1.

Assess factors that could affect the Production Possibility Frontier

A Production Possibility Frontier demonstrates the combination of two goods/services attainable
when all resources are fully and efficiently used. One factor which could shift the PPF curve outwards
is investment into education and training. This can be done by the government and will lead to, for
example, better teachers/lecturers in universities along with better resources and equipment/labs.
This means that students get a higher quality of education. As a result, these students will have more
flexibility and a stronger skillset. Consequently improving the efficiency and productivity levels of the
future workforce. This leads to an improvement in the quality of a key factor of production (labour).
This means that there will be an increase in the productive capacity of the economy which can be
demonstrated by the PPF curve shifting outwards to PPF2. However, to evaluate, additional
spending into high level education like this may be futile. This is because an improvement in the
skillset and mobility of the labour force could lead to higher demand for workers overseas. This
means that there may be a brain drain where skilled individuals emigrate, ultimately damaging the
potential and hence the PPF curve.

Another factor which could possibly shift the PPF curve is a natural disaster. This could lead to an
inward shift due to the impact it can have on the factors of production. A natural disaster such as a
tsunami or an earthquake can be devastating. This can lead to machinery being damaged, natural
resources being destroyed and people being killed. This means that the quantity of factors of
production in an economy would be reduced. This leads to a fall in the maximum potential in an
economy. As a result, the PPF curve is likely to shift inwards. This means that the economy is less
capable of producing both capital and consumer goods. However, to evaluate, the extent to which a
natural disaster impacts the PPF curve depends on the magnitude and region. This is because if a
small region of a country is affected, then it is likely that the impact on the PPF curve will be
insignificant.

One factor that can shift the PPF curve outwards is the relaxation of legislation regarding
immigration. This is because a fall in immigration laws would incentivise more people from abroad to
enter the UK and potentially look for work. This leads to an increase in the quantity of a key factor of
production (labour). As a result, the productive capacity of the UK economy would increase due to
having a larger potential from the increase in the size of the workforce. As a result, the PPF curve
would shift outwards from PPF1 to PPF2. This means that the economy is capable of producing more
capital and consumer goods. However, to evaluate, this positive impact on the PPF curve could be a
short term impact. This is because if people are entering the country for short term contracts (2 year
contracts are very common) the PPF curve may result in shifting back inwards if these people leave
the country.
2. Assess the possible impacts of an increase in any factor of production on the PPF
One impact of an increase towards funding for university is that it allows students to receive a higher
standard of education. This is because universities are able to use the funding granted to invest into
better lecturers, equipment and resources. As such, students have the best resources available to
maximise their learning and their skillset. Therefore, graduates have more knowledge. This leads to
an improvement in the mobility and flexibility of the future workforce. As a result, there will be an
increase in the productivity and efficiency levels within the economy. This means that there will be
an increase in the productive capacity of the UK economy. This leads to improvements in the quality
of a key factor of production, labour. This ultimately leads to an outward shift in the PPF curve which
increases the country's potential of producing more capital and consumer goods. However, to
evaluate, additional spending into high level education like this may be futile. This is because an
improvement in the skillset and mobility of the labour force could lead to higher demand for
workers overseas. This means that there may be a brain drain where skilled individuals emigrate,
ultimately damaging the potential and hence the PPF curve.

Another impact of an increase in funding towards universities is that it may lead to higher standards
of living and consumer welfare. This is because if there are better facilities and degrees, more
students will be encouraged to apply to university. As a result, the quality of education is more likely
to be meaningful and worthwhile. This is effective because upon graduation, students will be highly
qualified and mobile which means that they are able to apply for high paying jobs. As a result of
higher incomes, consumers can afford to purchase more luxury and higher quality goods and
services, such as healthy foods and holidays. As a result, consumer utility and welfare will be
improved. However, to evaluate, it may take a long time before consumers are able to benefit from
their education. This is because the majority of students are likely to be in very large debts from
tuition fees. This means that once they earn above a certain threshold students must repay their
loans therefore not having full access to their income . This fall in disposable income could damage
welfare.
3. Assess the benefits and drawbacks of division of labour to a car manufacturer
Division of labour is when the production process is broken down and specific roles are given to
members of staff. One benefit of car manufacturers such as BMW implementing division of labour is
an increase in labour productivity. This is because employees will be focussed on one aspect of the
production process. For example, one worker may focus on the engine while another on the paint.
This leads to specialisation and expertise in these fields. As a result of their high level of skill, workers
can produce these cars at a much faster rate. This leads to a fall in the unit cost as output per unit of
input is increasing. This means BMW can reduce its prices and become more competitive against
rivals such as Audi and Mercedes. This would allow a firm like BMW to increase its market power.
However, to evaluate, division of labour involves employees being interdependent. This means that
if there is a member of the assembly line absent, there may be no one else who can fill in that role.
This could reduce productivity levels and lead to rising costs.

