AQA GCSE Economics: Market failure, externalities and intervention (8136) – 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 cover sections 3.1.6.1 and 3.1.6.2 of the AQA GCSE Economics (8136) specification for first teaching from September 2017. All places, firms and figures are invented for illustration. Read the study guide first, or use the revision notes for recall. The course pages are the AQA GCSE Economics hub and the checklist, and the free diagnostics help you choose what to practise.

Questions

1. Define the term market failure. [2]

2. A small bakery in a made-up town has a private cost of £0.80 per loaf. Smoke from its oven costs neighbours £0.20 per loaf. It bakes 5,000 loaves a week. Calculate the social cost per loaf and the total weekly external cost. [3]

3. For each situation, state whether it is a positive or negative externality, and whether it arises from production or consumption.

(a) Dust from a quarry settles on nearby farms. (b) A firm pays for apprentices’ training and other local firms later hire some of them. (c) Fans leave litter in the streets after a match. (d) A person has a flu jab and so is less likely to pass flu to colleagues. [4]

4. In Town Z, producing a tonne of chemicals has a private cost of £50. The external cost is £18 per tonne. Output is 600 tonnes a month.

(a) Calculate the social cost per tonne. [1] (b) Work out the total external cost each month. [1] (c) Express the external cost as a percentage of the social cost, to 1 decimal place. [2]

5. Explain two costs to society of a misallocation of resources. [4]

6. A firm’s private cost is £40 per unit and its external cost is £15 per unit. It makes 800 units. Explain why the market is likely to produce too much of this good, and state the total external cost. [4]

7. A tram line in a made-up city gives each rider a private benefit of £9 a trip. Because roads are less crowded, other people gain an external benefit of £3 per trip. There are 8,000 trips a month.

(a) Calculate the social benefit per trip. [1] (b) Calculate the total external benefit each month. [1] (c) Explain why the market is likely to provide too few trips. [3]

8. A government puts a tax of £5 per unit on a good. Before the tax the price was £14 and 9,000 units were sold. After the tax the price paid by buyers is £16.50 and 7,200 units are sold.

(a) Calculate how much of the tax each unit is paid by buyers, and how much by producers. [2] (b) Calculate the percentage fall in quantity sold. [2] (c) Calculate the government’s revenue from the tax. [1] (d) State what must be true of the good for this tax to improve the allocation of resources. [1]

9. The government of a made-up country gives a subsidy of £3 per unit for 1,200 units of a service that has a positive externality.

(a) Calculate the total cost of the subsidy. [1] (b) Explain how the subsidy affects the price and the quantity of the service. [2] (c) Explain one problem with using a subsidy. [2]

10. A river is polluted by factories. Compare a tax on each unit of output with a limit on the amount of waste that each factory may release, and decide which is better. [8]

11. Four food vans operate near a stadium in a made-up town. Each van sells 3,000 meals a month. Packaging from each meal causes litter that costs the council £0.15 to clear.

(a) Calculate the total monthly external cost of the litter. [2] (b) The council introduces a charge of £0.15 per meal. Explain how this could improve the allocation of resources. [3] (c) Evaluate whether a charge is the best way for the council to deal with the litter. [4]

Answers

1. Market failure is the inability of the market system [1] to allocate resources efficiently, so there is misallocation [1]. [2] Examiner insight: Answers that say only “the market fails” or “prices are too high” repeat the term and show no understanding. Naming resource allocation is the idea the definition needs.

2. Social cost = private cost + external cost [1] = 0.80 + 0.20 = £1.00 per loaf [1]. External cost = 0.20 × 5,000 = £1,000 a week [1]. [3] Examiner insight: Show the addition and the multiplication as separate lines, and put the pound sign on both answers. A bare number with no unit loses clarity.

3. (a) Negative, production [1]. (b) Positive, production [1]. (c) Negative, consumption [1]. (d) Positive, consumption [1]. [4] Examiner insight: Each part needs both labels. Ask who causes the effect (the producer or the consumer), and then whether the third party is helped or harmed.

4. (a) 50 + 18 = £68 [1]. (b) 18 × 600 = £10,800 [1]. (c) 18 ÷ 68 [1] × 100 = 26.5% [1]. [4] Examiner insight: For a percentage, divide by the right base. The base here is social cost, not private cost, and the question says where to round.

