and 3.1.8.10 (printed as 4.1.8.7, 4.1.8.8 and 4.1.8.10 in the combined PDF).