Cambridge O Level Economics: Market failure: public, merit and demerit goods and externalities (2281) – 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 test section 2.10 (Market failure) of the 2026 examination syllabus for Cambridge O Level Economics (2281): terms, causes and consequences. The syllabus is not tiered, and no diagrams are needed. All people, places and figures are invented, and money is in dollars. Learn the content from the study guide and the revision notes. Course pages: the subject hub and the checklist. Unsure where to begin? Use the free diagnostics.

Questions

1. Define a public good and explain the free rider problem. [3]

2. A small laundry in Country D has a private cost of 52 per unit. Its chemical discharge into a stream is an external cost of 13 per unit. It makes 800 units a month.

(a) Calculate the social cost per unit. [1] (b) Calculate the total monthly external cost. [1] (c) Calculate the external cost as a percentage of social cost. [1]

3. State whether each is best described as a public good, merit good, demerit good or a good with an external cost, and give a reason. [4] (i) A national defence force. (ii) Primary schooling. (iii) Tobacco. (iv) A noisy generator at a building site.

4. Adult first-aid courses cost 25 per course. A learner values the course at 20, but the true private benefit is 35, and employers gain an external benefit of 12.

(a) Calculate the social benefit of the course. [1] (b) Explain why the learner does not buy it. [2] (c) Calculate the net social gain if the course is bought. [1] (d) State the consequence for consumption. [1]

5. Before a rival depot closed, gas cylinders on Island I sold for 12 each, with 2,000 sold a week. Now one supplier remains: the price is 15 and sales fall to 1,500. Each cylinder costs 9 to supply.

(a) Calculate the percentage change in the price. [1] (b) Calculate weekly profit before and after the rival depot closed. [2] (c) Explain why this is market failure. [2]

6. In Region R a sugar plant closes and 600 workers lose their jobs. The labour force is 12,000 and 480 were unemployed before.

(a) Calculate the unemployment rate before and after the closure. [2] (b) Distinguish occupational from geographical immobility. [2] (c) Explain why immobility is a market failure. [2]

7. In a town the market buys 700 units a week of Good G, a demerit good. The socially best quantity is 500 units.

(a) Calculate the over-consumption as a number and as a percentage of the best quantity. [2] (b) Explain why consumers over-consume a demerit good. [2] (c) Explain the consequence for resource allocation. [2]

8. Explain why a private market is likely to supply too few basic eye tests. [6]

9. A sawmill in Country E sells 10,000 tonnes of timber a year at 18 per tonne, equal to its private cost. Noise and sawdust impose an external cost of 6 per tonne on neighbours.

(a) Calculate total private cost, total external cost and total social cost. [3] (b) Explain why the noise and sawdust are an external cost. [2] (c) Explain the consequence for the quantity of timber sold. [3]

10. Town P has 2,400 households. A mosquito spraying programme costs 72,000 and each household values it at 50.

(a) Calculate the equal cost share per household, the total benefit and the net benefit. [3] (b) Explain why a profit-seeking firm would not supply the programme. [3] (c) Only 300 households volunteer to pay the equal share. Calculate the percentage of the cost raised. [2] (d) State one consequence of this outcome. [1]

11. In a coastal region of Country A, a fertiliser plant makes 6,000 tonnes a year at a private cost of 45 per tonne, with river damage of 15 per tonne. Separately, a fishing decline puts 300 workers out of work. The labour force is 6,000 and 300 were unemployed before. There are 120 vacancies in port construction needing new skills and 90 in a distant city.

(a) Calculate the total external cost and its share of social cost. [2] (b) Calculate the unemployment rate after the job losses, and again if 120 workers retrain and fill the construction vacancies. [2] (c) Evaluate whether external costs or factor immobility is the more serious problem for the region. [8]

Answers

1. A public good is non-excludable, so non-payers cannot be stopped from using it [1], and non-rival, so one person’s use does not reduce what others can use [1]. Free riders enjoy the good without paying, so firms cannot earn revenue and do not supply it [1]. [3] Examiner insight: Defining a public good by who provides it misses the point; state both features, non-excludable and non-rival, in your own words.

2. (a) 52 + 13 = 65 [1]. (b) 13 x 800 = 10,400 [1]. (c) 13 / 65 x 100 = 20% [1]. Examiner insight: Show the working beside each answer; the percentage must use social cost, not private cost, as the base.

3. (i) Public good, since it protects everyone and cannot exclude non-payers [1]. (ii) Merit good, since people undervalue education and society gains [1]. (iii) Demerit good, since users underestimate the harm [1]. (iv) Good with an external cost, since neighbours bear noise they did not choose [1]. [4] Examiner insight: Follow every label with a reason, and note that a generator is an external cost, not a demerit good, because the harm falls on others.