5. Any two costs, each with an explanation, 2 marks each. For example: resources are wasted [1] because land, labour and capital used for over-produced goods could have made something worth more, so the opportunity cost is a better use forgone [1]. Third parties suffer harm such as pollution or ill health [1] and nobody pays for it through the price [1]. Other acceptable answers include too little of a beneficial good being provided, and public money spent on clean-up that cannot be used elsewhere. [4] Examiner insight: Naming a cost earns less than explaining it. Say who loses and what they lose, and use the word opportunity cost where it fits.

6. The firm counts only its private cost of £40 [1], but the true cost to society is £55 because of the £15 external cost [1]. The price is therefore too low, so more is produced than is best for society [1]. Total external cost = 15 × 800 = £12,000 [1]. [4] Examiner insight: Link the reasoning in order: cost ignored, price too low, output too high. A bare statement of “over-production” with no chain gets less credit.

7. (a) 9 + 3 = £12 [1]. (b) 3 × 8,000 = £24,000 [1]. (c) Riders consider only their own benefit of £9 [1], so demand is lower than the benefit to society of £12 [1]. Fewer trips are bought than is best for society, so the market provides too few [1]. [5] Examiner insight: Direction matters. A positive externality leads to under-provision, and a mix-up with the negative case is an easy way to lose several marks at once.

8. (a) Buyers pay 16.50 − 14 = £2.50 of the tax [1], so producers pay 5 − 2.50 = £2.50 [1]. (b) (9,000 − 7,200) ÷ 9,000 [1] × 100 = 20% [1]. (c) 5 × 7,200 = £36,000 [1]. (d) The good has a negative externality, and the tax is close to the size of the external cost per unit [1]. [6] Examiner insight: In (a), the change in the buyers’ price is the buyers’ share. Compare the price after the tax with the price before it, and give the producers’ share as the remainder.

9. (a) 3 × 1,200 = £3,600 [1]. (b) The subsidy lowers the cost of supplying each unit, so supply increases [1]. The price falls and the quantity rises [1]. (c) Any one problem, with an explanation: it costs taxpayers £3,600 [1], and that money has an opportunity cost because it could be spent on something else [1]. Alternatives are that the external benefit may be measured wrongly, or that the producer may keep the subsidy as extra profit. [5] Examiner insight: A problem with no consequence is a weaker point. “It costs money” improves when you say whose money it is and what else it could do.

10. Tax: makes the polluter pay for each unit, raising cost [1], so supply falls and output falls [1]. Firms keep the freedom to choose how to cut costs, and the government gains revenue [1]. The tax needs the external cost to be estimated well, and firms may pass it on to consumers [1]. Limit: sets a maximum that every factory must meet, backed by fines [1]. It gives a more certain result when the harm is serious [1], but it is less flexible and gives no income, and policing it costs money [1]. Judgement: a reasoned choice that depends on context, such as a limit where the pollution is dangerous and a tax where harm rises steadily with output, supported by one reason [1]. [8] Examiner insight: A comparison earns more when each method is set against the other on the same point, such as certainty, flexibility or revenue. A final choice with no reason attached is less convincing.

11. (a) 0.15 × 3,000 = £450 per van [1]. × 4 = £1,800 a month [1]. (b) The price of a meal does not include the litter cost, so social cost is above private cost [1]. A charge of £0.15 adds the external cost to the cost of each meal [1]. Prices rise, fewer meals and less packaging are sold, and output moves towards the level that is best for society [1]. (c) For the charge: it makes those who cause the litter pay [1] and it raises revenue that can pay for clearing it [1]. Against: the council needs to be sure that £0.15 is the right figure [1], and vans might move or customers might litter elsewhere [1]. Close with a short judgement, such as that the charge suits this case if the litter cost is measured well. [9] Examiner insight: For an evaluation part, give points on both sides and then a short decision. Referring to the stadium and the vans keeps the points about this case, not about any charge.

Where marks are usually lost

• Defining an externality as any cost to a firm, rather than a cost or benefit to a third party.
• Writing that a negative externality leads to under-production.
• Calculating a percentage with the wrong base.
• Giving no unit, or giving a result such as 1,000 without saying it is £1,000 a week.
• Saying a tax removes pollution, when it reduces output.
• Naming an intervention but not explaining how it changes cost, price or quantity.
• Evaluating by repeating the explanation, with no limit, cost or alternative.
• Leaving out the opportunity cost of public money.

Next steps

• Revision notes
• Study guide
• AQA GCSE Economics hub
• Checklist
• All free 10-minute diagnostics
• Book a free trial class: /trial/

Official syllabus

AQA, GCSE Economics (8136) specification, for first teaching from September 2017, sections 3.1.6.1 and 3.1.6.2.