OxfordAQA A-level Economics: Government intervention and government failure (9640) – 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 sections 3.1.5.7 (government intervention in markets) and 3.1.5.8 (government failure) of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2. Both are in section 3.1, which is International AS content. All countries, firms and figures are invented. Revise with the study guide or the revision notes. Course pages: OxfordAQA A-level Economics hub and checklist.

Questions

1. Define government failure. [2]

2. In Country K, demand for a good is Qd = 240 − 20P and supply is Qs = 40P − 120, with quantity in thousands. A specific tax of 3 per unit is imposed on sellers.

(a) Find the equilibrium price and quantity after the tax. [3] (b) Calculate the amount of the tax paid by consumers, the amount paid by producers and the tax revenue. [3] (c) Use the price elasticities at the original equilibrium to explain why consumers pay the bigger part of the tax. [2]

3. In Country L, demand for a good is Qd = 150 − 10P and supply is Qs = 20P − 30. Producers receive a government subsidy of 3 per unit sold.

(a) Find the equilibrium price and quantity after the subsidy. [3] (b) Calculate the cost to the government and the price producers effectively receive per unit. [2]

4. A city market for rented rooms has demand Qd = 900 − 60P and supply Qs = 40P − 100. The council sets a maximum rent of 8.

(a) Calculate the shortage. [3] (b) Explain two unintended consequences of the maximum price. [2]

5. A market for a farm crop has demand Qd = 480 − 20P and supply Qs = 40P + 120. The government sets a minimum price of 8 and buys any surplus.

(a) Calculate the surplus and the cost of buying it. [3] (b) Explain who gains and who loses. [2]

6. A crop has demand P = 26 − Q/5 (Q in thousand tonnes). A buffer stock authority holds the price between a floor of 8 and a ceiling of 12. Harvests in three years are 100, 80 and 60.

(a) Calculate the price each year without the scheme. [3] (b) Calculate what the authority buys or sells in years 1 and 3, and the money spent or received, assuming it starts with no stock. [3]

7. Three firms each emit 40 tonnes of a pollutant. The authority caps total emissions at 90 tonnes and gives each firm 30 permits. Abatement costs per tonne are 5 (firm A), 12 (firm B) and 25 (firm C). Firm A can cut at most 20 tonnes.

(a) Calculate the total abatement cost if each firm cuts 10 tonnes. [2] (b) Calculate the lowest total cost if permits can be traded. [3] (c) State the permit price and say which firm buys permits. [2]

8. Country M taxes income at 0% up to 9,000, 22% on the slice from 9,000 to 35,000 and 42% on the slice above 35,000.

(a) Find the tax paid by households earning 25,000 and 85,000. [3] (b) Show whether the tax reduces the ratio of the higher to the lower income. [2] (c) Explain how government spending could reduce inequality further. [2]

9. A government subsidises fuel to help low-income households. It has no data on how much fuel those households use, and the transport minister also wants lower emissions. Explain two ways in which this policy could involve government failure. [6]

10. Evaluate whether a tax on emissions is better than a regulation setting an emissions limit for each factory. [8]

11. The market for rooftop solar panels has demand Qd = 200 − 10P and supply Qs = 30P − 40 (thousands). Each panel gives a benefit of 2 to third parties. The government wrongly estimates this benefit as 4 and sets a subsidy of 4 per panel.

(a) Calculate the market equilibrium with no subsidy. [2] (b) Calculate the price and quantity with the subsidy. [3] (c) Explain, using figures, why this is government failure. [3] (d) Compare the subsidy spending with the spending a subsidy of 2 would need. [2]

Answers

1. Government failure occurs when intervention leads to a worse allocation of resources [1] and a fall in economic welfare [1]. [2] Examiner insight: A good definition covers both halves: the misallocation and the welfare loss. Saying only that government makes mistakes is too vague.

2. (a) The tax shifts supply: Qs = 40(P − 3) − 120 = 40P − 240 [1]. 240 − 20P = 40P − 240, so P = 8 [1], Q = 80 [1]. [3] (b) Original equilibrium: 240 − 20P = 40P − 120, so P = 6 (Q = 120) [1]. Consumers pay 8 − 6 = 2; producers keep 8 − 3 = 5, so bear 1 [1]. Revenue = 3 × 80 = 240 [1]. [3] (c) PED = −20 × 6/120 = −1 and PES = 40 × 6/120 = 2 [1]. Demand is less responsive than supply, so buyers cannot reduce quantity as easily and absorb more of the tax [1]. [2] Examiner insight: Showing the shifted supply equation makes your method visible. In (c), quote both elasticities and compare them, not just one.

3. (a) Supply with subsidy: Qs = 20(P + 3) − 30 = 20P + 30 [1]. 150 − 10P = 20P + 30, so P = 4 [1], Q = 110 [1]. [3] (b) Cost = 3 × 110 = 330 [1]. Producers receive 4 + 3 = 7 per unit [1]. [2] Examiner insight: The price producers get is the market price with the subsidy added, which is easy to miss. State that it is per unit.

4. (a) At 8: Qd = 900 − 480 = 420 [1]. Qs = 320 − 100 = 220 [1]. Shortage = 200 [1]. [3] (b) A black market, with rooms let above the legal maximum [1]. Lower quality, because landlords earn less and spend less on upkeep, or rationing by queue or connections [1]. [2] Examiner insight: Each consequence needs a short reason, not just a label. “Black market” alone says little about why it happens.

