Level 3 Economics (90631) 2011 - New Zealand · PDF file · 2011-11-09without further government intervention. (e) Describe an intervention policy the Government could use to correct

906310

3SUPERVISOR’S USE ONLY

9 0 6 3 1

© New Zealand Qualifications Authority, 2011. All rights reserved.No part of this publication may be reproduced by any means without the prior permission of the New Zealand Qualifications Authority.

Level 3 Economics, 201190631 Describe market failure and government

interventions to correct for market failure

2.00 pm �hursday 1� November 2011pm �hursday 1� November 2011 �hursday 1� November 20111� November 2011 November 2011 Credits: Four

Check that the National Student Number (NSN) on your admission slip is the same as the number at the top of this page.

You should attempt ALL the questions in this booklet.

If you need more room for any answer, use the extra space provided at the back of this booklet.

Check that this booklet has pages 2 – 15 in the correct order and that none of these pages is blank.

YOU MUST HAND THIS BOOKLET TO THE SUPERVISOR AT THE END OF THE EXAMINATION.

ASSESSOR’S USE ONLY Achievement Criteria

Achievement Achievement with Merit Achievement with ExcellenceDescribe market failure. Explain market failure. Explain market failure.

Describe government interventions used to correct for market failure.

Explain government interventions used to correct for market failure and their impact on equity and efficiency.

Fully explain government interventions used to correct for market failure and evaluate their impact on equity and efficiency.

Overall level of performance (all criteria within a column are met)

You are advised to spend 40 minutes answering the questions in this booklet.

QUESTION ONE

Part A

�he running of major sporting and cultural events has positive production externalities. �he businesses in towns where events are held benefit from greater business revenue and profits.

Graph One: The Market for Major Events

Quantity

MB

MC

Cos

ts / B

enef

its ($

)

(a) Identify on Graph One the private quantity of major events that will occur. Label the quantity Qp.

(b) (i) Adjust Graph One to show the spillover benefits of the positive production externalities to other businesses. Clearly label any changes you make.

(ii) Label the social equilibrium quantity Qs.

(c) Explain why the company organising the major events would not produce quantity Qs, despite there being positive production externalities.

2

Economics 90631, 2011

ASSESSOR’S USE ONLY

Part B

�he company organising the major events owns the legal property rights to the events and can choose to produce the quantity that suits them. Although the company organising major events would not want to produce more than Qp, it is possible for the company and the town businesses to come to an arrangement to internalise the externality.

(d) Explain how the businesses in the town and the company organising the major events should be able to achieve the social equilibrium quantity Qs without further government intervention.

(e) Describe an intervention policy the Government could use to correct the market failure.

3



(f) Consider these options:

Option 1: the company and businesses solve the problem themselves as explained in (d)

Option 2: the government intervention policy you described in (e).

(i) Choose the solution you consider to be the more efficient to correct the market failure:

Policy chosen:

(ii) Evaluate the efficiency of your chosen intervention policy option by explaining:• how the policy would increase efficiency in the market for major events• why it would be more effective at correcting the market failure than the other

policy option.

4



5



QUESTION TWO

Part A

Graph Two: The Market for Freedom Camper-vans

Quantity

MB

MC

Cos

ts / B

enef

its ($

)

SMB

Freedom camper-vans provide tourists with a means of transport, basic sleeping and cooking facilities, and the ability to stop anywhere that attracts them, not just in designated motor camps or camping areas. However, the camper-vans do not include facilities to store human waste. �here has been considerable coverage in the media of the negative consumption externalities caused by the use of freedom camper-vans by some freedom campers who stay in places without toilet facilities.

(a) On Graph Two, identify for the market for freedom camper-vans:

(i) the private equilibrium price PP and private equilibrium quantity QP

(ii) the social equilibrium price PS and social equilibrium quantity QS.

(b) Explain, with examples, why the Private Marginal Benefit Curve (MB) is above the Social Marginal Benefit Curve (SMB).

6



(c) (i) On Graph Two, shade the deadweight loss that occurs if the market for freedom camper-vans is at the private equilibrium.

(ii) Explain why the deadweight loss occurs.

Part B

�wo possible policies the Government could use to achieve social equilibrium are: • to impose a tax on freedom camper-vans• to police areas where freedom campers may stop and fine them if they are breaking laws.

(d) (i) Show on Graph Two the effect of a tax on freedom camper-vans to internalise the market failure.

(ii) Explain how the tax would correct the market failure.

�



(e) (i) Identify which of the two policy options below would be more equitable by circling your recommendation.

�ax on freedom camper-vans Fines for breaking laws

(ii) Evaluate the equity of your chosen policy by explaining: • the impact on equity of each policy• why your recommended policy would be more equitable than the other policy.

8



9



QUESTION THREE

Part A

Approximately 20% of people in New Zealand smoke, although among Māori the figure is closer to 40%. Cigarettes are often described as being a demerit good.

(a) Explain, with an example, why cigarettes meet the requirements of a demerit good.

(b) Explain why the market fails with demerit goods like cigarettes.

10



Part B

�he Māori Affairs Select Committee report on smoking has suggested a number of policies to solve the issue of cigarettes as a demerit good. Among the policies are suggestions for increasing excise tax on cigarettes and bans on the advertising of cigarettes at point of sale.

Graph Three: The Market for Cigarettes

Quantity

MB

MC

Cos

ts / B

enef

its ($

)

P0

Q0

(c) (i) Show on Graph Three the effect of a ban on all advertising of cigarettes at point of sale. Label the new equilibrium price P1 and new equilibrium quantity Q1.

(ii) Explain, with reference to Graph Three, how a ban on all advertising of cigarettes at point of sale could help to correct the market failure.

11



(d) (i) Circle the intervention policy you consider to be the more efficient to help correct the market failure:

�ax on cigarettes Ban on advertising at point of sale

(ii) Evaluate the efficiency of your chosen intervention policy option by explaining:• how the policy would increase efficiency in the market for cigarettes• why it would be more effective at correcting the market failure than the other

policy option.

12



13



14



QUESTION NUMBER

Extra space if required.Write the question number(s) if applicable.

15



QUESTION NUMBER

Extra space if required.Write the question number(s) if applicable.

90

63

1

Documents

Level 3 Economics (90631) 2011 - New Zealand · PDF file · 2011-11-09without further government intervention. (e) Describe an intervention policy the Government could use to correct