AQA A-level Economics: Public goods and externalities (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), A-level sub-sections 3.1.8.3 Public goods, private goods and quasi-public goods and 3.1.8.4 Positive and negative externalities in consumption and production (4.1.8.3 and 4.1.8.4 in the combined PDF). Prepare with the study guide and revision notes. The hub is AQA A-level Economics, with a printable checklist and free 10-minute diagnostics. All countries, firms and figures are invented.

Questions

1. Classify each good as a pure public good, a private good, a common resource or a quasi-public good, giving a reason. (a) National defence. [1] (b) A ticketed stadium concert. [1] (c) The fish stock of an unowned sea. [1] (d) A road with no toll, which is rarely congested. [1]

2. Island B has four households. Each values a sea wall at 40. Building it costs 100.

(a) Calculate the net social benefit of building the wall. [2] (b) Show why no single household will build it alone. [2] (c) Explain the free-rider problem in this context. [2]

3. A bridge has no toll and is quiet most of the day.

(a) Explain why it is close to a pure public good. [2] (b) Explain two changes that would make it a quasi-public good. [2]

4. On a village common, the total milk value (in £) from c cows is 60c - 3c². Keeping a cow costs 18 a month.

(a) Find the number of cows when anyone can add a cow whenever the average value covers the cost. [2] (b) Calculate the net gain at that number. [1] (c) Find the number of cows that maximises the net gain to the village. [2] (d) Calculate the net gain at that number. [2] (e) Explain why herders add cows beyond that number. [3]

5. A quarry in Country C sells stone. Quantity is in thousands of tonnes and values are in £ per tonne. MPB = 52 - 4Q and MPC = 10 + 2Q. The quarry’s dust imposes an external cost of 12 per tonne.

(a) State the output and price in the unregulated market. [2] (b) State the output and price at the social optimum. [2] (c) Calculate the external cost at the market output. [1] (d) Calculate the welfare loss. [2] (e) Explain why the market over-produces. [2]

6. Householders in a town repaint their house fronts. Quantity is in thousands of jobs and values are in £ per job. MPB = 30 - 2Q and MPC = 6 + 2Q. Neighbours gain an external benefit of 8 per job.

(a) Find the market quantity and price. [2] (b) Find the socially optimal quantity and price. [2] (c) State the under-consumption. [1] (d) Calculate the welfare gain from correcting it. [2] (e) Explain why the market under-consumes. [1]

7. State the type of externality and the curve that diverges in each case. (a) A firm releases fumes that harm nearby residents. (b) A resident plays loud music late at night. (c) A firm trains staff who later move to rivals. (d) A resident fits a security light that deters crime in the street. [4]

8. A chemical plant discharges waste into a river that nobody owns.

(a) Explain why the absence of property rights leads to an externality and market failure. [4] (b) Explain how giving a single owner the rights to the river could change the plant’s behaviour. [2]

9. Three households value flood sirens as follows (£, marginal benefit of siren 1 to 4). Household X: 36, 24, 12, 6. Household Y: 30, 18, 9, 3. Household Z: 24, 15, 6, 3. Each siren costs 20.

(a) Calculate the marginal social benefit of each siren and explain your method. [2] (b) State the efficient number of sirens. [1] (c) Find how many X would buy alone. [2] (d) Calculate the welfare loss from under-provision. [2] (e) Explain why Y and Z would not contribute. [1]

10. Evaluate whether the tragedy of the commons can only be avoided by giving one owner the resource. [9]

11. Assess whether technological change has reduced the importance of public goods as a cause of market failure. [9]

Answers

1. (a) Pure public good: non-rival and non-excludable [1]. (b) Private good: rival and excludable by ticket [1]. (c) Common resource: rival, as fish caught are gone, but no one can be excluded [1]. (d) Quasi-public: non-rival when uncongested and non-excludable without a toll, but congestion or tolling would change that [1]. [4] Examiner insight: A label without a reason is weak; name rivalry and excludability for each good.

2. (a) Total benefit 4 × 40 = 160 [1]; net = 160 - 100 = 60 [1]. (b) One household gains 40 but pays 100 [1], a net loss of 60, so none builds it alone [1]. (c) Each household benefits whether or not it pays, because no one can be excluded [1]. So each waits for another to pay, nobody does, and the wall is not built even though society would gain 60 [1]. [6] Examiner insight: Quote 160 against 100 rather than describing free riders in general.

3. (a) Quiet, so one vehicle does not reduce others’ use: non-rival [1]. No toll or barrier, so non-payers cannot be stopped: non-excludable [1]. (b) Congestion at busy times makes it rival [1]. Camera-based tolling makes it excludable [1]. [4] Examiner insight: Tie each change to a characteristic; “it gets busy” alone does not say what has changed.

4. (a) Average value = 60 - 3c = 18, so c = 14 [2]. (b) Value = 840 - 588 = 252; cost = 14 × 18 = 252; net gain = 0 [1]. (c) Marginal value = 60 - 6c = 18, so c = 7 [2]. (d) Value = 420 - 147 = 273; cost = 7 × 18 = 126; net = 273 - 126 = 147 [2]. (e) Each herder gains the average value of an extra cow [1] but ignores the fall in milk from everyone else’s cows caused by crowding [1], so the private gain exceeds the social gain until the net gain falls to zero [1]. [10] Examiner insight: Distinguish average from marginal: using average value for part (c) gives 14 again.

