Market failure—externalities and common pool or common access resources Paper 1| IBDP Economics HL |

IBDP Economics HL – Microeconomics – Market failure—externalities and common pool or common access resources -Paper 1 Exam Style Practice Questions

Exam Style Questions.

IBDP Economic SL- All Topics

Question

Explain why merit goods tend to be under-provided in a free market.

▶️Answer/Explanation

Answers may include:

definitions of market, merit goods
diagram showing positive externalities in the consumption of a merit good
an explanation that consumers do not take external benefits into account when deciding how much to demand, resulting in producers allocating insufficient resources to the production of merit goods in a free market
examples of merit goods.

Question

Evaluate the use of carbon taxes to reduce threats to sustainability.

▶️Answer/Explanation

Answers may include:

definitions of carbon taxes, sustainability
diagram to show the application of a carbon tax
an explanation of the impact of a carbon tax on the amount of fossil fuels produced and/or on different stakeholders
examples of cases where carbon taxes have been applied
synthesis or evaluation (evaluate).

Question

Using real-world examples, evaluate different approaches to managing common access resources.

▶️Answer/Explanation

Answers may include:

Definition: common access resources.
Explanation: of different government approaches to this problem, legislation and regulation, collective self-governance, tradable permits, carbon taxes and international agreements.
Diagram: showing negative production externalities.
Synthesis (evaluate): the strengths and limitations of the above policies in addressing the problems of managing common access resources.
Examples: a real-world common access resource and policies used by governments eg Antarctic Treaty System, Nile Agreement etc.

Question

Explain why the existence of positive externalities of consumption would lead to allocative inefficiency and thus a welfare loss.

▶️Answer/Explanation

Answers may include:

Terminology: Positive externalities, consumption externalities, welfare loss, allocative inefficiency.
Diagrams: A diagram to show positive externalities in consumption and the welfare loss associated with the free market level of output.
Theory: An explanation that because there are positive externalities of consumption, a welfare loss exists, where the marginal social benefit exceeds the marginal social cost at levels of output up to the point where marginal social benefits are equal to marginal social costs. The socially optimum level of output would be greater than the level of output provided by a free market.