OCR A Level Economics: Information failure, public goods and inequity (H460) – 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 Market power/Information asymmetries, Public goods and Inequity in Component 01, Microeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. Teaching is in the study guide and the revision notes. Course pages: the OCR Economics hub and the checklist. All contexts and figures are invented.

Questions

1. In an illustrative market for second-hand laptops, a good laptop is worth £800 to a buyer and a poor one £300. Sixty per cent of laptops offered are good, but buyers cannot tell them apart.

(a) Calculate the expected value of a laptop to a buyer. [2] (b) Owners of good laptops will not sell for less than £650. Explain what happens in this market. [2]

2. A bicycle insurer in Country A (illustrative) assumes a 5% chance of a £400 theft claim per policy.

(a) Explain what is meant by moral hazard. [2] (b) After customers take full cover, the chance of a claim rises to 8%. Calculate the expected claim before and after, and the rise. [2] (c) State one way the insurer could respond. [1]

3. Consider a demerit good in an illustrative market. Quantity is in thousands and price in £. Marginal private benefit is 24 − 2Q, marginal social benefit is 18 − 2Q and marginal cost is Q + 6.

(a) Find the free-market quantity and price. [2] (b) Find the quantity and price that maximise social welfare. [2] (c) Calculate the welfare loss. [2] (d) Explain, in terms of information failure, why the market over-consumes. [2]

4. Evaluate the significance of merit and demerit goods. [8]

5. (a) Classify each good as private, public or quasi-public, giving the reason: (i) street lighting; (ii) a loaf of bread; (iii) a quiet toll bridge. [3] (b) Explain why a bridge may behave more like a private good as traffic grows. [2]

6. In a village of 80 households (illustrative), a flood barrier costs £1,600. Each household values it at £25.

(a) Calculate total benefit and net benefit. [2] (b) Calculate an equal share of the cost per household. [1] (c) Only 32 households pay their share. Calculate the shortfall, and the payment needed from each of those 32 to cover the cost. State why they may refuse. [3] (d) Explain why this causes market failure. [3]

7. A quiet bridge has a fixed cost of £12,000 a day and no extra cost for each user until it becomes busy.

(a) Calculate the average cost per user with 6,000 users and with 12,000 users. [2] (b) Explain why the efficient price of use is zero when the bridge is uncongested. [2] (c) Explain why a charge might be justified when it is congested. [2]

8. Evaluate the role of the government in the provision of a public good. [8]

9. An investor in Country B (illustrative) owns assets of £400,000 which rise in value by 5%. A worker earns £28,000, which rises by 2%.

(a) Distinguish between income and wealth. [2] (b) Calculate the money gain for each. [2] (c) Explain how this contributes to wealth inequality. [2]

10. A household has a gross income of £15,000, pays £500 tax and receives £3,500 in benefits.

(a) Calculate disposable income and its percentage difference from gross income. [2] (b) Explain two causes of income inequality. [4]

11. Households in a country (illustrative) face the cost of a three-year course at £9,000 a year. Household X has an income of £18,000 and household Y £90,000.

(a) Calculate the total course cost as a percentage of each household’s annual income. [2] (b) Evaluate the significance of differences in access to resources such as education. [6]

Answers

1. (a) Expected value = 0.6 × 800 + 0.4 × 300 [1] = 480 + 120 = £600 [1]. [2] (b) Buyers will pay about £600, below the £650 that good sellers need [1], so good laptops are withdrawn and mainly poor ones remain, shrinking the market [1]. [2] Examiner insight: Comparing the price buyers will pay with what good sellers require explains the withdrawal; “the market collapses” alone gives no reasoning to credit.

2. (a) A change in behaviour after risk is transferred to someone else [1], because the person no longer bears the full cost of loss, for example leaving a bicycle without a lock [1]. [2] (b) Before: 0.05 × 400 = £20 [1]. After: 0.08 × 400 = £32, a rise of £12 [1]. [2] (c) Charge higher premiums, or require an excess, or set conditions such as a lock [1]. [1] Examiner insight: Linking the definition to the case in the question tends to earn more than a general definition.

3. (a) 24 − 2Q = Q + 6 [1], so Q = 6 thousand and price £12 [1]. [2] (b) 18 − 2Q = Q + 6 [1], so Q = 4 thousand and price £10 [1]. [2] (c) At Q = 6, MSB = 6 and MC = 12, a gap of £6 [1]. Welfare loss = ½ × (6 − 4) × 6 × 1,000 = £6,000 [1]. [2] (d) Consumers lack full information or misjudge the harm [1], so their marginal private benefit is above the true marginal social benefit and they buy more than is socially best [1]. [2] Examiner insight: In part (c) the base of the triangle is the difference between the two quantities and the height is the gap at the market quantity; reading the gap at the wrong quantity gives a different figure.

