A government is considering intervening in a market to correct a market failure. In which of the following situations is the intervention most likely to lead to an increase in net economic welfare?
The government introduces a guaranteed minimum price for a farm product set below the market-clearing price to stabilize agricultural incomes.
The government imposes an indirect tax equal to the marginal external cost on a good where MSC>MPCMSC > MPCMSC>MPC, provided the administrative cost of implementing the tax is less than the deadweight loss of the market failure.
The government provides a unit subsidy to producers of a merit good with perfectly inelastic demand (PED=0PED = 0PED=0) in order to increase consumption to the socially optimal level.
The government funds the provision of a non-excludable public good by imposing a tax on a complement good that has a perfectly elastic demand (PED=∞PED = \inftyPED=∞).
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.