Cambridge A Level Economics: Market-failure policies: taxes, subsidies, controls and quotas (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 the first part of section 8.1.1 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 8 is A Level content, not examined at AS. All markets and figures are invented; prices are in currency units (cu). Read the study guide first. See also the free diagnostics.

Questions

1. Distinguish between a specific tax and an ad valorem tax. [3]

2. In a market for garden gates, demand is Qd = 500 − 4P and supply is Qs = −160 + 6P.

(a) Calculate the equilibrium price and quantity. [2] (b) An ad valorem tax of 25% is added to the sellers’ price. Calculate the price sellers receive, the price buyers pay and the new quantity. [3] (c) Calculate the tax revenue and the amount of the tax borne by consumers. [3]

3. In a market for bicycle servicing, demand is Qd = 300 − 5P and supply is Qs = −60 + 7P. The government pays workshops a subsidy of 12 cu per service.

(a) Find the price and quantity with no subsidy. [1] (b) Calculate the price customers pay with the subsidy, and the new quantity. [2] (c) Work out what the subsidy costs the government. [1] (d) Calculate the gain to customers and the gain to workshops, and state which group benefits more. [2]

4. A market for portable heaters has these marginal values for each extra unit. Each unit causes an external cost of 14 cu.

Unit	1	2	3	4	5	6
Marginal private benefit	60	52	44	36	28	20
Marginal private cost	14	18	22	26	30	34

(a) State how many units the free market produces. [1] (b) Find the socially optimal number of units. [2] (c) State the specific tax that achieves it and calculate the welfare gain. [2] (d) Explain one reason why the tax may not be set correctly in practice. [1]

5. In a market for repair appointments, demand is Qd = 450 − 6P and supply is Qs = −90 + 6P. The government sets a maximum price of 35 cu.

(a) Find the price and quantity that the market would reach without the cap. [2] (b) Work out the size of the shortage. [2] (c) Calculate the price buyers would pay for the last appointment supplied. [1] (d) Explain one effect on the quality of service. [1]

6. In a market for a cheap strong drink, demand is Qd = 640 − 8P and supply is Qs = −80 + 12P. A minimum price of 42 cu is set.

(a) Find the free-market price and quantity. [1] (b) Find the quantity demanded at 42 cu and the percentage fall in consumption from the original equilibrium. [2] (c) Calculate the change in consumer spending. [2] (d) Comment on what your results suggest about the policy’s effectiveness. [1]

7. In a market for sea fish, demand is Qd = 720 − 6P and supply is Qs = −180 + 12P. A quota limits output to 360 tonnes.

(a) Calculate the free-market equilibrium price and quantity. [1] (b) Calculate the price buyers pay under the quota. [1] (c) Calculate the price at which suppliers would supply 360 tonnes and the total quota rent. [2] (d) Explain how a specific tax could produce the same output and who would receive the equivalent amount. [2]

8. A rail operator is a natural monopoly. Demand is P = 90 − Q, marginal cost is 10 cu and fixed cost is 700 cu, so average cost AC = 10 + 700 ÷ Q.

(a) Calculate the profit-maximising output and price. [2] (b) Calculate the profit. [2] (c) A regulator caps the price at average cost. Calculate the new output and price. [3] (d) Calculate the loss if price were capped at marginal cost and explain why a regulator may reject this cap. [2]

9. A council runs a free library. The yearly cost is 90,000 cu. It has 1,500 regular users, each gaining a benefit worth 70 cu a year.

(a) Calculate the total benefit. [1] (b) Calculate the benefit-cost ratio and the net benefit. [2] (c) Calculate the cost per user. [1] (d) Explain why a private firm might not supply the service. [2]

10. A town issues 80 market-stall licences at 1,250 cu each. Inspecting the stalls costs 62,000 cu.

(a) Calculate the licence revenue. [1] (b) Calculate the net revenue after inspection costs. [1] (c) Explain how a ban on a dangerous product would differ in its likely effects from a licence. [2] (d) Explain one disadvantage of capping the number of licences. [2]

11. Explain how deregulating a local bus market could change prices, output and service quality. [8]

12. A solvent used in factories imposes pollution costs on a nearby river. The market price is 60 cu a litre, and demand has a price elasticity of −0.4. Evaluate whether a specific tax of 12 cu, a production quota or a ban is the most suitable policy. [10]

Answers

1. A specific tax is a fixed sum per unit, such as 6 cu on each item [1]. An ad valorem tax is a fixed percentage of each sale’s value [1]. A specific tax shifts supply in parallel, whereas an ad valorem tax pivots supply because the tax per unit rises with the price [1]. [3] Examiner insight: A distinction compares both sides; two separate definitions leave the difference unstated.

2. (a) 500 − 4P = −160 + 6P, so 10P = 660 [1]. P = 66 and Q = 236 [1]. (b) Buyers pay 1.25Ps, so 500 − 5Ps = −160 + 6Ps [1]. Ps = 660 ÷ 11 = 60 [1]. Buyers pay 75 and Q = 500 − 300 = 200 [1]. (c) Tax per unit = 15 cu, so revenue = 15 × 200 = 3,000 cu [1]. Consumer burden = (75 − 66) × 200 [1] = 1,800 cu [1]. [8] Examiner insight: Substitute 1.25 times the sellers’ price into demand. Taking 25% of the equilibrium price gives a different, wrong tax.

3. (a) 300 − 5P = −60 + 7P, so P = 30 and Q = 150 [1]. (b) Qs = −60 + 7(P + 12) = 24 + 7P [1]. 300 − 5P = 24 + 7P gives P = 23, Q = 185 [1]. (c) Cost = 12 × 185 = 2,220 cu [1]. (d) Customers gain (30 − 23) × 185 = 1,295 cu. Workshops receive 35, so gain 5 × 185 = 925 cu [1]. Customers benefit more, as demand is less elastic than supply here [1]. [6] Examiner insight: Check that the two gains add to the cost.

