IGCSE Economics Past Paper: Government Intervention and Market Failure PDF

MULTIPLE CHOICE BOOKLET 2B GOVERNMENT INTERVENTION AND MARKET FAILURE (J10-N20) 1. GOVERNMENT INTERVENTION QUESTIONS M20 6 In 2018 the UK government introduced a tax on the production of sugary drinks. How would this affect the market for sugary drinks as shown on a demand and supply...

MULTIPLE CHOICE BOOKLET 2B GOVERNMENT INTERVENTION AND MARKET FAILURE (J10-N20) 1. GOVERNMENT INTERVENTION QUESTIONS M20 6 In 2018 the UK government introduced a tax on the production of sugary drinks. How would this affect the market for sugary drinks as shown on a demand and supply diagram? N19 5 The diagram shows the equilibrium market price PE and quantity QE for rice. Which government action could cause the market price for rice to become P1? A encouraging the export of rice from the country B imposing a maximum price below the market price for rice C providing a subsidy to farmers to produce more rice D reducing import tariffs on rice 19 The diagram shows the impact of a government imposing an indirect tax on a good. The original demand curve is D1 and original supply curve is S1. What is the total tax revenue gained by the government? 1 A $1600 ​ ​ B $3200 ​ ​ C $4800 ​ ​ D $5000 M19 18 The diagram shows the demand curve D1 and supply curve S1 for a good. The government introduces a subsidy to encourage production. What will be the total cost of the subsidy to the government? A $40 ​ ​ ​ B $50 ​ ​ ​ C $100​​ ​ D $150 18 The diagram shows the effect of the imposition of a tax on a product. Which area represents the part of the tax paid by consumers of the product? A U + V​​ ​ B U + V + W​ ​ ​ C U + V + X + Y​​ ​ DU+X 19 Why might a government decide to subsidise a high-cost steel industry? A if cheaper imports of steel are improving the balance of payments B if economic growth is increasing due to the success of other industries 2 C if redundant steel workers can easily be retrained D if unemployment in steel producing areas is increasing N18 18 A government aims to boost production and increase sales of steel by subsidising private producers. A subsidy equal to W – Z per tonne is paid. According to the diagram, what would be the value of sales of steel after the subsidy? A OP × OQ ​ ​ B OP1 × OQ1 ​ ​ C WZ × OQ ​ ​ D WZ × OQ1 18. In the diagram, which level of subsidy per kilo would a government have to give to producers to encourage them to increase production from 20 kilos per week to 30 kilos per week? A US$3 per kilo​ B US$5 per kilo​ C US$8 per kilo​ D US$15 per kilo M18 10 The government increases the rate of income tax and decreases the rate of a sales tax (VAT). From the initial equilibrium point of X, which letter indicates the new equilibrium point in a market for normal goods? 3 N17 11 The diagram shows two curves. One is the demand for labour, the other is the supply of labour. A government fixes a minimum wage (Mw) that must be paid by employers. What will be the effect of this minimum wage? A Fewer workers will be employed​ ​ B No change in the market equilibrium C No worker will be paid wage W​ ​ D Supply of labour will exceed demand 19 A government collects the following revenue in a year. What is the amount of indirect tax revenue? A $200 m ​ ​ B $400 m ​ ​ C $500 m ​ ​ D $600 m 17 The government introduces a new tax. It adds $1 to the price of every $10 good and $2 to the price of every $20 good. What can be concluded about the nature of this tax? 4 19 A worker earns $40 000 a year and pays 20% income tax. He spends $5000 on electrical goods and $10 000 on a car, and pays 20% sales tax on each. How much indirect tax does he pay? A $3000 ​ ​ B $5000 ​ ​ C $8000 ​ ​ D $11 000 M17 17 The Indian government uses direct and indirect taxation. Which is a direct tax? A corporate (profits) tax​ ​ ​ ​ B customs duty C goods and services tax​ ​ ​ ​ D petrol tax 18 A worker earns $60000 a year and pays 25% income tax. He spent $2000 on furniture and $5000 on a computer and paid 20% sales tax on each. How much indirect tax did he pay? A $1000 ​ ​ B $1400 ​ ​ C $15 000 ​ ​ D $16 400 March 17 19 The Indian government gives farmers a subsidy of $5 per kilo to supply food in a market where X is the equilibrium position. The effect is illustrated in the diagram below. What will be the new equilibrium price and quantity supplied as a result of the subsidy? 10 The government increases the rate of income tax and decreases the rate of a sales tax (VAT). From the initial equilibrium point of X, which letter indicates the new equilibrium point in a market for normal goods? 