Economics

6744 Words Feb 18th, 2015 27 Pages
AS Economics Answers
4 Government intervention in markets
1 Remedies for market failure
Activity 1, page 163 a It has declined. The state now owns less of the country’s housing stock. b That the state thinks there is less market failure in the housing market now than in 1979. use. Figure 1 shows that drivers do not initially pay for the negative externalities (external costs) they generate. A tax equivalent to the marginal external cost would push price up to PX. Road use would be reduced from Q to QX, the socially optimum level. In practice, it is difficult to estimate external costs. d Congestion and other negative externalities caused by car use will increase. Road use by cars is likely to continue to increase in the absence of
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If left to market forces, some people would seek to act as free riders as they know that it would not be possible to exclude non-payers from the protection given by flood defences. b The imposition of a large connection charge on the housing market in flood areas will increase the cost of building houses there. This will cause supply to decrease to S1, raise price to P1 and reduce the quantity demanded to Q1 (see Figure 8).

Figure 8
D
S1 S

price of houses

P1 P

3 Answer A A tax can be used to ensure that those who generate harmful effects pay for them rather than third parties. 4 Answer B Public goods cannot be left to market forces as they are non-rival and non-excludable. A and C refer to merit goods and D to demerit goods. 5 Answer B More training, if in appropriate areas, should enable workers to move more easily from declining to expanding industries. A would help to reduce geographical immobility. C and D would be likely to increase demand and employment. 6 Answer B The socially optimum output is where MSB equals MSC, at point W. To achieve this output costs need to rise to incorporate external cost. The marginal external cost at W is represented by the gap between MSC and MPC.

S1 S

D

Data response questions, page 172 a Because they have a more harmful effect on people’s health than most

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