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IB Economics: Market Failure and Government Intervention (10 correction items)
IB Economics: Market Failure and Government Intervention (10 correction items)
Negative externalities cause overproduction and positive ones underproduction, so fix the direction before computing taxes and welfare loss.
Focus Three steps: sign of the externality, MPC against MSC, then the tax, subsidy and deadweight loss.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 |
| Suggested time | 25 |
| Difficulty mix | Foundation 3 · Intermediate 4 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: IB Economics: Market Failure and Government Intervention |
| Level | IB DP1 to DP2 |
02 Questions (10 items)
- FoundationA factory has MPC = 3Q and MSC = 3Q + 12. Find the marginal external cost per unit.
- FoundationA good yields a constant marginal external benefit of 8. Find the Pigouvian subsidy per unit at the social optimum.
- FoundationA facility is both non-rival and non-excludable. What problem arises in the market?
- IntermediateDemand is P = 100 − Q, MPC = 20 + Q, and marginal external cost is 10 per unit. Find market and socially optimal output.
- IntermediateWith the same data, a Pigouvian tax of 10 per unit is imposed. Find the new equilibrium output.
- IntermediateWith the same data, find the deadweight loss without intervention.
- IntermediateTwo firms each emit 60 units and the cap is 100. Abatement costs 30 (A) and 10 (B) per unit. Find the cost-effective allocation and total cost.
- ChallengeDemand is P = 120 − 2Q, MPC = 2Q, and marginal external benefit is a constant 24. Find market and socially optimal output.
- ChallengeWith the same data, a subsidy of 24 per unit is paid. Find total spending and the welfare gain removed, then evaluate in one sentence.
- Error redoCorrect the statement: “With a negative externality in production, market output is below the social optimum.”
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | 12 | MEC = MSC − MPC = 3Q + 12 − 3Q = 12, a constant. |
| 2 | 8 | At the optimum the subsidy equals the marginal external benefit. |
| 3 | Free riding: people consume without paying, so the private market underprovides. | Non-excludability lets people consume without paying, so firms cannot charge. |
| 4 | Market 40 units; social optimum 35 units, an overproduction of 5 units. | The market uses MPC only; the optimum uses MSC = 30 + Q. |
| 5 | 35 units | The tax shifts MPC to 30 + Q, meeting demand at Q = 35. |
| 6 | 25 | The triangle is ½ × 5 × 10 = 25. |
| 7 | Firm B abates 20 units and firm A abates 0; total cost 200. | The lower-cost firm abates first, saving 200 against an even split of 400. |
| 8 | Market 30 units; social optimum 36 units, an underconsumption of 6 units. | The optimum uses MSB = 120 − 2Q + 24 against MPC. |
| 9 | Spending 864; welfare gain 72; spending far exceeds the gain once administrative and tax-distortion costs are counted. | 864 = 24 × 36 and the welfare gain is ½ × 6 × 24 = 72. |
| 10 | It should read above: MSC exceeds MPC, so market output of 40 is above the optimum of 35. | Social cost is understated, so firms overproduce. |
04 What to do after marking
- After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
- Repeat the same item two days later; move to the next paper only when both attempts are correct.
- Parents only need the answer and note columns; there is no need to explain every item.
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