4.1.8.9 Government intervention in markets Quiz: AQA Economics, Unit 1

The 20 questions

1. Which is the main argument for government intervention in markets?

   • Intervention is needed only to raise tax revenue, since markets never fail to produce the quantity of goods that society wants.
   • The existence of market failure, in its various forms, can justify intervention to improve the allocation of resources.
   • Markets always allocate resources efficiently, so intervention is only ever needed to redistribute income between households.
   • Governments always allocate resources better than markets, because they have full information about every household's preferences.

2. Which tool of intervention works through the government's own spending?

   • Price controls, which set a maximum or minimum price that firms may charge for goods and services in the market.
   • Indirect taxation, which raises the price of goods such as alcohol and tobacco paid by consumers in the market.
   • Public expenditure, such as the provision of schools, hospitals and roads funded from taxes.
   • The extension of property rights, which assigns ownership of resources such as pollution permits to firms or individuals.

3. A government imposes an indirect tax on a good with a negative externality. What is the intended effect?

   • To lower the price of the good, which increases consumption so that the external cost is spread across more users.
   • To transfer income from consumers to producers, so that firms can afford to invest in cleaner production methods.
   • To increase the supply of the good, so that the market price falls and the good is more widely available to all.
   • To raise the price of the good, reducing consumption towards the level at which social cost equals social benefit.

4. A subsidy is paid on a good with a positive externality. What is the intended effect?

   • To lower the price paid by consumers, increasing consumption towards the socially efficient level of the good.
   • To raise the price paid by consumers, which reduces consumption and so brings the market closer to its efficient level.
   • To remove the good from the market entirely, so that consumers receive only the substitute goods that have no externality.
   • To set a maximum price below equilibrium, so that suppliers reduce output and consumers pay less for the good in the market.

5. Which is a disadvantage of a maximum price set below the equilibrium price?

   • Consumers reduce their demand to zero, because the lower price signals that the good is of low quality to them.
   • A shortage occurs, because quantity demanded exceeds quantity supplied at the controlled price in the market.
   • The equilibrium price rises, because the controlled price forces firms to increase the quantity they supply to buyers.
   • A surplus occurs, because quantity supplied exceeds quantity demanded at the controlled price in the market.

6. Which policy would extend property rights to correct an externality?

   • Banning the trade of all permits, so that every firm must reduce its pollution to zero without any flexibility.
   • Removing all ownership rights from firms, so that no firm can own any resource or asset in the economy.
   • Allowing firms to pollute freely while the government pays a subsidy for each tonne of pollution they emit.
   • Assigning tradable pollution permits, so that firms must hold a permit for each unit of pollution they emit.

7. Which is an example of regulation used to correct market failure?

   • A decision by the central bank to lower the base rate of interest, which affects the monetary conditions of the economy.
   • A cut in income tax for all workers, which raises their disposable income but does not affect any market directly.
   • Health and safety standards that require firms to meet minimum requirements for the products they sell to consumers.
   • A rise in government borrowing to fund a programme of road building, which affects the level of public debt only.

8. Which objective most likely explains a government's decision to intervene in the housing market?

   • Ensuring access to affordable housing for low-income households, which the market may fail to provide at an acceptable price.
   • Increasing the rate of return on investment in property for the wealthiest households, which the market already provides.
   • Raising the price of housing for all buyers, so that the government earns more revenue from property transactions at the time in question.
   • Reducing the number of households in the economy, so that the demand for housing falls to a level set by the state.

9. Why might a government use a range of policies rather than a single intervention?

   • Different market failures and objectives may need different tools, such as taxes for externalities and regulation for safety.
   • Multiple policies are always required by law, so the government has no choice in the tools used in any market at the time in question.
   • Multiple policies reduce all market failure to zero, because each policy completely removes the need for the others.
   • A single intervention always solves every market failure, so using several policies only adds cost without any benefit.

10. Which policy best describes the use of a price control to protect consumers?

    • A subsidy given to firms that raises their profit margins, so consumers pay the full market price for the good in each year.
    • A maximum price set by government, which caps the price a firm may charge for an essential good or service.
    • A minimum price set by government, which guarantees that consumers can always buy the good at a price below equilibrium.
    • A tax imposed on consumers of the good, which lowers the price they pay for each unit that they buy in the market.

