1.4.1 Government intervention in markets Quiz: Pearson Edexcel Economics A, Unit 1

The 20 questions

1. What is the main purpose of government intervention in a market?

   • To increase the number of consumers in each market by reducing the price of every good.
   • To remove all prices from the economy so that goods are allocated by the government alone.
   • To correct market failure or improve outcomes that the free market does not deliver efficiently or fairly.
   • To ensure that all firms earn the same level of profit in every market in the economy.

2. What is the difference between an ad valorem tax and a specific tax?

   • An ad valorem tax is a fixed amount per unit sold, while a specific tax is a percentage of the price of the good.
   • An ad valorem tax is paid only by consumers, while a specific tax is paid only by producers in the market.
   • An ad valorem tax is a percentage of the price of a good, while a specific tax is a fixed amount per unit sold.
   • An ad valorem tax is paid once a year, while a specific tax is paid once for every transaction in the market.

3. A specific tax on a good shifts the supply curve. In which direction and by how much?

   • It does not shift, since taxes change the position of the demand curve rather than the supply curve.
   • To the left, by the amount of the tax per unit, since the tax raises the cost of each unit supplied.
   • To the right, by the amount of the tax per unit, since the tax raises the revenue of each producer.
   • To the left, by the percentage of the price, since an ad valorem tax shifts supply in proportion to price.

4. A government sets a minimum price for a good above the equilibrium price. Which outcome is most likely?

   • Excess demand, since consumers want to buy more at the higher price than producers want to supply.
   • Excess supply, since producers want to supply more at the higher price than consumers want to buy.
   • The market clears at the minimum price, so there is neither excess supply nor excess demand in the market.
   • The price falls back to equilibrium, since a minimum price above equilibrium cannot be enforced in any market.

5. A government sets a maximum price for a good below the equilibrium price. Which outcome is most likely?

   • The price rises above the maximum, since consumers always bid up a capped price in every market.
   • Excess demand, since consumers want to buy more at the capped price than producers are willing to supply.
   • The market clears at the maximum price, so there is no shortage or surplus in the market.
   • Excess supply, since producers want to supply more at the capped price than consumers are willing to buy.

6. Which of the following is a method of government intervention that uses tradable pollution permits?

   • The government bans all firms from producing goods, so that pollution is removed from the economy.
   • The government sets a cap on total pollution, issues permits, and firms can buy and sell permits to meet the limit.
   • The government pays each firm a fixed sum regardless of the amount of pollution it produces in the market.
   • The government fixes the price of pollution at zero and allows firms to pollute without any limit in the market.

7. Why might tradable pollution permits be efficient compared with a fixed rule for every firm?

   • Firms that can cut pollution cheaply do so and sell spare permits, so the total reduction is achieved at lower cost overall.
   • Firms are all required to cut pollution by the same amount, which always minimises the cost of reducing pollution.
   • Permits remove any need for a cap, since firms will reduce pollution voluntarily once a permit market exists.
   • Permits make pollution rise, since firms can trade permits to pollute more without any limit being applied.

8. Which of these is an example of a government providing a public good directly?

   • The state bans citizens from buying defence services from abroad in the open market.
   • The state funds and provides a national defence force, paid for through taxation.
   • The state sets a maximum price for defence services, so that they are supplied at a lower cost.
   • The state requires each private firm to provide defence services at its own expense.

9. Which form of government intervention aims to correct information gaps?

   • Banning all sales of goods where consumers may lack information about them in any market.
   • Subsidising all firms equally, so that consumers have no need to compare products in the market.
   • Providing information, such as health warnings or energy labels, so that consumers can make better decisions.
   • Setting a maximum price for every product, so that consumers no longer need information about quality.

10. Which form of government intervention uses regulation?

    • Taking firms into public ownership, so that the state controls all output decisions in each industry.
    • Offering a fixed subsidy per unit to all firms that produce goods, regardless of quality or safety standards.
    • Setting legal standards, such as safety rules or emission limits, that firms must meet when producing goods.
    • Allowing firms to set any price they choose without legal restriction, so the market is left to function alone.

11. A government imposes a specific tax of 2 pounds per unit on a good. The price paid by consumers rises from 10 pounds to 11.20 pounds. How much tax revenue does the government collect if 100 units are sold?

    • 200 pounds, since the tax per unit of 2 pounds multiplied by 100 units gives the total revenue.
    • 1000 pounds, since the original price of 10 pounds multiplied by 100 units gives the total tax collected.
    • 120 pounds, since the price rise of 1.20 pounds multiplied by 100 units gives the total tax revenue.
    • 1120 pounds, since the consumer price of 11.20 pounds multiplied by 100 units gives the total revenue.