5. (a) 52 - 4Q = 10 + 2Q, so 42 = 6Q, Q = 7 [1]; P = 52 - 28 = 24 [1]. (b) MSC = 22 + 2Q; 52 - 4Q = 22 + 2Q, so Q = 5 [1]; P = 52 - 20 = 32 [1]. (c) 12 × 7 = 84, i.e. £84,000 [1]. (d) At Q = 7, MSC = 36 and MPB = 24, a gap of 12 [1]; welfare loss = ½ × (7 - 5) × 12 = 12, i.e. £12,000 [1]. (e) Producers count only MPC, ignoring the 12 of dust cost [1]. So they supply where MPB = MPC, beyond the point where MSC equals MPB [1]. [9] Examiner insight: Shade the triangle between the market and social outputs, not from zero.

6. (a) 30 - 2Q = 6 + 2Q, so Q = 6 [1]; P = 18 [1]. (b) MSB = 38 - 2Q; 38 - 2Q = 6 + 2Q, so Q = 8 [1]; P = 6 + 16 = 22 [1]. (c) 8 - 6 = 2 thousand [1]. (d) At Q = 6, MSB = 26 and MPC = 18, a gap of 8 [1]; gain = ½ × 2 × 8 = 8, i.e. £8,000 [1]. (e) Households ignore the benefit to neighbours, so MSB lies above MPB and consumption stops too soon [1]. [8] Examiner insight: Check that MSB lies above MPB for a positive externality; subtracting the benefit is a common slip.

7. (a) Negative production externality; MSC above MPC [1]. (b) Negative consumption externality; MSB below MPB [1]. (c) Positive production externality; MSC below MPC [1]. (d) Positive consumption externality; MSB above MPB [1]. [4] Examiner insight: Give both the type and the curve; one alone leaves the answer half done.

8. (a) Nobody owns the river, so no one has the legal power to stop the plant or charge for dumping [1]. The plant pays nothing for the damage, so the cost falls on downstream users [1]. MPC is therefore below MSC, so output is higher than the social optimum [1]. Resources are misallocated, which is market failure [1]. (b) An owner could charge or sue for damage [1], so the plant would face the cost and reduce output or waste towards the efficient level [1]. [6] Examiner insight: Finish the chain at misallocation, not at “so pollution”.

9. (a) Add the three benefits at each siren: 90, 57, 27, 12 [1]. Public good, so sum vertically [1]. (b) Sirens 1 to 3 have MSB of at least 20; siren 4 (12) does not: 3 [1]. (c) X alone buys while own benefit is at least 20: 36 and 24 qualify, 12 does not [1], so 2 [1]. (d) The missing third siren has MSB 27 against cost 20 [1], so the loss is 27 - 20 = 7 [1]. (e) They can enjoy X’s sirens without paying [1]. [8] Examiner insight: Sum across households at each quantity, not across sirens.

10. The tragedy occurs because no one owns the resource, so each user ignores the harm to others [1] and use rises past the efficient level, as in a fishery where entry continues until net gain is zero [1]. A single owner bears all the costs of over-use, so would limit use to the level where marginal gain equals marginal cost [1] and could charge for access [1]. But a single owner is not the only answer. Communities can agree and enforce rules among themselves [1], especially where users know each other [1]. Single ownership may be hard to apply to the atmosphere or oceans, which cross borders [1], and private owners may exclude poorer users [1]. Judgement: single ownership suits small resources with clear boundaries; for large or cross-border resources, shared rules are likely to be needed [1]. [9] Examiner insight: A conclusion naming the conditions under which each approach works is stronger than a repeat of earlier points.

11. Technology has made some goods excludable: coded signals let broadcasters charge viewers [1], and camera tolling lets a road owner charge [1]. Firms can then earn revenue, so private supply becomes profitable and the free-rider problem shrinks [1]. But national defence, flood defences and street lighting remain non-excludable [1], so their under-provision remains. Technology may also weaken exclusion, as with unpaid copying of digital files [1]. Excluding people from a non-rival good wastes benefit, since the extra user costs nothing [1], so charging may reduce welfare even when it makes provision profitable [1]. Judgement: technology has moved many goods into the quasi-public group, but the core examples remain, so public goods stay an important though narrower cause of market failure [2]. [9] Examiner insight: A balanced answer sets a specific example on each side, such as broadcasting against defence.

Where marks are usually lost

• Calling a good “public” because the government supplies it.
• Defining a free rider without saying why no payment results.
• Using average rather than marginal values to find the social optimum of a common resource.
• Adding public-good benefits across quantities instead of across users.
• Moving the wrong curve for a production externality.
• Stating that property rights are missing without explaining the link to misallocation.
• Finishing an evaluation by repeating points instead of judging.

Next steps

• Recap with the revision notes or the study guide.
• Go to the AQA A-level Economics hub and the checklist.
• Take all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

AQA AS and A-level Economics specification, version 1.3 (29 June 2022), published by AQA: A-level sub-sections 3.1.8.3 and 3.1.8.4 (4.1.8.3 and 4.1.8.4 in the combined PDF).