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IB Economics: Market Failure – Practice Paper 2 (10 Questions)
IB Economics: Market Failure – Practice Paper 2 (10 Questions)
Paper two turns to external costs of consumption and public goods: read MPB against MSB, find the market and socially optimal quantities, work out deadweight loss and a Pigouvian tax, then handle subsidies for positive externalities, the commons and free riding.
Quick answer The market clears where MPB equals MPC and the optimum where MSB equals MSC; a consumption external cost makes MSB equal MPB minus MEC.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 questions |
| Suggested time | 25 minutes |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: IB Economics: Market Failure – Tutor Lesson Plan |
| Level | IB SL |
02 Questions (10 items)
- FoundationWhat is a negative externality of consumption and which curve does it shift?
- FoundationA market has MPB equal to fifty minus Q and MPC equal to ten plus Q. Find the free-market quantity and price.
- FoundationContinuing, each unit carries an external cost of eight. Write the MSB equation and evaluate it at Q equal to twenty.
- FoundationWhat are the two defining characteristics of a public good?
- IntermediateFor the same market, with MSB of forty-two minus Q and MPC of ten plus Q, find the socially optimal quantity and price.
- IntermediateWhat is the deadweight loss between the free-market and socially optimal quantities?
- IntermediateThe government levies a Pigouvian tax of eight dollars per unit. Find the new quantity and total tax revenue.
- ChallengeA service carries a positive consumption externality: MPB is twenty minus Q, MPC is four plus Q and the marginal external benefit is four. Find the market quantity, the optimum, the per-unit subsidy and its total cost.
- ChallengeWhat causes the tragedy of the commons, and name two policy remedies.
- Error redoA student writes MSB equal to MPB plus eight for a production external cost. What is wrong and what is correct?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | consumption harms a third party, so marginal social benefit lies below marginal private benefit | The external cost is ignored by the buyer, so MSB equals MPB minus MEC. |
| 2 | Q equals twenty and P equals thirty | Setting fifty minus Q equal to ten plus Q gives twenty units at thirty dollars. |
| 3 | MSB equals forty-two minus Q, which is twenty-two at a quantity of twenty | Subtracting eight from fifty minus Q gives forty-two minus Q, so the value is twenty-two. |
| 4 | non-rivalry, where one more user adds no cost, and non-excludability, where others cannot be kept out | Together they prevent charging, so private output falls short of the optimum. |
| 5 | Q equals sixteen and P equals twenty-six | Setting forty-two minus Q equal to ten plus Q gives sixteen units at twenty-six dollars. |
| 6 | sixteen dollars | The triangle is half of four units times eight dollars, which is sixteen. |
| 7 | Q equals sixteen and revenue equals one hundred twenty-eight dollars | Supply becomes eighteen plus Q, giving sixteen units and revenue of eight times sixteen. |
| 8 | the market gives eight units, the optimum is ten, the subsidy is four per unit and costs forty in total | MSB is twenty-four minus Q, and a four-dollar subsidy makes the consumer price equal Q, so both give ten units. |
| 9 | unclear property rights lead to overuse; remedies are defining property rights, taxing use or setting quotas | Each user counts only private cost, so the resource is depleted. |
| 10 | the cost belongs on supply, so MSC equals MPC plus eight; adding it to demand would imply a benefit | A cost raises social cost rather than social benefit, so the sign is reversed. |
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.
Questions and answers are written originally by the TutorZone team and are not taken from any school, publisher or examination authority paper. Every value is checked by computer.
