PMT

AS
ECONOMICS
Unit 1 Markets and Market Failure

Monday 16 May 2016 Morning Time allowed: 1 hour 15 minutes

Materials
For this paper you must have:
l an objective test answer sheet
l a black ball-point pen
l an AQA 12-page answer book.
You may use a calculator.

Section A (ECON1/1)
l Answer all questions on your objective test answer sheet.
l Use a black ball-point pen. Do not use pencil.
l Do all rough work in this question paper, not on your objective test answer sheet.

Section B (ECON1/2)
l Answer either Context 1 or Context 2.
l Use black ink or black ball-point pen. Pencil should only be used for drawing.
l Write the information required on the front of your answer book. The Paper Reference is ECON1/2.

Information
l The maximum mark for this paper is 75.
l There are 25 marks for Section A. Each question carries one mark. No deductions will be made
for wrong answers.
l There are 50 marks for Section B. The marks for questions are shown in brackets.
l You will be marked on your ability to
– use good English
– organise information clearly
– use specialist vocabulary where appropriate.

Advice
l You are advised to spend no more than 25 minutes on Section A and at least 50 minutes on
Section B.

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Section A: Objective Test

Answer all questions in Section A.

Each question carries 1 mark. No deductions will be made for wrong answers.
You are advised to spend no more than 25 minutes on Section A.

For each question there are four alternative responses, A, B, C and D. When you have selected
the response which you think is the best answer to a question, mark this response on your objective
test answer sheet. If you wish to change your answer to a question, follow the instructions on your
objective test answer sheet.

1 A free good

A is paid for by the government.

B has zero opportunity cost in its supply.

C has a negative social cost.

D has a perfectly inelastic supply.

2 The equilibrium market price can be defined as the price at which

A the market for the product clears.

B the price elasticity of demand equals the elasticity of supply.

C producers maximise their profits.

D positive excess demand equals negative supply.

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3 The diagram below illustrates the industry supply curve for mobile phones.

All other things being equal, the upward slope of the supply curve is due to

A the existence of a monopoly in the industry.

B higher prices providing a profit incentive for firms to expand production.

C the elasticity of supply exceeding the elasticity of demand for mobile phones.

D higher prices providing an incentive for firms to increase their productive efficiency.

4 The free market equilibrium price for a merit good is £50 per unit. At present, the
government does not intervene in the market for this good. The government is most
likely to correct the market failure associated with this merit good if it

A imposes a maximum price of above £50 per unit.

B sets a minimum price of £50 per unit.

C taxes the free market price.

D subsidises the free market price.

Turn over for the next question

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5 The four diagrams below relate to the provision of medical services at a local hospital.
The services are currently provided free. It has been suggested that patients could
pay £20 each time they receive treatment at the hospital to reduce pressure on its fixed
capacity and to reduce waiting times for treatment.

Which one of the diagrams, A, B, C or D, best illustrates the effects of such a policy?

6 The table below shows the private and external costs for four products. Which product,
A, B, C or D, has a market price which takes least account of negative externalities?

Private cost per unit External cost per unit

Market price
Product of output of output
£
£ £

A 10 2 12

B 12 5 15

C 16 7 22

D 22 8 24

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7 Which one of the following provides a reason why governments should intervene in a
market economy?

A Small firms are less efficient than large firms due to economies of scale.

B The existence of free riders will result in the overproduction of public goods.

C The social benefits of some private goods exceed the private benefits.

D Private firms are unable to produce merit goods in a free market.

8 The diagram below illustrates the market demand (D) and market supply (S) curves for a
good. The production of the good creates a negative externality.

To reduce production and consumption of the good to OQ2, the government could
impose a

A price ceiling of OP3.

B tax of P2P3.

C minimum price of OP2.

D tax of P2P1.

Turn over for the next question

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9 The table below shows possible sources of market failure in current UK markets.

Which combination of example and policy, A, B, C or D, is consistent with the possible

source of market failure identified?