4. (a) 35 + 12 = 47 [1]. (b) The learner decides on the perceived value of 20 [1], which is below the price of 25, so they do not buy [1]. (c) 47 - 25 = 22 [1]. (d) Under-consumption [1]. Examiner insight: Part (b) needs the learner’s own view compared with the price; quoting the social benefit there is a common slip.

5. (a) (15 - 12) / 12 x 100 = 25% [1]. (b) Before: (12 - 9) x 2,000 = 6,000 [1]. After: (15 - 9) x 1,500 = 9,000 [1]. (c) A sole supplier can raise the price and cut sales [1], so buyers lose cylinders they value above cost and resources are not used where buyers want them [1]. [5] Examiner insight: Profit rising while sales fall is the evidence of abuse of monopoly power, so use both numbers in your explanation.

6. (a) Before: 480 / 12,000 = 4% [1]. After: (480 + 600) / 12,000 = 1,080 / 12,000 = 9% [1]. (b) Occupational: workers lack the skills for new jobs [1]. Geographical: workers cannot or will not move to where jobs are [1]. (c) Labour is idle while vacancies exist elsewhere [1], so a factor of production is not in its best use, which is a misallocation [1]. Examiner insight: Define each type of immobility separately and then link to idle resources; a vague “they can’t get jobs” does not show the market failure.

7. (a) 700 - 500 = 200 units [1]; 200 / 500 x 100 = 40% [1]. (b) Consumers underestimate the harm to themselves [1] and ignore harm to others, so they judge only private benefit [1]. (c) Too many resources go into Good G [1], so other goods with greater social benefit are under-produced [1]. [6] Examiner insight: The base for the percentage is the best quantity named in the question, so check which figure the wording asks you to divide by.

8. Eye tests are a merit good [1]. People undervalue the benefit of finding problems early [1]. There are external benefits, such as fewer accidents on the road [1]. Buyers weigh only their own view [1], so consumption is below the social best [1] and resources are under-used on something that would raise welfare [1]. [6] Examiner insight: Strong answers name the good type, give a specific external benefit, and finish with a consequence for resources rather than stopping at “people don’t buy it”.

9. (a) Private: 10,000 x 18 = 180,000 [1]. External: 10,000 x 6 = 60,000 [1]. Social: 180,000 + 60,000 = 240,000 [1]. (b) Noise and sawdust fall on neighbours, not the sawmill [1], and they receive no compensation [1]. (c) The sawmill counts only 18 per tonne, so the price is below the social cost of 24 [1], so too much timber is bought [1], and resources are over-allocated to it, harming others [1]. [8] Examiner insight: Compare price with social cost per tonne and not just the total; that comparison shows why over-consumption occurs.

10. (a) 72,000 / 2,400 = 30 [1]. Total benefit 2,400 x 50 = 120,000 [1]. Net benefit 120,000 - 72,000 = 48,000 [1]. (b) Non-payers cannot be excluded [1], so households wait for others to pay [1], and the firm cannot earn enough revenue [1]. (c) 300 x 30 = 9,000 [1]; 9,000 / 72,000 x 100 = 12.5% [1]. (d) The programme is not provided, so the net benefit of 48,000 is lost [1]. [9] Examiner insight: Use the term free rider in part (b) and link it to revenue, not just “nobody wants to pay”.

11. (a) External cost 15 x 6,000 = 90,000 [1]. Share 15 / (45 + 15) x 100 = 25% [1]. (b) After: (300 + 300) / 6,000 = 10% [1]. After retraining: 480 / 6,000 = 8% [1]. (c) External costs: the river damage of 90,000 a year is ignored by the plant, so too much fertiliser is produced and other users of the river lose [2]. Immobility: unemployed workers lack skills for the 120 vacancies and cannot move to the other 90, so labour is idle [2]. Judgement points: the plant harm repeats every year, but immobility can be reduced by retraining [1]; immobility falls on 480 workers, a clear 8% of the labour force, while the river harm is harder to measure [1]. A balanced conclusion with a reason, such as that the answer depends on how long the damage lasts and whether retraining works [2]. [8] Examiner insight: Weigh both problems against a stated criterion, such as scale or permanence, and close with a judgement you have supported.

Where marks are usually lost

• Leaving out non-excludable or non-rival from a public good definition.
• Calling a good “public” because the state runs it.
• Labelling harm to third parties as a demerit good.
• Giving only a label for a classification with no reason.
• Using the new figure instead of the original as the base for a percentage.
• Mixing up private cost with social cost in totals.
• Saying a merit good “is not bought” instead of “is under-consumed”.
• Describing government policy instead of the cause or consequence asked for.
• Finishing an evaluation without a verdict.

Next steps

• Book a free trial class if you want a teacher to go through your weak points.
• Revisit the study guide for any question you missed, then the revision notes.
• Tick progress on the printable checklist and return to the subject hub.
• Take all the free 10-minute diagnostics.

Official syllabus

Source: Cambridge International, Cambridge O Level Economics (2281), examination year 2026, version 2, section 2.10 headed Market failure.