IB DP Economics: Public goods and asymmetric information – 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 – the IB holds copyright in its own papers. Use these alongside the official past papers available through your school or the IB store.

This set follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. Questions 1 to 6 cover sub-topic 2.9, public goods (SL and HL). Questions 7 to 11 cover sub-topic 2.10, asymmetric information, which is HL only and is labelled as such. Every place, firm and figure here is made up.

Revise first with the study guide or the revision notes. Related unit: the role of government. Course links: the IB DP Economics hub and the printable checklist. Real answers to evaluation questions are judged against IB markbands, so the [1] points below are a revision aid.

Questions

1. State what is meant by a non-rivalrous good and a non-excludable good. [2]

2. Classify each good as a public good or a private good, with a reason. (i) A radio weather signal from a hilltop mast that any radio can receive. (ii) A seat at a ticketed concert. (iii) A sea wall that defends one entire bay. [3]

3. (calculator allowed) The fictional village of Harrowby has 90 households. A shared drainage-alert system costs 2,250 veldors. Each household values it at 36 veldors. (a) Show that building it gives a net benefit to society of 990 veldors. [2] (b) A private firm asks for 25 veldors from each household. Only 18 pay. Calculate the shortfall and state what happens to the system. [2]

4. (calculator allowed) Harrowby’s council plans a coastal path for 60 households, each valuing it at 42 veldors. Its own cost estimate is 2,100 veldors. Three firms bid: 2,310, 1,890 and 2,040 veldors. (a) Calculate the saving from accepting the lowest bid. [1] (b) Calculate the net gain per household if the cost is shared equally. [2] (c) Suggest one reason why the lowest bid may not give the best outcome. [1]

5. Explain why a profit-seeking firm is unlikely to supply a good that is non-excludable. [4]

6. Evaluate direct provision and contracting out to the private sector as responses to the under-provision of public goods. [10]

7. (HL only) Distinguish between adverse selection and moral hazard, giving one example of each. [4]

8. (HL only, calculator allowed) In the fictional market of Kormas, half of all used laptops are good. Buyers value a good laptop at 700 and a poor one at 300. Sellers value them at 560 and 200. Buyers cannot observe quality before buying. (a) Find the value a buyer expects from a laptop picked at random. [1] (b) Explain why sellers of good laptops leave the market. [2] (c) Find the smallest share of good laptops at which good sellers would stay. [2]

9. (HL only, calculator allowed) A shop owner in Kormas faces a fire with a loss of 12,000 veldors. Without care, the chance of fire is 15%. Care costs 600 veldors and lowers the chance to 5%. (a) Show that an uninsured owner takes care. [2] (b) Explain why a fully insured owner does not. [2] (c) The insurer adds an excess of 9,000 veldors. Show that the owner takes care again. [2]

10. (HL only) Distinguish between signalling and screening as private responses to asymmetric information. [4]

11. (HL only) Evaluate government legislation and regulation, and the provision of information, as responses to adverse selection in the used-laptop market of Kormas. [10]

Answers

1. Non-rivalrous: when one person uses it, the same amount remains for everyone else [1]. Non-excludable: non-payers cannot be prevented from using it [1]. [2] Examiner insight: “State” asks for a brief answer, so one clear sentence per term is enough; extra detail is wasted time.

2. (i) Public: anyone with a radio receives it and one listener does not reduce another’s signal [1]. (ii) Private: the seat is occupied by one person and non-ticket holders can be turned away [1]. (iii) Public: the wall protects every property in the bay and defending one does not reduce protection for another [1]. [3] Examiner insight: A classification mark needs a reason that uses both features, not just a label.

3. (a) Total benefit = 90 × 36 = 3,240 [1]. Net benefit = 3,240 − 2,250 = 990 veldors [1]. (b) Revenue = 18 × 25 = 450, so shortfall = 2,250 − 450 = 1,800 veldors [1]. The system is not built, although society would gain [1]. [4] Examiner insight: “Show that” needs each step written out, ending on the given value; a bare 990 does not demonstrate it.

4. (a) Lowest bid 1,890; saving = 2,100 − 1,890 = 210 veldors [1]. (b) Share = 1,890 ÷ 60 = 31.5 [1]. Net gain = 42 − 31.5 = 10.5 veldors per household [1]. (c) The firm may cut quality to protect its margin, or the contract may be costly to monitor [1]. [4] Examiner insight: “Calculate” asks for working; a correct figure with no working is a risk if one step slips.

