Resource Allocation in Different Economic Systems: five questions to try now
Real past-paper questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Question 1
Consumers in country X buy some goods and services from private sector firms. Other goods and services are provided by the state.
What is this type of economy?
Answer: C.
An economy is classified by who owns the resources and who decides what is produced, and country X shows both mechanisms working side by side: private firms supplying some goods through the price mechanism, and the state supplying others through public provision. That coexistence is the definition of a mixed economy, which is what almost every real economy turns out to be. A free market economy would leave every good to private firms responding to profit signals, with the state confined at most to protecting property rights. A planned economy would have the state owning the resources and directing output centrally, which the presence of private sector firms rules out immediately. Joint economy is not a term used in economics at all, so it can be discarded before the reasoning even begins.
Question 2
There has been a worldwide move towards market economies and away from state controlled nationalised industries. Which policy would limit this transition?
Answer: D.
D regulation of prices of former nationalised industries’ products
Correct answer: D
Explanation: The regulation of prices of former nationalised industries’ products would limit the transition towards market economies as it implies continued government control over the pricing mechanism. In a market economy, prices are typically determined by supply and demand forces in the market without government intervention. By regulating prices, the government would be interfering with the free market principles, hindering the full transition to a market economy. On the other hand, options A, B, and C all support the transition towards market economies by promoting the development of capital markets, stable currencies, and liberalisation of markets and trade, respectively.
Correct answer: D
Explanation: The regulation of prices of former nationalised industries’ products would limit the transition towards market economies as it implies continued government control over the pricing mechanism. In a market economy, prices are typically determined by supply and demand forces in the market without government intervention. By regulating prices, the government would be interfering with the free market principles, hindering the full transition to a market economy. On the other hand, options A, B, and C all support the transition towards market economies by promoting the development of capital markets, stable currencies, and liberalisation of markets and trade, respectively.
Question 3
What would supporters of a nationalised public transport service expect to be the most likely outcome from the privatisation of train and bus services?
Answer: A.
The question asks what SUPPORTERS OF NATIONALISATION would expect, so it is asking for the drawback they would predict, not the benefit privatisation's advocates would claim. Their central worry is that a private operator chases profit, and routes to small or remote places do not make a profit, so those routes get cut. Fewer destinations served is exactly that fear, which is A. The other three are the case FOR privatisation, not against it: competition is supposed to push fares down, sharpen the incentive to run more frequent services, and improve efficiency. In fact a nationalisation supporter would expect employment to FALL after privatisation, since cutting costs is one of the first things a profit-seeking owner does.
Question 4
A country is moving from a planned economy to a market economy. The government previously provided transport services but has now sold these to private firms. What is a consequence of this?
Answer: D.
Selling state transport operators to private firms hands the allocation decision to the price mechanism: firms now survive on the revenue consumers choose to give them, so spending patterns rather than a planning ministry decide what is produced. That is the meaning of consumer sovereignty, and it is the standard consequence of privatisation. The claim that government ownership of resources has increased inverts the transaction, since the whole point of the sale is that the state no longer owns the assets. Saying that public sector provision has increased makes the same mistake from the output side, because these services have moved out of the public sector and into the private one. An increase in central planning is the reverse of the direction of travel the question describes, which is planned economy to market economy.
Question 5
The transition of centrally planned economies to market economies was accompanied by a significant change in the composition of output. What was an immediate consequence of this transition?
Answer: C.
The correct answer is C. an increase in unemployment.
Explanation:
When centrally planned economies transition to market economies, there is usually a restructuring of industries and a shift in the composition of output. This transition often results in increased competition and a decreased demand for certain products and services. This can lead to layoffs and increased unemployment as businesses adjust to the new market dynamics. Therefore, an immediate consequence of this transition is an increase in unemployment.
A is not correct because a transition to a market economy typically involves a reduction in government intervention and a move towards more efficient allocation of resources, which would reduce the build-up of unsold stocks of goods.
B is not correct because an increase in exports would depend on various factors such as market demand, competitiveness, and trade agreements, which may not be immediately impacted by the transition to a market economy.
D is not correct because while there might be changes in prices of goods and services during the transition, these changes are likely to be influenced by various factors beyond just the transition itself.
Explanation:
When centrally planned economies transition to market economies, there is usually a restructuring of industries and a shift in the composition of output. This transition often results in increased competition and a decreased demand for certain products and services. This can lead to layoffs and increased unemployment as businesses adjust to the new market dynamics. Therefore, an immediate consequence of this transition is an increase in unemployment.
A is not correct because a transition to a market economy typically involves a reduction in government intervention and a move towards more efficient allocation of resources, which would reduce the build-up of unsold stocks of goods.
B is not correct because an increase in exports would depend on various factors such as market demand, competitiveness, and trade agreements, which may not be immediately impacted by the transition to a market economy.
D is not correct because while there might be changes in prices of goods and services during the transition, these changes are likely to be influenced by various factors beyond just the transition itself.
What this practice covers
These questions are drawn from past CIE 9708 papers and filtered to resource allocation in different economic systems. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on resource allocation in different economic systems, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- A market economy has no government. Even market systems require legal and institutional support.
- Government ownership automatically means a fully planned economy. A mixed economy can contain public enterprises.
- Mixed means exactly half market and half state. The balance varies by country, sector and time.
- Market allocation means resources go to those who need them most. Price rationing reflects ability and willingness to pay.
- Planned economies make no use of prices. Prices may exist, but may be administratively fixed and play a weaker coordinating role.
- Central planning guarantees equality. Formal distribution may be more equal, but political privilege and shortages may remain.
- Profit always means social benefit. Profit reflects private revenue and cost, which may exclude external effects.
- Planning always prevents waste. Planning may reduce duplication but create surpluses, shortages or target distortion.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Resource Allocation in Different Economic Systems revision notes.