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IB Economics: Market Failure – Practice Paper 4 (10 Questions)
IB Economics: Market Failure – Practice Paper 4 (10 Questions)
Paper 4 uses one full set of cost and benefit functions to work through the market outcome, the social optimum, deadweight loss, a Pigouvian tax and tradable permits, then adds a positive externality case.
Quick answer With private cost of twenty plus Q, external cost of Q and private benefit of fifty-six minus two Q, the market gives twelve units at thirty-two and the optimum is nine at thirty-eight, with a deadweight loss of eighteen dollars and tax revenue of eighty-one 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/HL |
02 Questions (10 items)
- FoundationMPC = 20 + Q and MEC = Q. What is the marginal private cost when Q = 5?
- FoundationUsing the same functions, what is the marginal social cost when Q = 5?
- FoundationMPC = 20 + Q and MPB = 56 − 2Q. What are the market quantity and price?
- FoundationWhat do tradable pollution permits and a Pigouvian tax have in common?
- IntermediateMSC = 20 + 2Q and MSB = 56 − 2Q. What are the socially optimal quantity and price?
- IntermediateOutput falls from the market level of twelve to the optimum of nine. What is the deadweight loss?
- IntermediateThe government imposes a nine dollar Pigouvian tax per unit. What is the total tax revenue?
- ChallengeIf permits capped at nine units are auctioned instead, what are the permit price and auction revenue? Why do they match the tax?
- ChallengePositive externality: MPB = 40 − 2Q, MEB = 6 and MPC = 16 + Q. Give the market quantity, the socially optimal quantity and the subsidy needed.
- Error redoCommon error: the external cost is added to private benefit. Where should it be added?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | $25 | Twenty plus five equals twenty-five. |
| 2 | $30 | Social cost adds the external cost, so twenty-five plus five equals thirty. |
| 3 | Q = 12, P = $32 | Setting private cost equal to private benefit gives three Q equal to thirty-six. |
| 4 | Both internalise the external cost so that the marginal cost facing firms rises to the social level | A tax fixes the price and a permit fixes the quantity, yet both move output toward the optimum. |
| 5 | Q = 9, P = $38 | Twenty plus two Q equals fifty-six minus two Q, so four Q equals thirty-six. |
| 6 | $18 | The triangle is half of twelve multiplied by three, which is eighteen. |
| 7 | $81 | Firms produce nine units, so nine times nine equals eighty-one. |
| 8 | A permit price of $9 and revenue of $81, because the shadow price of a permit equals the external cost at the optimum | Quantity control and price control meet at the same point, one fixing quantity and the other price. |
| 9 | Market Q = 8, optimal Q = 10, a subsidy of $6 per unit costing $60 in total | Social benefit equals forty-six minus two Q, which meets private cost at ten units. |
| 10 | To private cost, giving social cost equal to private plus external cost | An external cost shifts the cost curve, not the benefit curve. |
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.