5. Non-payers cannot be excluded, so the firm cannot charge for use [1]. Each consumer can reason that the good will be available whether or not they pay [1], so many choose to free ride [1]. Revenue then falls below cost, so supply is not profitable [1]. [4] Examiner insight: The free rider step is the link most often missing; without it the answer jumps from “cannot charge” to “not supplied”.

6. Model plan, one point per bullet; the real paper is marked against markbands, not point by point.

• Both responses overcome free riding by funding the good through compulsory taxation [1].
• Direct provision: the government supplies the good itself [1]. Strength: provided although the market would not supply it, and free at the point of use [1]. Limitation: the government does not know true valuations, so quantity may be wrong; opportunity cost of tax revenue [1].
• Contracting out: a private firm supplies under a contract after a tender [1]. Strength: competition between bidders can lower cost [1]. Limitation: contract costs, and quality may be cut [1].
• Applies reasoning to a context, for example a coastal path whose quality is hard to specify [1].
• Judgement supported by a deciding factor, such as how easily quality can be specified and how many bidders exist [2]. [10] Examiner insight: An evaluation weighs strengths against limitations and ends in a judgement; two separate lists with no comparison read as description.

7. (HL only) Adverse selection arises before the deal because one party hides quality or risk [1]. Example: sellers know a used item is poor and buyers cannot tell [1]. Moral hazard arises after the deal because behaviour changes when another party bears the risk [1]. Example: an insured owner stops maintaining equipment [1]. [4] Examiner insight: “Distinguish” needs the difference stated, most easily as timing; two separate definitions do not make the contrast.

8. (HL only) (a) 0.5 × 700 + 0.5 × 300 = 500 veldors [1]. (b) Buyers will pay at most the average, 500 [1], which is below the 560 good sellers need, so they withdraw [1]. (c) Expected value = 300 + 400g [1]. Set 300 + 400g ≥ 560, so g ≥ 260 ÷ 400 = 0.65 [1]. [5] Examiner insight: Show the average-value calculation; the explanation in (b) then follows from comparing it with the sellers’ value.

9. (HL only) (a) No care: 0.15 × 12,000 = 1,800 [1]. Care: 600 + 0.05 × 12,000 = 1,200, which is lower, so the owner takes care [1]. (b) Full insurance leaves the owner’s expected loss at zero in both cases [1], so paying 600 for care is a pure cost and care is not taken [1]. (c) No care: 0.15 × 9,000 = 1,350 [1]. Care: 600 + 0.05 × 9,000 = 1,050, which is lower, so care returns [1]. [6] Examiner insight: Compare the two expected costs side by side; stating only the owner’s decision, without both figures, leaves the “show” incomplete.

10. (HL only) Signalling: the informed party acts to reveal its quality [1], for example a seller offering a warranty [1]. Screening: the uninformed party designs a test or choice that makes the other side reveal its type [1], for example an insurer offering a menu of policies with different excesses [1]. [4] Examiner insight: The key distinction is who moves first; naming the actor in each definition secures the contrast.

11. (HL only) Model plan, one point per bullet; the real paper uses markbands.

• Adverse selection: buyers cannot judge quality, so the average price drives out good sellers [1].
• Legislation and regulation, such as compulsory disclosure of known faults [1]. Strength: it binds all sellers [1]. Limitation: costly to enforce, and rules lag behind practice [1].
• Provision of information, such as published inspection results [1]. Strength: cheap way to narrow the gap [1]. Limitation: may be misread or become out of date [1].
• Contrast with a private response such as a warranty, which costs the government nothing but may not cover every seller [1].
• Judgement on which response suits Kormas, with a reason [2]. [10] Examiner insight: Tie each strength and limitation to the used-laptop context; generic points about “regulation” without the market named gain less.

Where marks are usually lost

• Giving one feature of a public good when the question needs both.
• Calling a state-run service a public good without testing it.
• Leaving out the free rider step between non-excludability and under-provision.
• Listing strengths of direct provision and contracting out with no comparison.
• Writing a final answer with no working under “show” or “calculate”.
• Mixing up adverse selection and moral hazard by timing.
• Describing a signal as something the buyer does.
• Giving a government response with no limitation.

Next steps

• Re-read the revision notes and the study guide.
• Tick off the topic on the printable checklist and visit the IB DP Economics hub.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization, February 2020. Sub-topics 2.9 and 2.10 (HL only) of Unit 2: Microeconomics.