5 N16 6 A government subsidises the production of pineapples. This is likely to: A increase the price of pineapples​ ​ B raise the costs of supplying pineapples C raise revenue for the government​ ​ D cause the supply of pineapples to increase at every price 19 A government gives farmers a subsidy of $5 per kilo to supply food on the open market where X is the original equilibrium position. The effect is illustrated in the diagram. What will be the new equilibrium price and quantity supplied as a result of the subsidy? M16 4 A government taxes the production of cars. What is likely to decrease? A the cost of supplying cars​ ​ ​ B the price of cars C the revenue for the government​ ​ D the supply of cars at every price 6 5. What would have caused the equilibrium price to rise from OP1 to OP2? A a government subsidy to rice farmers​ ​ B a successful advertising campaign for rice C improved rice farming methods​ ​ ​ D poor weather conditions 19. What is the total amount of revenue raised by indirect taxes? A $95m ​ B $300m​ C $400m ​ D $495m N15 18 The diagram shows the imposition of a tax of UZ on a good. Which area shows the government’s tax revenue? A TUEV​​ ​ B TUEZY ​ ​ C TUWV ​ ​ D TUZY 16 A government policy results in an increase in government spending and a fall in the market price of a good. What is the government policy? A The application of an indirect tax to a luxury good B The introduction of a subsidy to wheat farmers​ C The privatisation of health services D The setting of a minimum price for milk M15 19 The government reduces the rate of income tax and increases the rate of tax on producers. From the initial equilibrium point X, which indicates the new equilibrium point in the market? 7 M14 20 A government collects the following revenue in a year. What is the amount of indirect tax revenue? A $30 m​ ​ B $70 m​ ​ C $100 m​ ​ ​ D $500 m N13 18. Which will encourage domestic producers to grow more maize? A granting subsidies to maize producers ​ ​ ​ B increasing the sales tax on maize C removing guaranteed minimum prices for maize ​ ​ D removing quotas on imported maize J13 9 The graph shows the impact of a tax on the supply of petrol (gas). What can be concluded from this graph? A The government will receive no tax revenue B The impact of the tax will be shared between the consumer and the producer C The impact of the tax will fall entirely upon the consumer D The impact of the tax will fall entirely on the producer 8 2. MARKET FAILURE QUESTIONS (J10-N19) N20 5 Why might a market economy fail to achieve the best use of scarce resources? A Consumers may lack information about which good to buy. B Demerit goods are under consumed. C Public goods are overconsumed. D Most resources are owned by the government. 19 The government wants to reduce the consumption of cigarettes. Which policy would be most likely to do this? A increasing a subsidy on cigarettes​ ​ B increasing income tax C increasing interest rates​ ​ ​ D increasing the indirect tax on cigarettes M20 5 What is a cause of market failure? A many firms​ ​ ​ B monopoly C profit maximisation​​ D specialisation 19 Why are governments responsible for the defence of the country? A It is impossible to charge a price for defence. B It prevents individual citizens having access to weapons. C Only governments can manufacture weapons. D Providing defence is very expensive. 19 The diagram shows how a government policy influences the market for biofuel crops in the private sector. According to the diagram, which policy does the government use and what effect does it have on the market? 9 Mar 20 5 What aspect of demerit goods means they are overproduced? A clear product information​ ​ B high external costs C high product taxes​ ​ ​ D low customer demand N19 5 What suggests that there is market failure? A high producer profits​ ​ B high retail prices C lack of competition​ ​ ​ D low levels of investment 5 In a private market system certain goods and services would not be available unless the government intervened. What does this identify in a private market? A market distribution​​ ​ B market equilibrium C market failure​ ​ ​ D market structure M19 5 What causes market failure? A government provision of services​ ​ B social costs equal private costs C the existence of external benefits​ ​ D the existence of perfect competition 5 An airline upgrades its services by providing bigger aircraft. The airline claims it will reduce catering waste and lower carbon (CO2) emissions per passenger journey although fares may rise. What is a private cost and an external benefit of this decision? 5 China has built a new railway in Kenya from the capital, Nairobi, to the seaport of Mombasa. Kenya must repay the cost of the railway to China. Journey time has been reduced significantly but fares have increased and farmers have lost agricultural land along the new line. Who bears the external costs of this operation? A China who built the new railway​ ​ ​ B farmers who have lost agricultural land C Kenya who must repay the cost to China​ ​ D passengers who pay the higher fare March 19 5 A private sector firm is given a contract by the government to supply a country’s water. Which government directive will minimise the risk of market failure? A allow the firm to ration water rather than meet demand B ensure the firm’s supply includes all areas which are expensive to service C insist that the firm aims to maximise profits D instruct the firm to provide water only to those who can pay for it 10 N18 6 Coal production in the UK has declined in recent years. One reason given for this is that the social cost of coal production is too high. What best describes the social cost of coal