In an effort to transition away from fossil-fuel energy, a national government introduces a substantial subsidy for domestic wood-pellet biomass boilers. Following the policy's implementation, the demand for wood pellets rises so rapidly that forestry companies begin clear-cutting ecologically diverse, young forests to meet the demand, resulting in a net decrease in national carbon sequestration and a loss of biodiversity.
This outcome is most accurately classified as:
a negative externality in consumption resulting from household biomass usage.
market failure caused by the underprovision of a public good.
government failure arising from unintended consequences of the subsidy.
government failure due to the excessive administrative costs of verifying boiler installations.
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.