12. Which of these is a risk of a maximum price set below equilibrium for a product such as rented housing?

    • The number of homes rises sharply, since the cap makes building more profitable for developers in the market.
    • A shortage develops, which can lead to queues, waiting lists or lower quality housing supplied to tenants.
    • A surplus of housing develops, so landlords struggle to find tenants for their homes at the capped rent.
    • Rents rise above equilibrium, since the cap encourages landlords to charge more to offset the lower rent.

13. A government considers a minimum price for alcohol to reduce consumption. Which evaluation is most accurate?

    • It will certainly reduce all alcohol consumption by the same proportion, with no side effects for any consumer group.
    • It will have no effect on consumption, since prices do not influence the amount of alcohol that people choose to buy.
    • It will increase consumption, since a minimum price makes alcohol more attractive to consumers in every case.
    • It may reduce consumption among heavy drinkers, but it raises prices for everyone and may create side effects for lower-income households.

14. Which of these interventions is most likely to address an externality in the form of traffic congestion?

    • A maximum speed for cars on all roads, which has no effect on congestion at peak times in the city.
    • A charge on vehicles entering a city centre at peak times, so that drivers face the external cost they impose.
    • A subsidy for fuel that lowers the price of petrol and encourages more driving during peak hours.
    • A ban on all public transport, which leaves more road space for private cars and reduces the need for charges.

15. A government introduces a subsidy on electric vehicles. Which group benefits most if demand is inelastic and supply is elastic?

    • Consumers, since the subsidy lowers the price they pay and they buy at a lower price with little change in quantity.
    • Producers, since the subsidy is kept by firms and consumers gain nothing from the lower price in the market.
    • The government, since the subsidy raises tax revenue from every electric vehicle sold in the market.
    • Neither group, since subsidies have no effect on prices or quantities when supply is elastic in the market.

16. What is the intended effect of a tax set equal to the external cost of a negative externality of production?

    • The private cost of production rises to the social cost, so the market output moves towards the socially optimal quantity.
    • The external cost is removed entirely, so the market output rises above the original level in the economy.
    • The external cost is paid by consumers only, so the market output is unchanged at the original level in the economy.
    • The tax is paid to the affected third parties, so the market output rises as they receive compensation directly.

17. Which statement best describes the role of the price mechanism when a government uses an indirect tax?

    • The tax removes all price signals, so buyers and sellers no longer respond to changes in prices in the market.
    • The tax fixes the price at the equilibrium level, so the price mechanism no longer operates in the market.
    • The tax changes the price signals facing buyers and sellers, which then respond by altering the quantities they demand and supply.
    • The tax sets the price below equilibrium, so the price mechanism creates a surplus for all producers in the market.

18. Evaluate: is government intervention always better than leaving the market to function alone?

    • No, since government intervention always makes market failure worse, so markets should never be corrected by the state.
    • Not necessarily, since intervention is justified only when market failure is significant and its benefits outweigh the costs and risks.
    • Yes, since government intervention always improves outcomes, whatever the size of market failure or the costs of acting.
    • Yes, since markets always fail, so government intervention is always required in every market at all times.

19. Which of the following best describes how a subsidy affects a market where a positive externality exists?

    • The subsidy shifts supply to the right, increasing output towards the socially optimal quantity where external benefits are present.
    • The subsidy has no effect on output, since subsidies only change the price of the good for the producer in the market.
    • The subsidy shifts supply to the left, reducing output below the market quantity where external benefits are present.
    • The subsidy shifts demand to the left, so consumers buy less of the good than they would without any subsidy.

20. Which intervention is most closely linked to a government using a price floor for agricultural products?

    • A maximum price below equilibrium, which can create excess demand and queues for food in the market.
    • A subsidy paid to consumers, which lowers the price of food and removes any need for a price floor in the market.
    • A minimum price above equilibrium, which can create excess supply that the government may need to buy up or store.
    • A ban on imports, which removes competition from abroad and leaves the domestic price at its equilibrium level.

Related quizzes

• Economics as a social science Quiz · 1.1.1 · 20 questions
• Positive and normative economic statements Quiz · 1.1.2 · 20 questions
• The economic problem Quiz · 1.1.3 · 20 questions
• Production possibility frontiers Quiz · 1.1.4 · 20 questions
• Specialisation and the division of labour Quiz · 1.1.5 · 20 questions
• Free market, mixed and command economies Quiz · 1.1.6 · 20 questions
• Rational decision making Quiz · 1.2.1 · 20 questions
• Demand Quiz · 1.2.2 · 20 questions
• Price, income and cross elasticities of demand Quiz · 1.2.3 · 20 questions
• Supply Quiz · 1.2.4 · 20 questions