Notes

(q) With the help of a diagram, assess the view that government intervention can be used successfully to correct market failure caused by positive externalities. (20)
(ans) market failure caused by positive externalities indicates allocative inefficiency the misallocation of resources in the interest of society as a whole. the concept of allocative efficiency states that resources must be allocated in such a way where the needs and wants of the customers are met and is shown on a graph where the price or avg revenue or cost of the good is equal to demand
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government intervention is where the govt steps in to manage the market failure occurring and in thus case it would lead to underconsumption underproduced. Positive externalities occur when the consumption/production of a good produces a benefit to society which is greater than that received by an individual consumer/producer. This is sometimes described as a positive spill-over’ effect.
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types of govt intervention that can be done is subsidy and advertising or direct provision

evaluation= value of subsidy diff to measure
impacts of corrective measures take time to be in effect
direct provision may become more inefficient
It is possible to show that government intervention can reduce the level of inefficiency caused by the existence of positive externalities but it is not clear whether the net effect of government intervention will always be positive. Some types of intervention will be more effective than others depending on the nature of the good/service under consideration.

With the help of a diagram, assess whether imperfect labour markets will always lead to lower wages and higher unemployment.
ans => perfect labour markets are classed as ones that have homogenous labour, perfect mobility, large number of buyers and sellers of labour, and perfect information available. the demand curve is perfectly elastic, and this makes firms price takers.
(AN) There are 4 main ways of imperfect labour markets occurring, namely: imperfect information, trade union intervention government intervention and monopsony power.
A monopsony is where there is a single buyer in a market. graphically, in a monopsony, one buys where the MC=MRP of labour. as shown on the graph this will lead to both lower wager and higher unemployment.
the government could intervene by implementing a minimum wage above market equilibrium. this will lead to a higher wage rate, simultaneously increasing the level of unemployment as now there is excess supply of labour. trade unions represent workers and fight for worker rights within or outside and organization. they could be successful in getting higher wage rates however the unemployment rates will increase.
(EVAL) elasticities of labour.
It is possible for trade unions to intervene in monopsonistic markets and undertake bilateral wage negotiations. Depending on the respective bargaining strengths of the union and monopsony, it might be possible for collective bargaining to raise both wages and employment

Q. The increased use of electric vehicles (EVs) is encouraged as part of governments’ climate change policies because they create fewer negative externalities than diesel and petrol (gas) vehicles. Evaluate, with the help of diagrams, two policies that a government may use to encourage the use of EVs (20)
(ans) negative externalities are negative effects on a third party that has nothing to do w production or consumption of a good or MPB>MSB // MSC>MPC. market failure in the inability to allocate resources effectively and reach allocative efficiency which is where MC=AR
government intervention is when the government takes it upon itself to fix this misallocation and this can be done through a number of different ways.
the government can intervene by giving subsidies to producers. providing subsidies to producers for EVs will first of all act as an incentive to produce more EVs and secondly will lower unit costs for firms, allowing them to lower their prices thus attracting more customers.
the second way a government will be able to increase the use of EVs is increasing indirect taxes on diesel and petrol. this is going to increase the costs for users of vehicles that aren't electric as suppliers are likely to raise prices and they will most likely reduce their consumption of diesel and petrol and they will look for alternatives and be led to EVs
<GRAPHS>
(EVAL) governments introducing subsidies to producers might encourage them to increase production and reduce prices however costs of providing a subsidy need to be examined and it needs to be evaluated on whether its actually worth it or the sum of the subsidy should be spent elsewhere.
though indirect taxation might be able to push people towards EVs, they will??
the degree of govt intervention doesn't matter as much as ultimately the nature of the good will be the biggest influence on whether consumption will increase or decrease.

Q- Evaluate, with the help of a diagram(s) how total market demand and minimum efficient scale may determine the form of market structure in an industry (20)
(kn) total market demand is determined by adding all individual demand curves together. minimum efficient scale is the lowest point on a cost curve at which a company can produce its product at minimum LRAC. the downward sloping region of this LRAC will show increasing returns, the MES shows constant returns and the upward sloping portion will show the decreasing returns to scale. Economies of scale are where the avg costs decrease while production increases and can also be considered MES since costs are minimized at this point.
(an) At the point where demand intersects with LRAC, the minimum amount being produced by any firm in the market is shown however what determines the type of market structure being operated under depends on the length of the period where a firm has constant returns to scale.
<graph showing MES etc>
Assuming the period of EOS is prolonged, this would indicate the firm operating under a monopoly since it indicates that






Q. To improve allocative efficiency economists frequently advise governments to remove existing subsidies to the private sector providers of education. With the help of a diagram, evaluate this advice (20) DOOOOO
Ans the public sector provides goods that are non-rival and non-excludable and it doesn't have the objective of earning profits.
the private sector is based on profit motive and only produces goods that are excludable and rival. merit goods are thought to be underprovided and under consumed with positive impacts on society. here education is being talked abt as being a merit good. allocative efficiency talks about where resources are allocated in a way that consumer wants and needs are met.
merit goods are goods that have positive externalities. when positive externalities are present in a market it indicates the misallocation of resources. to fix this the govt intervenes w the market with ways such as subsidies, advertising or direct provision of the good.

Some firms frequently use price discrimination. Assess the view that when this occurs, price discrimination will always benefit the producer at the expense of the consumer and society.

(kn) price discrimination is when producers charge different prices to different consumers based on factors such as age gender region etc
there must be key factors available for a firm to be able to price discriminate such as they should be price makers, separable markets with diff price elasticities. for example, in cinemas adults, students and kids are charged diff prices even tho it costs the cinema the same amt of money to put on a movie. they are charged on the basis of their age.
(an) price discrimination has diff impacts on producers and consumers. looking at the producers first, they have many benefits and negative aspects associated with PD. firstly the producers can charge prices according to peoples ability to pay thus increasing the amt of potential customers. secondly the producers earn supernormal profits which can help stimulate investment. the quantity demanded can also increase due to ease of payment for consumers. lastly if one markets makes less profits, it can be offset by profits made elsewhere in the market.
now for the cons. It might cost the firm to divide the market, which limits the benefits they could gain. secondly, if consumers being charged higher find out they are being exploited more, this could damage the brand name and lead to lowered demand leading to lesser demand.
for consumers there are pros and cons too. the first benefit Consumers could benefit from a net welfare gain as a result of cross subsidization, if they receive a lower price. secondly consumers previously excluded by higher prices will be able to afford the products being sold now. the cons tho are that Usually, price discrimination results in a loss of consumer surplus. Since P > MC, there is a loss of allocative efficiency. secondly it increases monopoly power of firms and this could increase prices.
(EVAL) Some consumers gain and some lose. The lower price in the low PED market will benefit those consumers in that market whilst the opposite occurs in the High PED market. If the price discrimination exists between domestic and foreign markets The producer may also be able to drive competition from the foreign market if it charges high domestic prices / recovers overheads domestically. This may improve a country’s balance of payments.