4. Possible points, each developed. A merit good is under-consumed and a demerit good over-consumed because consumers misjudge benefits or harm [1]. Information failure means the gap between private and social benefit leads to a welfare loss [1]. The larger the gap, the more significant the loss [1]. For goods like education or health the amounts at stake are large [1]. The label is a value judgement, since someone decides consumers are wrong [1]. Under-consumption may reflect low income as much as ignorance, so information alone may not fix it [1]. Opinions about which goods count change over time and between societies [1]. A reasoned judgement says the case is strongest where harm or benefit is large and evidence clear [1]. [8] Examiner insight: Giving a reason a point could be weaker, then a supported judgement, usually gains more than a longer list of examples.

5. (a) (i) Public: non-excludable and non-rival [1]. (ii) Private: excludable and rival [1]. (iii) Quasi-public: excludable by toll but non-rival while quiet [1]. [3] (b) As traffic grows, each extra vehicle slows others, so use becomes rival [1], and a toll can exclude, so it behaves more like a private good [1]. [2] Examiner insight: Naming both tests, excludability and rivalry, for each good supports the classification; one test leaves it unsupported.

6. (a) Total benefit = 80 × 25 = £2,000 [1]; net benefit = 2,000 − 1,600 = £400 [1]. [2] (b) 1,600 ÷ 80 = £20 [1]. [1] (c) 32 × 20 = £640, so the shortfall is 1,600 − 640 = £960 [1]. Needed from 32 payers: 1,600 ÷ 32 = £50 [1], which is above their £25 valuation, so they may refuse [1]. [3] (d) Non-payers cannot be excluded, so each hopes others pay (free riding) [1]. Firms cannot charge, so they do not supply [1]. A good whose benefits exceed costs is not provided, which is a missing market and a misallocation [1]. [3] Examiner insight: Saying that benefits exceed costs yet the good is not provided shows why this is market failure.

7. (a) 12,000 ÷ 6,000 = £2 [1]; 12,000 ÷ 12,000 = £1 [1]. [2] (b) An extra user adds nothing to cost [1], so the efficient price is zero, since a charge would deter use that costs society nothing [1]. [2] (c) When congested, extra vehicles delay others, so marginal cost is positive [1], and a charge can ration scarce road space [1]. [2] Examiner insight: Distinguishing average cost from marginal cost makes parts (a) and (b) fit together; falling average cost is not the same as zero marginal cost.

8. Possible points. Funding through tax removes free riding, so the good can be provided [1]. Use can be free, which is efficient when marginal cost is zero [1]. The government can supply a quantity that benefits everyone [1]. It does not know people’s true valuations, so quantity may be wrong [1]. Funding has an opportunity cost [1]. State provision may be inefficient or costly [1]. Some quasi-public goods can be charged for or provided privately or by charities, reducing the need [1]. A judgement on a particular good, such as street lighting or defence, supported by reasons [1]. [8] Examiner insight: Applying the points to a named good gives the judgement something to rest on.

9. (a) Income is what is received each period [1]; wealth is the value of holdings on one date, after subtracting debts [1]. [2] (b) Investor: 0.05 × 400,000 = £20,000 [1]. Worker: 0.02 × 28,000 = £560 [1]. [2] (c) Owners of assets gain far more from price rises than workers gain from pay [1], so existing wealth widens the gap, and asset owners can save and buy more assets [1]. [2] Examiner insight: Using the two money figures to make the comparison is stronger than saying “the rich get richer”.

10. (a) Disposable income = 15,000 − 500 + 3,500 = £18,000 [1], which is 20% above gross income [1]. [2] (b) First cause, such as differences in skills and education [1], developed: higher productivity leads to higher wages [1]. Second cause, such as unemployment or ownership of assets [1], developed: no earnings, or rent, interest and profit on top of wages [1]. Discrimination, and tax and benefit design, are other valid causes. [4] Examiner insight: Each cause needs a link to income; naming a cause without the link tends to earn less.

11. (a) Total cost = 3 × 9,000 = £27,000 [1]. For X: 27,000 ÷ 18,000 = 150%; for Y: 27,000 ÷ 90,000 = 30% [1]. [2] (b) Costs take a larger share of lower incomes, restricting access [1]. Other causes include location, information and networks, and borrowing limits [1]. Significance: lost talent and lower productivity [1]; unequal opportunity can pass between generations [1]; social cost, fairness is a value judgement [1]. Counter-view: support, loans or bursaries can narrow the gap, and the effect depends on the scale and mobility [1]. [6] Examiner insight: A judgement after the analysis, such as “most significant where access shapes later income”, reads better than ending on a list.

Where marks are usually lost

• Calling a merit good “worthwhile” without saying buyers undervalue it.
• Reading the welfare-loss gap at the wrong quantity.
• Naming only one test for a public good, usually non-excludability.
• Describing free riding but not why the market fails.
• Treating average cost as marginal cost.
• Treating government provision as automatically right, or mixing up income and wealth.
• Listing causes of inequality with no effect, or stating a value judgement as fact.

Next steps

• Review the revision notes and re-read the study guide.
• Visit the OCR Economics hub and tick off the checklist.
• Take the free 10-minute diagnostics to find your next topic.
• Book a free trial class for help with any question you got wrong.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, topics Market power/Information asymmetries, Public goods and Inequity.