Source of market Example of Policy to correct

failure market failure market failure

A Public good Healthcare State provision

Positive consumption
B Education Minimum price
externalities

C Merit good Petrol Indirect taxation

Negative production Electricity

D Pollution permits
externalities generation

10 All other things being equal, when the equilibrium price of car tyres in a market rises
from £60 to £90, the quantity demanded falls from 2 million units to 1.5 million units.
Therefore, the value of the price elasticity of demand is

A +2.5

B +0.5

C –0.5

D –2.0

11 The existence of scarcity in an economy implies that

A there are no free goods.

B there are no public goods.

C individuals must make choices.

D there has been a misallocation of resources.

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12 The diagram below shows the production possibility boundaries for Countries X and Y
respectively.

The opportunity cost of cars in terms of bicycles

A is greater for Country X than for Country Y.

B is greater for Country Y than for Country X.

C increases as more cars are produced.

D increases as more bicycles are produced.

13 The table below indicates the average price of furniture as a price index.

Year Price index

2011 100

2012 105

2013 120

2014 110

2015 125

Which one of the following can be deduced from the data above?

A The price of furniture rose throughout the whole period 2011 to 2015.

B Compared with 2015, the price of furniture was 20% cheaper in 2011.

C Revenue from the sale of furniture fell in 2014.

D Between 2013 and 2014, the price of furniture fell by 10%.

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14 Which one of the following is the most likely disadvantage that may arise from the growth
in the size of a firm?

A Increased division of labour reduces productivity

B An increase in the size of the marketing budget

C The need to purchase components in large quantities

D Problems in coordinating different parts of the business

15 The diagram below shows the marginal private and social benefit (MPB and MSB)
curves and the marginal private and social cost (MPC and MSC) curves for a good which
generates negative externalities in production.

£ MSC

MPC

MPB = MSB

O J H Output

In the absence of government intervention, a misallocation of resources is likely to occur

because

A there is underconsumption of JH.

B market output is too low.

C market price is too high.

D there is overproduction of JH.

16 A firm is productively efficient when

A it is operating at the lowest point on its average cost curve.

B it cannot increase current production even if the demand for its products increases.

C output per worker cannot increase.

D an increase in production will decrease average costs.

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17 The use of money as a medium of exchange enables an economy to

A operate outside its production possibility boundary.

B increase the production of public goods.

C prevent market failure.

D benefit from specialisation and the division of labour.

18 The two diagrams below show the markets for Goods X and Y.

The markets are initially in equilibrium at P1 and Q1. If the supply of Good X increases
and both markets move to a new equilibrium at P2 and Q2, it may be concluded that
Goods X and Y are in

A competitive demand.

B derived demand.

C composite demand.

D joint demand.

19 Which one of the following combinations, A, B, C or D, is most likely to increase a firm’s

monopoly power?

Barriers to entry Product differentiation

A Increase Decrease

B Increase Increase

C Decrease Increase

D Decrease Decrease

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20 An indirect tax on the production of a good will have no effect on its market price if
demand is

A inversely related to price.

B unit elastic.

C perfectly elastic.

D perfectly inelastic.

21 Complete market failure exists when

A there are negative externalities in production.

B the free market fails to provide sufficient merit goods.

C the free market underprices demerit goods.

D there is a missing market in the provision of public goods.

22 The cross price elasticity of demand for two products which are close substitutes for
each other will be

A high and positive.

B low and positive.

C low and negative.

D high and negative.

23 The size of a firm increases. As a result, its long run average costs fall because the
firm utilises its factory more efficiently and the advertising cost per item decreases.
Therefore, the firm experiences

A technical and marketing economies of scale.

B purchasing and marketing economies of scale.

C financial and purchasing economies of scale.

D financial and technical economies of scale.

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24 If the consumption of a product results in a negative externality, it follows that

A an optimum allocation of resources can never be achieved.

B non‑consumers benefit at the expense of consumers.

C an optimum allocation of resources can be achieved by placing a tax on the product.

D social benefits of consumption exceed social costs.