5. (a) At 8: Qd = 480 − 160 = 320 [1]. Qs = 320 + 120 = 440, so surplus = 120 [1]. Cost = 120 × 8 = 960 [1]. [3] (b) Producers gain a higher price (8 instead of 6) and sell all output [1]. Consumers pay more and buy less (320 against 360), and taxpayers fund the 960 [1]. [2] Examiner insight: Name every group: producers, consumers and taxpayers. Answers that describe only the farmers lose this breadth.

6. (a) Year 1: P = 26 − 100/5 = 6 [1]. Year 2: 26 − 16 = 10 [1]. Year 3: 26 − 12 = 14 [1]. [3] (b) Demand at 8 is (26 − 8) × 5 = 90, so in year 1 the authority buys 100 − 90 = 10 at 8, spending 80 [1]. Demand at 12 is 70, so in year 3 it sells 70 − 60 = 10 at 12, receiving 120 [1]. The stock of 10 is exactly enough [1]. [3] Examiner insight: Check the stock before selling: an answer that sells more than has been bought has missed the key constraint.

7. (a) The costs are 10 × 5 = 50, 10 × 12 = 120 and 10 × 25 = 250 [1]. Total = 420 [1]. [2] (b) Cut where it is cheapest: A cuts its maximum of 20, costing 100 [1]. B cuts the remaining 10, costing 120 [1]. Total = 220, which is 47.6% lower than 420 [1]. [3] (c) The price is 12, the abatement cost of the marginal firm B [1]. A emits 20 and sells 10 permits; C emits 40 and buys 10 [1]. [2] Examiner insight: Show why the cuts come from the cheapest firms first. A correct total with no explanation of the allocation is thin.

8. (a) On 25,000: 22% × 16,000 = 3,520 [1]. On 85,000: 22% × 26,000 = 5,720 [1] plus 42% × 50,000 = 21,000, total 26,720 [1]. [3] (b) After tax: 21,480 and 58,280 [1]. The ratio falls from 85,000/25,000 = 3.4 to 58,280/21,480 = 2.71, so inequality falls [1]. [2] (c) Benefits or free services, funded by tax, raise the real income of low earners [1]. A transfer of 3,000 would lift 21,480 to 24,480 and the ratio to 2.38 [1]. [2] Examiner insight: Compare before and after with a calculation. Saying “tax reduces inequality” with no figures leaves the claim unsupported.

9. Inadequate information [1]: without data on households’ fuel use, the government cannot target the subsidy or set it at the right level [1], so money goes to better-off users and the policy wastes resources, reducing welfare [1]. Conflicting objectives [1]: lower fuel prices raise consumption, which works against the aim of lower emissions [1], so one objective cancels part of the other, a net loss of welfare [1]. [6] Examiner insight: For each source, link it to the scenario and then state the welfare effect. Naming a source and stopping is thin.

10. A tax raises firms’ costs, shifts supply up and cuts output [1]. Firms with low abatement costs cut emissions most, so the cut is made at lower total cost [1]. Tax revenue can fund other policies [1]. But the tax is correct only if it matches the external cost, which may be unknown, and if demand is inelastic emissions may barely fall [1]. A regulation is direct and gives a certain limit [1]. But the same limit for every factory ignores differences in cost, so the total cost of meeting the target is higher [1]. Regulation needs monitoring and enforcement, creating administrative costs [1]. Judgement: a tax is likely better where abatement costs differ widely and the damage rises with output, but a limit or ban is more suitable where harm is severe or irreversible and certainty matters most [1]. [8] Examiner insight: Credit tends to rise when you compare the two tools on the same criteria and reach a reasoned judgement, instead of describing each separately.

11. (a) 200 − 10P = 30P − 40, so P = 6 [1], Q = 140 [1]. [2] (b) Supply with subsidy: Qs = 30(P + 4) − 40 = 30P + 80 [1]. 200 − 10P = 30P + 80, so P = 3 [1], Q = 170 [1]. [3] (c) With a benefit of 2, the best subsidy is 2, giving Q = 155 (200 − 10P = 30P + 20, P = 4.5) [1]. At 170 the last panel is worth 3 + 2 = 5 to society but costs (170 + 40)/30 = 7 to supply, so there is a welfare loss of ½ × 15 × 2 = 15 [1]. This equals the loss with no subsidy (at 140, value 8 against cost 6, ½ × 15 × 2 = 15), so inadequate information left welfare no better [1]. [3] (d) Spending: 4 × 170 = 680, against 2 × 155 = 310 [1]. The extra 370 could have been used elsewhere, which is its opportunity cost [1]. [2] Examiner insight: Use the calculated figures to make the argument. A discussion of government failure that never uses the numbers given is weaker.

Where marks are usually lost

• Shifting the wrong curve: a tax or subsidy moves supply.
• Treating the price change as the tax.
• Forgetting to add the subsidy to the market price when finding what producers receive.
• Giving a shortage or surplus without computing Qd and Qs at the controlled price.
• Listing groups affected without saying whether each gains or loses.
• Selling more buffer stock than was ever bought.
• Naming a source of government failure with no link to the scenario.
• Evaluating by listing advantages and disadvantages, with no judgement and no reasons.

Next steps

• Revision notes
• Study guide
• OxfordAQA A-level Economics hub
• Printable checklist
• All free 10-minute diagnostics
• Book a free trial class

Official syllabus

OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, published by OxfordAQA: sections 3.1.5.7 and 3.1.5.8, with the quantitative skills in section 3.5.