11. Which is a likely benefit of public provision of a good that the market under-provides?

    • Greater market power for the state, which allows it to exclude private firms from supplying any substitutes at all.
    • Greater availability of the good to all, including those who would not buy it at the market price in the economy.
    • Reduced output of the good, because public provision always lowers the quantity supplied to a level below the market.
    • Higher prices for the good, since the government always sets prices above the marginal cost of supply in every case.

12. Which evaluation best challenges the case for government intervention?

    • Intervention never has any unintended consequences, because policies always work exactly as the government plans in every case.
    • Intervention is unnecessary, because markets always self-correct without any change to prices or behaviour in the economy.
    • Intervention always improves welfare, because the government has perfect information about the preferences of every citizen.
    • Intervention can also misallocate resources, so its costs and benefits must be compared with the market failure it is meant to correct.

13. A government uses a tax to correct a negative externality. Which factor determines the appropriate level of the tax?

    • The number of consumers of the good, regardless of the external cost created by each unit they consume in the market.
    • The size of the external cost per unit, so that the private cost is raised to the level of the social cost.
    • The total revenue the government wishes to raise, regardless of the size of any external cost imposed by the good.
    • The current exchange rate, which determines the price of imported inputs used to make the good in the economy.

14. Which is the best description of a government's trade-off when intervening in a market?

    • Intervention has no trade-off, because the objectives of efficiency and equity always move together in every market.
    • Intervention only affects firms and never has any impact on consumers, workers or the wider economy at any time.
    • Intervention always reduces costs for everyone, because the government pays for all of its policies from the state's own funds.
    • Intervention may improve efficiency or equity but can impose costs, such as reduced incentives or administrative expense.

15. Which is the most accurate statement about the effects of price controls?

    • Price controls always increase the supply of goods in the market, because firms are willing to produce more at any fixed price.
    • Price controls never change the quantity supplied or demanded, because the market quantity is fixed by the state in every case.
    • Price controls can create shortages or surpluses, because the controlled price differs from the equilibrium price set by the market.
    • Price controls always eliminate shortages, because the government has the power to force suppliers to meet all demand.

16. A government intervenes in a market with an external cost. Which policy most directly internalises the externality?

    • A subsidy set equal to the marginal external cost, so that producers are paid for the damage their output causes.
    • A Pigouvian style tax set equal to the marginal external cost, so that producers pay for the damage their output causes.
    • A maximum price set equal to the marginal external cost, so that producers are not allowed to charge the full cost.
    • A ban on the sale of all goods that have any external cost, so that consumers buy only goods that are free of externalities.

17. Which is a likely drawback of a minimum price set above equilibrium for an agricultural good?

    • No change in the quantity bought, because a minimum price has no effect on the balance of supply and demand.
    • A shortage of the good, because the minimum price reduces the quantity demanded by consumers across the market.
    • A fall in the price received by farmers, because the minimum price always sets prices below the market equilibrium.
    • A surplus of the good, which may need to be bought up or stored by the government at public expense.

18. Why might a government regulate a monopoly rather than rely only on a tax?

    • Regulation always raises the profit of monopolists, so governments use it to increase their tax revenue in the economy.
    • A tax always lowers the monopolist's price to the level of marginal cost, so regulation is never necessary in any market.
    • A tax removes the monopolist's market power entirely, so regulation is needed only where taxes are not collected in full.
    • Regulation can directly limit the price or output of the monopolist to protect consumers, which a tax may not achieve.

19. A government sets an indirect tax on a good with a negative externality. Why might the tax not fully correct the externality?

    • The tax is never paid by consumers, because the entire burden always falls on the producer in every market in the economy.
    • The tax always equals the external cost automatically, because the market reveals the exact size of the externality to the government.
    • The tax removes the externality completely, so the question of setting its level never arises for the government in practice.
    • The external cost per unit may be hard to measure, so the tax may be set above or below the level needed to correct the externality.

20. Which statement about a subsidy for a merit good is most accurate?

    • It removes the need for government spending, because subsidies replace all public expenditure on the merit good over the period concerned.
    • It can increase consumption of the merit good, but it may cost the government money and must be funded through taxation.
    • It reduces consumption, because a subsidy raises the price paid by consumers for each unit of the merit good they buy.
    • It has no fiscal cost, because subsidies are always paid by the firms that receive them in every case in the economy.

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