Cambridge A Level Economics: Permits, property rights, nudges, government failure (9708) – 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 part of section 8.1.1 and all of 8.1.2 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028: permits, property rights, nationalisation and privatisation, information, nudge theory and government failure. Topic 8 sits in the A Level part of the syllabus (topics 7 to 11), not AS. The countries, firms and numbers are made up, and money is in dollars. Revise first with the study guide or the revision notes. Course home: Cambridge A Level Economics. Progress tracker: checklist. Starting point: free diagnostics.

Questions

1. Define government failure. [2]

2. In Country P, three firms each emit 90 tonnes of waste a year. The government caps total emissions at 180 tonnes and gives each firm 60 tradable permits. Each tonne cut costs firm P 8, firm Q 5 and firm R 2. Firm R can cut at most 80 tonnes.

(a) Calculate the total cost of meeting the cap if no trading is allowed and each firm cuts the same amount. [2] (b) Calculate the total cost when permits are traded and the saving from trading. [3] (c) State the permit price that clears the market. [1]

3. Explain two reasons why a tradable permit scheme might not achieve an efficient allocation of resources. [4]

4. Shared pasture in Country S is open to all. Each cow costs 28 to keep for a season. Total milk value for herds of 1 to 6 cows is 50, 90, 120, 140, 150 and 150.

(a) Find the herd size under open access. Show your working. [3] (b) Find the efficient herd size. [2] (c) Calculate the loss of net value caused by open access. [2] (d) Explain how a clearly defined private property right would change the outcome. [2]

5. A state-owned bus company in Country T faces demand P = 60 - Q (Q in thousands of journeys), fixed cost 300 (thousand) and constant marginal cost 10.

(a) Find output, price and profit if the state prices at marginal cost. [2] (b) Find output, price and profit if the firm is privatised and maximises profit. [3] (c) Calculate the deadweight loss under the private monopoly. [2] (d) State one argument for privatisation despite your results. [1]

6. In Country U, monthly sales of a snack were 800,000 units. After a health-information campaign costing 360,000, sales were 752,000.

(a) Calculate the percentage fall in sales. [2] (b) Calculate the cost per unit of consumption avoided. [1] (c) Explain two reasons why information alone may not correct overconsumption. [2]

7. A school canteen moves fruit to eye level. Daily fruit sales rise from 120 to 156.

(a) Calculate the percentage increase. [2] (b) Explain why this is an example of a nudge. [2] (c) Explain two limitations of nudges. [2]

8. A firm has 5,000 workers. Under opt-in pension enrolment, 35% join. Under automatic enrolment, 80% remain.

(a) Calculate the extra members, the percentage increase in members and the percentage-point change. [3] (b) Explain why the default option changes behaviour. [2]

9. In Country V, the marginal abatement cost of cutting a pollutant is MAC = 3q and the marginal social benefit is MSB = 150 - 2q, where q is thousand tonnes cut. Net benefit equals total benefit minus total cost, which is 150q - q² - 1.5q².

(a) Find the efficient cut and the marginal cost at that point. [2] (b) The regulator orders a cut of 40. Calculate the net benefit at 30, at 40, and the welfare loss. [3] (c) Identify and explain a likely cause of this government failure. [2]

10. Explain two causes of government failure, with an example of each. [6]

11. The government of Country W plans to privatise a state-owned electricity grid that is a natural monopoly. Evaluate whether this is the best way to improve the use of resources. [10]

Answers

1. Government intervention in a market [1] that leads to a misallocation of resources, so the net welfare gain is smaller than it could be or becomes a net welfare loss, or that creates new problems [1]. [2] Examiner insight: answers that only say “the policy did not work” miss the comparison with a more efficient outcome, which the definition needs.

2. (a) Each firm cuts 90 - 60 = 30 tonnes [1]. Cost = 30 x 8 + 30 x 5 + 30 x 2 = 240 + 150 + 60 = 450 [1]. (b) Total cut needed is 90. R cuts its maximum, 80, at 2 = 160 [1]. Q cuts the remaining 10 at 5 = 50, and P cuts none [1]. Total 210, saving 450 - 210 = 240 [1]. (c) 5, the marginal cutter Q’s cost [1]. R sells 50 permits and P and Q buy 30 and 20. [6] Examiner insight: show the number cut by each firm so that your method is visible and easy to check.

3. Reason one: the regulator sets the cap with imperfect information [1], so it may be too loose or too tight and cost more than the benefit gained [1]. Reason two: free initial allocation favours existing polluters and may deter entry [1], while large firms may hoard permits to block rivals [1]. Other valid reasons: pollution clustering where permits are bought, and costly monitoring. [4] Examiner insight: the strongest answers tie each weakness to why efficiency is missed. Listing four brief weaknesses earns less than developing two.

