The table below shows the marginal private and external benefits and the marginal private and external costs of two products at their free market equilibrium level of output.
| Product A (£) | Product B (£) | |
|---|---|---|
| Marginal private benefit | 120 | 90 |
| Marginal external benefit | 80 | 20 |
| Marginal private cost | 120 | 90 |
| Marginal external cost | 30 | 60 |
To improve the allocation of resources, what should the government do?
Tax product A and subsidise product B
Subsidise product A and tax product B
Subsidise product A and subsidise product B
Tax product A and tax product B
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.