Reasons for Government Intervention in Markets: 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
The market for good X is in equilibrium. A government then introduces an effective minimum price on good X. What will decrease as a result of this minimum price?
Answer: D.
An effective minimum price is one set ABOVE the equilibrium, so buyers now face a higher price and cut back the quantity they buy. Consumer surplus is the area between the demand curve and the price paid, and it is squeezed from both sides at once: the remaining buyers pay more per unit and there are fewer units bought, so consumer surplus falls, which is D. A is wrong because excess supply rises from nothing to a genuine surplus, since producers offer more at the higher price while buyers want less. B is wrong because the market price is exactly what the intervention has raised. C is wrong because a higher price makes production more rewarding, so producers move up their supply curve and the quantity SUPPLIED rises; the quantity actually SOLD falls, but that is not what the option says.
Question 2
Medical researchers indicated that drinking too many sugary drinks is bad for health. Government intervention to impose a tax on the sale of sugary drinks might help solve which market failures? Each option answers yes or no for three columns, in order: negative externalities of consumption, negative externalities of production, over-consumption of demerit goods.
Answer: C.
Three columns, one at a time. Drinking sugary drinks harms the drinker's health and imposes costs on health services, so there are negative externalities of CONSUMPTION, yes, and sugary drinks are demerit goods that are over-consumed because people undervalue the harm, yes. Nothing in the question concerns pollution or other costs arising from the production process, so negative externalities of production is a no.
Question 3
An effective minimum price is applied to alcohol in an attempt to reduce consumption.
Why would a government not buy up any surplus created?
Answer: A.
An effective minimum price sits above equilibrium, so quantity supplied exceeds quantity demanded and a surplus of alcohol builds up. A government could buy that surplus, as agricultural support schemes have long done, but the money would have to come from taxation or borrowing, and it would be spent acquiring the very product the policy is trying to discourage people from consuming. Cost is therefore the reason to stay out of the market. The claim that buying the surplus would reduce producers' incomes gets the effect backwards, since producers would then sell their whole output at the higher price and earn more, not less. Buying the surplus cannot cause a shortage either, because at the minimum price consumers already want less than producers are offering, and government purchases mop up that excess rather than creating excess demand. Unemployment is equally unlikely to follow, as supporting sales at a high price protects jobs in the industry rather than destroying them.
Question 4
Why might governments provide free education for children aged 4 to 16 years old?
Answer: A.
The correct answer is A: consumers are not fully aware of the benefits of education.
Education is a merit good. Households underestimate the private benefit, higher lifetime earnings, better health, wider opportunity, partly because those benefits arrive years later and are hard to assess when the decision is made for a child. Expressed demand is therefore below informed demand, and a free market would leave consumption below the socially optimal level. Providing education free at the point of use removes the price barrier and raises consumption towards the optimum. There are positive externalities too: a better-educated workforce raises productivity for everyone, so social benefit exceeds private benefit.
Why the other options are wrong:
Education is a merit good. Households underestimate the private benefit, higher lifetime earnings, better health, wider opportunity, partly because those benefits arrive years later and are hard to assess when the decision is made for a child. Expressed demand is therefore below informed demand, and a free market would leave consumption below the socially optimal level. Providing education free at the point of use removes the price barrier and raises consumption towards the optimum. There are positive externalities too: a better-educated workforce raises productivity for everyone, so social benefit exceeds private benefit.
Why the other options are wrong:
- B reverses the direction. Merit goods are under-consumed in a free market, which is the reason for intervening at all.
- C misclassifies education as a public good. It is rival (finite classroom places) and excludable (fees can be charged), so free-riding is not the problem.
- D would make education not worth buying for the individual at all, which is false, private returns to schooling are large and positive. The problem is that consumers undervalue those returns, not that they do not exist.
Question 5
Governments provide public goods.
What is an example of a public good?
Answer: A.
A public good has two properties together: it is non-rival, meaning one person consuming it leaves no less for anyone else, and non-excludable, meaning nobody can be kept from benefiting whether they pay or not. A defence force satisfies both, since protecting the territory protects every resident simultaneously and there is no way to leave out the household that refused to contribute, which is why the free rider problem stops the market supplying it. Hospital services fail both tests, because a bed or an operating theatre used by one patient is unavailable to another and treatment can be withheld from those who do not pay; hospitals are provided by governments as merit goods for a different reason. A leisure centre charges at the door, so exclusion is easy, and it becomes crowded, so it is rival. A toll road has the exclusion mechanism built into its name.
What this practice covers
These questions are drawn from past CIE 9708 papers. 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 reasons for government intervention in markets, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Government-provided does not automatically mean public good.
- Public good does not mean free good.
- Merit good does not mean public good.
- Demerit goods are not necessarily illegal.
- A maximum price is a method, not a reason.
- A minimum price is a method, not a reason.
- Public-good non-provision is caused by the payment problem, not zero value.
- Merit-good under-consumption can arise from low income as well as information.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Reasons for Government Intervention in Markets revision notes.