25 Which one of the following is most likely to be a reason for government failure?

A The negative externalities that result from the production of some goods and
services

B The difficulties in determining the true social costs and benefits of merit goods

C Missing markets for public goods and merit goods

D Excessive consumption of demerit goods

QUESTION 25 IS THE LAST

QUESTION IN SECTION A

On your answer sheet

Ignore rows 26 to 50

Turn over for Section B

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Section B: Data Response

Answer either Context 1 or Context 2.

You are advised to spend at least 50 minutes on Section B.

Total for this Context: 50 marks

Either

Context 1

UK ENERGY MARKETS – CHANGING THE ENERGY MIX

Study Extracts A, B and C, and then answer all parts of Context 1 which follow.

Extract A: Contribution to UK electricity production by fuel type, 2013 and 2014

Source: Energy Trends Statistics: Electricity Generation – Department of Energy and Climate Change

Extract B: Power to the people

In 2013, overall energy consumption in the UK was the lowest since 1985. Yet there is much 1
more that can be done to reduce the reliance on non‑renewable energy from fossil fuels,
such as natural gas, oil and coal. The United Nations recommends that fossil fuel use should
end by the year 2100. However, resources continue to be depleted and the environment
degraded as economic agents do not consider the external costs of their actions. 5

As a result, it can be argued that the price of non‑renewable energy is too low and that the
signalling and rationing functions of price have broken down. However, other economists
believe that energy prices are too high, and are forcing some low‑income households to
spend a disproportionate amount of their incomes on heating and power. They argue that
increased competition in energy markets would lead to reduced prices for consumers. 10

Whatever the reason, many believe that it is vital for more energy to be generated from
renewable sources, such as wind, wave and solar power.
Source: News reports, January 2015

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Extract C: Wind, waves and sunshine

The UK is recognised as having the best wind resources in Europe and a recent report 1
stated that, in 2013, wind power saved the UK £579m in fossil fuel costs. Even so, wind
energy contributes only a small part of the UK’s electricity requirement due to its large initial
capital costs and uncertainty regarding future government support.

Recently, the Scottish firm, Pelamis Wave Power, a leader in marine energy technology, 5
closed down. Quite simply, it did not have the vast sums of money required to develop the
technology further in order to supply electricity in large quantities. However, there is more
optimism in Wales, where a private firm, Tidal Lagoon Power Limited, has already secured
large amounts of financial support from two financial institutions. It is believed that the
project, off the Swansea coast, could produce enough energy to power a small city. 10

Even when firms do have an incentive to join a market, there are barriers to entry. For
example, in the north‑west, a firm has submitted a planning application to erect up to 20 000
solar panels in the countryside. Many believe that solar is a less environmentally‑damaging
source of energy, yet the scheme has received numerous objections from local residents.
Perhaps markets would work better if such restrictions were relaxed. 15

An alternative to these ‘cleaner’, renewable forms of energy is fracking, where water and
chemicals are injected into rocks below the earth’s surface to extract shale gas. However,
this is a hugely controversial form of energy creation, and the likely benefits of a cheaper
energy supply and more jobs need to be weighed carefully against the potential damage to
the environment, including the possibility of earth tremors. If fracking goes ahead, tough 20
regulation is likely to be required.
Source: News reports, January 2015

0 1 Define the term ‘external costs’ (Extract B, line 5).

[5 marks]

0 2 Use Extract A to identify two significant differences in the contribution to electricity

production by various fuel types between 2013 and 2014.
[8 marks]

0 3 Extract C (lines 20–21) states: ‘If fracking goes ahead, tough regulation is likely to be
required.’

Using a diagram to help you, explain why regulation of firms involved in the fracking
process is likely to be necessary.
[12 marks]

0 4 Extract B (lines 11–12) states: ‘Whatever the reason, many believe that it is vital for
more energy to be generated from renewable sources... .’