production? A all the benefits of coal production minus all the costs of coal production B the cost of the environmental damage caused by coal production C the cost to the government of subsidising the coal industry D the private costs of coal production plus the external costs of coal production 6 A major highway has been built at a cost of US$175 million between Nairobi, Kenya and its suburbs. This reduces travel time and increases safety, but there are environmental problems for small enterprises along its route. Who bears the external costs of this project? A the authorities who paid for the highway B the commuters who travel to work in Nairobi C the construction companies that built the highway D the small enterprises along the route M18 6 A government approved the construction of a new railway line connecting major cities. It would be built by a private company but be funded partly through taxation. It would create many jobs. People living on the route worried about the harm to their environment. Which concepts are directly involved in this statement? A excess demand and public corporation​ ​ B government subsidies and perfect competition C market system and income distribution​ ​ D private benefit and external cost 19 Which situation involving the building industry is most likely to be investigated by a government body set up to control restrictive practices? A a builder purchasing a plot of land for development of housing B groups of suppliers of building materials agreeing to fix prices C several builders bidding for the same contracts D several builders using different sources of supply 6 A bee-keeper maintains hives of bees to produce honey. The bees can pollinate neighbours’ fruit trees but also give a painful sting to gardeners. If both of these events occur, how will costs and benefits be affected? A External benefits will fall and social costs will fall. B External costs will rise and social benefits will fall. C Social costs and social benefits will fall. D Social costs and social benefits will rise. 6 A private firm is one of a few suppliers of electricity in an economy. It is fined by the government for pollution from its coal-fired power stations which affect the health of those living nearby. What does this situation involve? A a government policy of nationalising an electricity supplier B a market structure for electricity that is perfect competition C a monopoly electricity supplier that ignores government controls D external costs that are the result of electricity production N17 4 What might be an external cost of drinking alcohol? A the cost of a bottle of wine​​ B the risk of illness from drinking alcohol 11 C the risk of street violence​ ​ D the tax paid to the government 5 Which of the effects of economic development is an external cost? A higher employment​​ ​ B higher fixed costs C increased production​ ​ D increased traffic congestion 5 What is an example of market failure? A city centre congestion​ ​ B low economic growth C rising prices​ ​ ​ ​ D trade deficits M17 6 A company produces an electric car that can be driven much further than other electric cars without needing recharging. The car does not emit the dangerous fumes that petrol cars do. The batteries that power the car are very expensive and the company is building a huge factory to produce batteries more cheaply. Which concepts can be applied to the above statement? A average cost and mergers​ ​ ​ B external costs and mixed economy C private costs and economies of scale​ D public sector and market failure 7 A project to build one of the world’s biggest coal mines was planned in Australia. The project was estimated to cost $US12.5 million. It would create employment but threaten endangered species as large coal ships would damage the Great Barrier Reef. What effects would this project have on the following costs and benefits? 6 A beekeeper maintains hives of bees to produce honey. The bees can pollinate neighbours’ fruit trees but also give a painful sting to gardeners. If both of these events occur, how will costs and benefits be affected? A External benefits will fall and social costs will fall. B External costs will rise and social benefits will fall. C Social costs and social benefits will fall. D Social costs and social benefits will rise. 4 What is an example of market failure? A a growth of competition​ ​ ​ ​ B a spread of pollution C a surplus of production in the short term​ ​ D an existence of scarcity N16 7 What indicates the existence of external costs in an economy? A An international trade deficit has caused the country to be in debt. B National companies have borrowed from foreign investors. C Private costs of production are less than social costs. D Private costs of production are more than social benefits. 