Crop farms buy high-impact and low-impact pesticides. Each litre of high-impact pesticide causes an estimated £7 of uncompensated damage to bees owned by nearby beekeepers. Each litre of low-impact pesticide causes an estimated £1 of such damage. The beekeepers do not buy or sell the pesticides.
The government introduced an indirect tax on high-impact pesticide and a subsidy for low-impact pesticide. Before the policy was introduced, the total annual external cost was £370,000.
| Type of pesticide | Price before the policy | Price after the policy | Annual amount bought before the policy | Annual amount bought after the policy | External cost per litre |
|---|---|---|---|---|---|
| High-impact | £18 per litre | £24 per litre | 50,000 litres | 35,000 litres | £7 |
| Low-impact | £26 per litre | £20 per litre | 20,000 litres | 38,000 litres | £1 |
Calculate the change in the total annual external cost after the government introduced the policy.
Explain why the combined policy is likely to reduce market failure in this market. Use the data in the table.
83 exam-style questions on AQA GCSE Economics 1.6 Market failure, covering 1.6.1a Market failure as misallocation of resources, 1.6.1b Government intervention, 1.6.2a Defining externalities, and 1.6.2b Positive and negative externalities. Each one has a worked solution and a mark scheme showing where the marks go.