4. (a) Revenue per cow = 50, 45, 40, 35, 30, 25 [1]. Cows enter while revenue per cow is at least 28 [1]. At 5 cows it is 30, at 6 cows 25, so 5 cows [1]. (b) Extra value from each cow: 50, 40, 30, 20, 10, 0 [1]. Third cow adds 30 > 28, fourth adds 20 < 28, so 3 cows [1]. (c) Net value at 3 cows = 120 - 84 = 36 [1]. At 5 cows = 150 - 140 = 10. Loss = 26 [1]. (d) One owner, or a rights system, bears the cost each extra cow imposes on others through lower output per cow [1], so the herd is limited where extra value equals cost [1]. [9] Examiner insight: separate revenue per cow from extra value. Using one column for both gives one herd size and loses the contrast the question tests.

5. (a) MC pricing: 60 - Q = 10, so Q = 50, P = 10 [1]. Profit = 0 x 50 - 300 = -300 [1]. (b) MR = 60 - 2Q = 10, so Q = 25 [1]. P = 60 - 25 = 35 [1]. Profit = (35 - 10) x 25 - 300 = 325 [1]. (c) DWL = 1/2 x (35 - 10) x (50 - 25) [1] = 312.5 [1]. (d) For example: the firm has an incentive to cut costs, or the state avoids a subsidy of 300 [1]. [8] Examiner insight: use marginal revenue, not demand, when finding the profit-maximising output. The triangle needs the gap between price and marginal cost, not the profit.

6. (a) Fall = 800,000 - 752,000 = 48,000 [1]. 48,000 / 800,000 = 6% [1]. (b) 360,000 / 48,000 = 7.50 [1]. (c) Addicted or present-biased consumers may ignore it [1]. Its effects may fade over time [1]. (Also valid: it does not reduce harm to third parties.) [5] Examiner insight: cost per unit avoided divides the cost by the change in units, not by total sales.

7. (a) Rise = 36 [1]. 36 / 120 = 30% [1]. (b) It changes the choice architecture, how options are presented [1] while no option is banned and the price is unchanged [1]. (c) The effect may be small or temporary [1]. It cannot tackle large external costs on its own [1]. (Also valid: it may be seen as manipulation.) [6] Examiner insight: tie “nudge” to the unchanged price and open choice. Describing the move as encouragement alone earns little.

8. (a) Members rise from 1,750 to 4,000, extra 2,250 [1]. 2,250 / 1,750 = 128.6% [1]. Percentage points: 80 - 35 = 45 [1]. (b) People tend to stick with the default option because of inertia [1], and leaving needs effort, so most stay [1]. [5] Examiner insight: percentage change and percentage-point change are different answers. Giving both, labelled, prevents confusion.

9. (a) 3q = 150 - 2q, so q = 30 [1]. MAC = 90 [1]. (b) Net benefit at 30 = 4,500 - 900 - 1,350 = 2,250 [1]. At 40 = 6,000 - 1,600 - 2,400 = 2,000 [1]. Welfare loss = 250 [1]. (c) Imperfect information [1]: the regulator overestimated the marginal social benefit or underestimated abatement costs, so ordered too large a cut [1]. [7] Examiner insight: the efficient point is where MAC equals MSB. A larger cut adds more to cost than to benefit, so overshooting lowers net benefit.

10. Imperfect information: a regulator sets a cap or tax at the wrong level [1], for example ordering a cut whose cost exceeds its benefit [1], which wastes resources [1]. Political pressure: ministers favour visible short-term measures or yield to lobbying [1], for example protecting a vocal industry rather than the most valuable use of resources [1], which misallocates resources [1]. Also accept administrative cost, unintended consequences and regulatory capture. [6] Examiner insight: name a mechanism for each cause. A list of causes with no example reads as a definition.

11. A natural monopoly has high fixed costs, so one firm serving the market is efficient [1]. Privatisation alone leaves the monopoly [1], so the owner can raise price and cut output [1], causing deadweight loss [1]. The profit motive may cut costs [1], but the gain only matters if savings exceed the welfare loss [1]. The sale raises revenue and ends any subsidy [1]. State ownership may bring political interference and weak cost control [1], though it may price nearer marginal cost [1]. Judgement: the answer depends on how far competition or the design of the sale limits market power, and on how large the cost falls are [1]. [10] Examiner insight: a verdict that turns on a stated condition gains more than a one-sided list.

Where marks are usually lost

• Calculating costs without showing the cut by each firm.
• Setting the permit price without reference to the marginal cutter.
• Using average revenue instead of marginal revenue to find the efficient number.
• Confusing percentage change with percentage-point change.
• Treating nudges as bans or taxes.
• Treating privatisation as a cure without discussing market structure.
• Calling any bad outcome government failure without a comparison with a more efficient outcome.
• Evaluation that is generic rather than tied to the context.

Next steps

• Review the revision notes and the study guide.
• Visit the course hub and the checklist.
• Take the free diagnostics.
• Or book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, Cambridge University Press & Assessment. Sections covered: 8.1.1 (pollution permits, property rights, nationalisation and privatisation, provision of information, behavioural insights and nudge theory) and 8.1.2.