4. (a) The market produces 4 units (36 against 26; unit 5 has 28 against 30) [1]. (b) Marginal social cost adds 14: 28, 32, 36, 40, 44, 48 [1]. Unit 3 passes (44 against 36) and unit 4 fails (36 against 40), so 3 units [1]. (c) Tax = 14 cu, equal to the marginal external cost [1]. Welfare gain = unit 4 costs society 40 for a benefit of 36 = 4 cu [1]. (d) Putting a value on the damage is difficult, so the rate may miss the true cost [1]. [6] Examiner insight: Compare marginal benefit with marginal social cost unit by unit.

5. (a) 450 − 6P = −90 + 6P, so 12P = 540 [1]. P = 45 and Q = 180 [1]. (b) At 35: Qd = 450 − 210 = 240 and Qs = −90 + 210 = 120 [1]. Shortage = 120 [1]. (c) Price on demand at 120 = (450 − 120) ÷ 6 = 55 cu [1]. (d) Providers may cut quality because buyers queue regardless [1]. [6] Examiner insight: Quantity traded is the lower figure, 120. Using the demand quantity there overstates sales.

6. (a) 640 − 8P = −80 + 12P gives P = 36 and Q = 352 [1]. (b) Qd at 42 = 640 − 336 = 304 [1]. Fall = 48 ÷ 352 = 13.6% [1]. (c) Before: 352 × 36 = 12,672 cu. After: 304 × 42 = 12,768 cu [1]. Spending rises by 96 cu [1]. (d) Price rises 16.7% and consumption falls 13.6%, so demand is inelastic (about −0.82), and the extra spending goes to sellers [1]. [6] Examiner insight: Link the numbers just calculated to elasticity.

7. (a) 720 − 6P = −180 + 12P, so P = 50 and Q = 420 [1]. (b) P = (720 − 360) ÷ 6 = 60 cu [1]. (c) Supply price = (360 + 180) ÷ 12 = 45 cu [1]. Rent = 15 × 360 = 5,400 cu [1]. (d) A specific tax of 15 cu per tonne gives buyers 60 and sellers 45, and output 360 [1]. The government would receive the 5,400 cu [1]. [6] Examiner insight: Say who gets the money.

8. (a) MR = 90 − 2Q = 10, so Q = 40 [1] and P = 50 [1]. (b) AC = 10 + 700 ÷ 40 = 27.5 [1]. Profit = (50 − 27.5) × 40 = 900 cu [1]. (c) 90 − Q = 10 + 700 ÷ Q gives Q² − 80Q + 700 = 0 [1]. Q = 70 or 10; take the larger root [1]. Q = 70, P = 20 [1]. (d) At P = 10, Q = 80 and the loss = fixed cost = 700 cu [1]. The state must fund it [1]. [9] Examiner insight: A quadratic gives two roots; say why the larger one is chosen.

9. (a) 1,500 × 70 = 105,000 cu [1]. (b) Ratio = 105,000 ÷ 90,000 = 1.17 [1]. Net benefit = 15,000 cu [1]. (c) 90,000 ÷ 1,500 = 60 cu [1]. (d) Benefits differ between users, so some would not pay a fee covering the cost [1]. Wider social benefits do not reach the firm as revenue [1]. [6] Examiner insight: A ratio above 1 supports provision, but add that some benefits are hard to value.

10. (a) 80 × 1,250 = 100,000 cu [1]. (b) 100,000 − 62,000 = 38,000 cu [1]. (c) A ban may push demand to a black market [1]. A licence keeps supply legal and lets the town set standards [1]. (d) A cap limits entry, so competition falls [1]. Prices may rise and new traders are shut out [1]. [6] Examiner insight: Give each disadvantage with its consequence.

11. Deregulation removes entry rules or fare controls [1]. New operators enter, so supply rises [1]. Competition may cut fares and costs [1]. Output rises on busy routes [1]. Firms may drop unprofitable routes [1]. Quality can fall if safety checks weaken [1]. The effect depends on how contestable the market is and on demand elasticity [1]. A conclusion weighs consumer gain against lost services [1]. [8] Examiner insight: Treat price, output and quality separately, then judge.

12. The solvent has a negative externality, so the market over-produces [1]. A 12 cu tax raises the price by 12 ÷ 60 = 20% if fully passed on [1]. With elasticity −0.4, quantity falls by about 20 × 0.4 = 8% [1]. Demand is inelastic, so the tax mainly raises revenue and reduces pollution only slightly [1]. A quota gives certainty about total output [1], but the rent goes to firms and allocation can be unfair [1]. A ban works only if enforced and may drive a black market [1]. The tax is flexible and its revenue could fund river clean-up [1]. A quota or larger tax suits better if the damage is severe [1]. A reasoned conclusion on the size of the external cost and enforcement is needed [1]. [10] Examiner insight: Reach a decision and state its condition; listing the three policies without choosing leaves the judgement incomplete.

Where marks are usually lost

• Treating an ad valorem rate as a percentage of the equilibrium price rather than of the sellers’ price.
• Mixing up the price buyers pay and the price sellers keep.
• Using the demand quantity when a price control binds, instead of the lower quantity traded.

Next steps

• Re-read the revision notes and the study guide.
• Use the course hub and checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

Cambridge International AS & A Level Economics (9708), syllabus for examination in 2026, 2027 and 2028, published by Cambridge International, section 8.1.1.