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IB Economics: Market Failure – Practice Paper 3 (10 Questions)
IB Economics: Market Failure – Practice Paper 3 (10 Questions)
Paper 3 starts from a production external cost of twenty dollars plus two Q with a constant six dollar external cost, then works through the optimal quantity, deadweight loss and a Pigouvian tax before comparing tradable permits with a subsidy for a positive externality.
Quick answer Market equilibrium is ten units at forty dollars and the optimum is eight units at forty-two dollars. Deadweight loss is six dollars, a tax of six dollars raises forty-eight dollars, and a permit cap of eight units prices a permit at about six dollars.
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)
- FoundationMPC = 20 + 2Q. What is the marginal private cost when Q = 5?
- FoundationEach unit produced creates an external cost of six dollars, so MEC = 6. Write the marginal social cost.
- FoundationMPC = 20 + 2Q and MPB = 50 − Q. What are the market quantity and price?
- FoundationWhat is an external cost?
- IntermediateWith MSC = 26 + 2Q and MSB = 50 − Q, what are the socially optimal quantity and price?
- IntermediateOutput falls from the market level of ten to the optimum of eight. What is the deadweight loss?
- IntermediateThe government taxes at the marginal external cost. What is the tax rate and the revenue at the optimal quantity?
- ChallengeThe government issues tradable pollution permits with a cap of eight units. What is the likely permit price?
- ChallengeA good has a positive consumption externality: MPB = 30 − 2Q, MEB = 4, MPC = MSC = 10 + 2Q. Find the market quantity, the optimal quantity and the subsidy needed.
- Error redoCommon error: deadweight loss is written as six times two, giving twelve dollars. What is the correct value?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | $30 | Twenty plus two times five equals thirty. |
| 2 | MSC = 26 + 2Q | Social cost equals private cost plus external cost, so twenty plus two Q plus six. |
| 3 | Q = 10, P = $40 | Setting private cost equal to private benefit gives three Q equals thirty. |
| 4 | A cost borne by a third party that the buyer and seller do not include in private cost | Factory waste that harms nearby residents is an example, and it does not appear in private cost. |
| 5 | Q = 8, P = $42 | Twenty-six plus two Q equals fifty minus Q, so three Q equals twenty-four. |
| 6 | $6 | Deadweight loss is half times six times two. |
| 7 | Tax of $6 per unit; revenue $48 | Six dollars on eight units gives forty-eight dollars. |
| 8 | About $6 | The cap equals the optimal quantity, so the permit price equals the marginal external cost there. |
| 9 | Market 5, optimum 6, subsidy $4 | Thirty minus two Q equals ten plus two Q gives five; thirty-four minus two Q gives six; the subsidy equals four. |
| 10 | $6 | Deadweight loss is a triangle, so it must be halved, with the external cost as its height. |
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.