12 26 The chart shows total world carbon emissions in 1995 and predicted emissions by 2035. If the chart proves to be correct, what will have happened by 2035? A ​ Africa and the Middle East will have responsibility for the same amount of carbon emissions in 2035 as in 1995. B ​ Between 1995 and 2035, the Middle East will have increased its industrialisation by as much as Latin America. C ​ By 2035 the combined percentage of carbon emissions caused by Africa and Latin America will have doubled. D ​The US will have decreased its carbon emissions by a smaller percentage than Western Europe. March 16 7 How are social costs calculated? A fixed costs plus variable costs​ ​ B private benefits less private costs C private costs plus external costs​ ​ D social benefits less external costs M16 6 Developers want to increase the size of a major retail shopping area in a city. It is thought that the proposal would create hundreds of jobs, be profitable for the shops but cause major traffic congestion. What economic concepts are directly involved in this statement? A external cost and private benefit​ ​ ​ B income distribution and inelastic demand C private investment and a decrease in supply​ D social benefit and perfect competition N15 8 A developer built some large houses in a rural area which poorer people could not afford. The houses destroyed an area of natural beauty. What type of market failure resulted from the development? A ignoring external cost​ ​ B inequality of income C lack of information​ ​ ​ D price discrimination 16 What is most likely to be the responsibility of a government? A the building of a food processing plant​ ​ B the building of a housing estate C the building of a large shopping centre​ ​ D the building of a major rail link M15 8 A large supermarket applied to build on land which was in an area of natural beauty. The local government allowed the building, even though the natural beauty of the area would be lost, because many jobs would be created and much needed income would be brought to the local community. 13 Which economic ideas cannot be found in the above statement? A external cost and private enterprise B free market and the conservation of resources C opportunity cost and improved standards of living D public sector and external benefit 19 The table shows the harmful carbon dioxide emissions for a country in selected years in millions of tonnes. What would be likely to have the greatest effect on reducing carbon dioxide emissions? A introducing incentives to encourage manufacturers to reduce their emissions B providing grants to fit solar panels to manufacturing premises C raising taxes on petroleum and diesel fuel D subsidising car manufacturers N14 6 A bridge is built over a river which enables journey times to be reduced. The table shows costs and benefits from building the bridge. Which calculation represents social benefit? A $12 000 − $10 000 = $2000​​ ​ ​ B $8000 − $5000 = $3000 C $12 000 + $5000 = $17 000​​ ​ ​ D $8000 + $12 000 = $20 000 7 The following is a headline from the newspaper. What will result from an increased tax on cars? A Increased employment in the car industry​​ B Increased petrol (gas) sales C Reduced external costs of car use​ ​ ​ D Reduced number of bus journeys M14 6 An area attracts tourists to see rare animals but the tourists have few hotels in which to stay. The local government has given permission for a developer to build a hotel. Conservationists say that the area will be ruined as the animals will move away and the nature of the area will be changed. What is likely to happen as a result of this decision to the private benefit of the tourists and the external cost? 14 22 The Mexican government has passed a law which prevents any monopoly charging a price significantly above its production costs. Any monopoly that breaks the law is fined. Which type of policy measure is this? A Minimum price​ ​ B Regulation​ ​ C Subsidy​ ​ D Tax N13 17 Developers want to increase the size of a major retail shopping area in a city. It is thought that the proposal would create hundreds of jobs, be profitable for the shops but cause major traffic congestion. What economic concepts are involved in this statement? A external cost and private benefit ​ ​ ​ B income distribution and inelastic demand C private investment and a decrease in supply ​ D social benefit and perfect competition 8 What is an example of market failure? A a firm forced to close because of fierce competition B a firm polluting rivers with waste chemicals C a high price for an essential product D a shortage of an agricultural crop J13 17 What is a likely reason why many countries’ governments subsidise scientific research? A ​ Private sector firms may overestimate the external benefits and ignore the private benefits of scientific research. B ​ Private sector firms may overestimate the external costs and ignore the private costs of scientific research. C ​ Private sector firms may underestimate the private benefits and ignore the external benefits of scientific research. D ​Private sector firms may underestimate the private costs and ignore the external costs of scientific research. 8 A government makes public transport free to try to reduce car use in a city.What might explain why people continue to use their own cars? A Cars are less crowded than public transport. B Car use does not cause external costs. C Public transport has a better safety record than cars. D Public transport networks require high capital costs. 15