Using the data and your knowledge of economics, to what extent do you agree with
the view that markets can be relied upon to encourage the development of renewable
energy? Justify your answer.
[25 marks]

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Do not answer Context 2 if you have answered Context 1

Total for this Context: 50 marks
or
Context 2
THE UK CULTURAL ECONOMY – ENJOYING THE BRIGHTER SIDE OF LIFE
Study Extracts D, E and F, and then answer all parts of Context 2 which follow.
Extract D:  Visitor attendance figures for London theatres and selected London museums,
in thousands, 2006 to 2013

Visitor attendance:
Visitor attendance:
selected London
London theatres
museums*
(thousands)
(thousands)
2006 12 351 13 391
2007 13 636 13 697
2008 13 892 13 718
2009 14 258 14 718
2010 14 152 15 764
2011 13 915 16 147
2012 13 993 16 257
2013 14 587 18 234
*Includes the British Museum, the Natural History Museum and the National Gallery
Source: Museums and Galleries: Department for Culture, Media and Sport; Society of London Theatre, January 2015

Extract E: Arts and culture: making life better?

As news reports focus on seemingly endless problems, it is easy to overlook the brighter 1
side of life. Arts Council England (ACE) is an organisation that ‘champions, develops and
invests in artistic and cultural experiences that enrich people’s lives’. ‘In short,’ it says, ‘it
makes life better.’

Between 2011 and 2015, ACE allocated £1.4 billion of taxpayers’ money, and an estimated 5
£1 billion from the National Lottery, to a range of activities and events, such as those
provided by museums, theatres, and music festivals. It can be argued that the social benefits
of these activities outweigh the private benefits and, in addition, it is stated that for every £1
invested in arts and culture, up to £6 is generated elsewhere in the economy.

Education also has a role to play in enriching people’s lives. Schools provide countless 10
opportunities for children and young adults to experience a variety of cultural and sporting
activities.

In some towns, local councils have provided licences to enable small businesses, such as
bars and cafes, to host ‘live’ entertainment events, with other firms providing sponsorship
for the shows. This allows for a more market‑based approach. The performers enjoy 15
performing, the firms generate income from the spectating public and the public have a great
time. Everybody wins!
Source: Arts Council England and News reports, January 2015

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Extract F: If music be the food of love, play on

One aspect of arts and culture that has seen growing popularity in recent years is music 1
festivals. Faced with falling incomes due to changes in the way consumers obtain music,
artists have been forced to tour and perform live more often. Whilst on the one hand new
artists have benefited from the removal of barriers to entry, such as the need for a recording
contract, once in the industry it has become more difficult to achieve the ‘superstar’ lifestyle. 5

This is of course to the benefit of the many thousands of festival‑goers who are able to enjoy
a selection of their favourite bands for the price of a single festival ticket. It would cost fans
much more to see these artists in separate concerts. However, there are concerns that, with
ticket prices rising year on year, some fans are being priced out of the market.

The price of a ticket to attend one of the most well‑known festivals in the UK increased by 10
130% between 2000 and 2013. A much smaller music festival, held in the north of England,
has also seen ticket prices rise, but not as significantly, as it has moved to a larger site.
Between 2010 and 2014, the ticket price for the northern festival rose from £85 to £119,
during which time the number of tickets on sale increased from 8 000 to 14 000. Here too,
the benefits provided by Arts Council England have been seen, as it has contributed money 15
towards the construction of a new stage.
Source: News reports, January 2015

0 5 Define the term ‘social benefits’ (Extract E, line 7).

[5 marks]

0 6 Using Extract D, identify two significant points of comparison between the visitor
attendance figures for London theatres and selected London museums over the period
shown.
[8 marks]

0 7 Extract F (lines 13–14) states: ‘Between 2010 and 2014, the ticket price for the northern
festival rose from £85 to £119, during which time the number of tickets on sale increased
from 8 000 to 14 000.’

All other things being equal, calculate the price elasticity of supply of tickets for the
music festival held in the north of England between 2010 and 2014 to one decimal place
and explain the factors that might determine the price elasticity of supply of tickets for
this music festival.
[12 marks]

0 8 Extract E (lines 2–3) states that Arts Council England is an organisation that
‘champions, develops and invests in artistic and cultural experiences that enrich
people’s lives’.

Using the data and your knowledge of economics, evaluate the view that providing
subsidies is the best way to ensure that sufficient resources are devoted to the arts and
cultural activities.
[25 marks]

END OF QUESTIONS

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