CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded
may be different.

Coursebook answers
Chapter 38
Economics in context
Learners’ discussion might include:
• The appraisal should recognise that each of the policies has merits, but that implementation will vary
depending on costs and the timescale. Providing free masks can be done cheaply and quickly. Planting
more trees will enhance the areas close to roads and traffic, but the effects are uncertain and are likely
to take a long time to have an impact. Rationing road space to odd- and even-plated vehicles will bring
immediate relief although it could be difficult to enforce and may be subject to malpractices. Banning
vehicles over 15 years old appears attractive, but the effects could be unfairly felt by low-income groups.
Improving public transport, especially the Metro, is a good long-term policy though likely to be
disruptive and costly.
• In principle, charging for the use of roads in central Delhi is possible; the practical problems will
be huge and the charge will be regressive. Another policy would be to introduce regulations for the
maximum emissions allowed from vehicles.
• The plan should consist of which policy or combination of policies the group believe to be the most
realistic. A timeline is essential with a broad estimate of costs and benefits.

Activities
Activity 38.1
1 MSC
MSC = MPC + MEC
MSC' = MPC + MEC
Costs and benefits

Costs and benefits

MPC
MPC
P MEC P1 MEC

D
0 Q
Quantity 0 Q1
a b
1 a Diagram a shows where the full MEC is included in the ERP charge of P.
b Diagram b shows where only part of the MEC is included in the ERP charge of P1.
2 a In 1 a, MPC + MEC = MSC. The charge is being paid in full. Where MEC = 0, MPC = MSC.
b In 1 b, The charge paid will be less than MEC. It does not produce the most efficient use
of resources.

1 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021
 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Learners’ answers might include: The ERP system in Singapore has been successful for various
reasons. Singapore is a small city state. Geographically, it is easy to put a cordon around the city centre.
The ERP is complemented by an effective public transport system that has heavily subsidised fares.
There are also measures in place that make it expensive to own a private car.

Activity 38.2
1 S'

S = MPC = MSC
Costs and benefits

Pm
P1

MEC

D = MPB
MSB = MPB – MEC

0 Qm Q1
Quantity

2 The minimum price is now Pm and the quantity consumed is Qm. The new price is higher and the
quantity consumed is lower than for the previous equilibrium position.

Activity 38.3
Undertaking this activity has various stages. These are:
a agree an example of market failure
b obtain information on how the government has tried to correct this market failure
c consider whether there is potential for a ‘nudge’ approach to complement current interventions – if
so, then draft out what form this intervention could take. If not, then say why not.

Activity 38.4
Learners’ own answers.

Activity 38.5
Learners’ answers might include:
1 Imperfect information. If the benefits were correctly estimated then an increased subsidy would be
paid out for public transport and there would be a net gain in economic welfare due to lower fares.
2 Policy conflict. Scarce resources have been allocated for a new road that has unclear benefits for
the community. The funds that have been committed could have been put to better use through the
provision of services that will produce greater benefits.
3 Unintended consequences. The high tax on healthcare is likely to deter low-income people from using
healthcare services. This can lead to an unhealthy population, which may restrict productivity and the
rate of economic growth.
4 Unintended consequences. From the government’s point of view, it is best to have people working
rather than being unemployed. The high level of income support gives unemployed people little
incentive to seek work.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ECONOMICS: COURSEBOOK ANSWERS

Think like an economist

Learners’ own discussion might include:
The diverse ownership creates a competitive market. The government is keen for companies to inject
investment and innovation into the rail system. The bidding process is open to all, including UK
companies. Franchises are awarded on the basis of providing the best value for money for the taxpayer.
It is important for there to be a regulatory framework in place to prevent unfair competition and business
practices. It is difficult to know whether Brexit (the UK’s departure from membership of the European
Union) will deter EU companies from future participation in the provision of rail services.

Exam-style questions: Multiple choice

1 A The profit maximising output is 5 and is where MC = MR. The social optimum output is 4 and
determined where MSC = MSB. The difference is 1.
2 B A green tax is based on the ‘polluter pays’ principle. C and D are part of a green tax but are not
reasons why such a tax is levied. A is of no relevance.
3 D The point is that it is not possible to get any information since you have no experience of either
job. The satisfaction gained is a behavioural matter that rests with the individual.
4 B The government will subsidise goods that produce positive externalities which rules out C. D is a
consequence of subsidising merit goods but not the reason for the subsidy. A is a general reason
why a government may have more money to spend in all sorts of ways, not just on subsidies.
5 C This is the welfare gain triangle. All other options are wrong.

3 Cambridge International AS & A Level Economics - Bamford & Grant © Cambridge University Press 2021