Another benefit of car manufacturers implementing division of labour is an increase in the quality of
their cars. This is because workers carry out the same task over and over again until they are
extremely specialised. This leads to these workers such as engineers and assembly line workers to
not make many errors or faults. This reduces waste and also allows the cars to be made to a very
high standard as all employees know exactly what they are doing. For instance it may lead to
excellent quality engines and body work. As a result, the higher quality may lead to customer loyalty
and higher levels of sales, revenue and profits for BMW. These profits can then be reinvested into
the best quality technology to further develop innovative research and development. However, to
evaluate, division of labour could lead to boredom. This is due to the monotonous nature of the job
and as a result workers may slack and not put in enough effort which could actually result in
mistakes. As a result, there could be faulty engines and bodywork which reduces the quality of these
cars.
4. Assess the potential impacts of specialisation
Specialisation is when an individual/firm/country focuses their productive efforts on
tasks/products/industries. Specialisation allows for high level trade which has many microeconomic
impacts on consumers. One benefit is that consumer utility is likely to be improved. This is because
specialisation leads to highly skilled workers and industries that are extremely innovative and
efficient. An example can be division of labour or even the German car manufacturing industry
making high quality cars. This leads to high quality goods and services along with low unit costs
which can be passed on to consumers in the form of lower prices. This means that consumer surplus
and welfare improves as they have access to the best quality goods and services at reasonable
prices. As a result, living standards will see huge improvements. However, to evaluate, specialisation
can lead to dominance within global markets. This means that producers such as BMW and
Mercedes have high pricing power which they can use to exploit consumers. This leads to a
reduction in consumer surplus and allocative efficiency.

Another impact of specialisation can be on the producers in different countries. For example, the UK
specialises in a range of goods/services such as pharmaceuticals, aviation and financial services. One
benefit for firms within these industries is that there is likely to be a high global demand for their
products. This is because of the large market to which they can supply their products. As a result
there will be higher levels of revenue and ultimately profits for these companies. This means that
these profits can be used to reinvest into different aspects of the companies including improving
production process even further,creating innovative products and expanding into new markets and
locations. As a result, share prices of many of these organisations could see a rise which will benefit
shareholders. However, to evaluate, specialisation can lead to overspecialisation and over reliance.
This means that if there is a fall in global and domestic demand for these firms it can have
detrimental effects on the firms, consumers, employees and the wider economy.
5. Assess the benefits and drawbacks of free market economies
A free market economy is one where the economic problem is resolved by the price mechanism. This
type of economic system has no or little government intervention. One benefit of operating as a free
market economy stems from the fact that firms in this type of economic system are profit driven.
This is because we assume firms’ rational decision making to be linked to profit maximisation. This
means that the businesses in the free market will be encouraged to innovate and continuously
improve the quality of their goods and services. This is so that they can stand out from the
competition. This ultimately leads to improved consumer utility as consumers are provided with high
quality products and plenty of choice. This means that consumer welfare and quality of life in
general will be improved. However, to evaluate, in a free market economy there is little regulation
which can lead to high levels of provision for demerit goods. This means that consumers have access
to products such as guns, alcohol and drugs. This can ultimately lead to a negative impact on the
health and wellbeing of consumers and society in general.

A drawback of a free market economy is that monopoly firms could be formed. This is when there is
one dominant firm within a specific industry. An example of this could be Thames Water within a city
as the only supplier of water. This means that the monopoly firm will have the power to exploit
consumers in a range of ways, especially due to the lack of government intervention/regulation. For
example, Thames Water could raise prices by an extremely ridiculous amount and consumers will be
inclined to pay as there are no substitutes, making the product highly inelastic. The monopoly firms
could also reduce quality to increase profitability, knowing that consumers will not have an
alternative. As a result, consumer utility and welfare will be damaged in this type of economic
system. However, to evaluate, due to the dynamic nature of markets and the fact that firms know
that competition could arise, they may in fact be encouraged to operate as efficiently as possible.
This increase in productive efficiency could reduce levels of waste.

Another impact of the existence of a free market economy is that there is likely to be high levels of
inequality in income and wealth. This is because there is no government intervention which implies
that there is no existence of a tax and benefit system. Taxation effectively takes money from the rich
and redistributes income to the poor via welfare/state benefits. In a free market, this does not exist
which means that the poorer in society do not have a safety net. As a result, if people lose their jobs
they could be earning nothing. Whilst those who have access to the factors of production and own
business will continue to get rich as they do not need to pay taxes and there is no regulation to stop
their earnings. This widens the gap between the rich and the poor. However, to evaluate, one could
argue that in this type of economic system, jobs are provided by the rich. This leads to people having
an income and potentially being taken out of poverty. This means that people can have a livelihood
and see improvements in their standards of living.
6. Assess the benefits and drawbacks of command economies
A command economy is one where all factors of production are controlled by the government. One
key drawback of a command economy is that it has detrimental effects on the consumer. This is
because consumer preferences are not taken into account. Whilst in the free market consumers and
producers decide what to produce, in a planned economy it is the state who decides. This means
that consumer choice is extremely low which has a negative impact on consumer utility. As a result,
people are left with low levels of satisfaction especially since government agencies usually have poor
information, this could also damage the quality of goods and services. This means that living
standards in this type of economic system are likely to be low. However, to evaluate, living standards
may be higher than free market economies as governments intervene for negative externalities. This
is done to correct market failure and should lead to the removal of demerit goods such as alcohol,
guns and drugs. This means that consumer health and wellbeing will be improved.

A benefit of a command economy is that the government can create a society that maximises social
welfare rather than profits. The government can do this by providing a safety net. This is where the
government supports people during times of difficulty, for example by paying unemployment
benefits and supporting firms and consumers during uncertain times or external shocks such as the
pandemic. This means that there is likely to be a more equal society. This is mainly because the
poorer in society are protected whilst the richer are taxed. This means that less people are likely to
fall into poverty because if they lose their jobs the government will be there to pay benefits and
offer housing etc. As a result, living standards in a planned economy can be stable. However, to
evaluate, people in this type of society could become over reliant on the state. This is because the
benefits they receive may be preferred to working hard for an income. As a result it could lead to an
economy that is filled with inefficiency and low levels of productivity, damaging capacity.

Another key impact of operating as a command economy is that there is likely to be low levels of
competition within markets. This is because the state is in control of all factors of production and
resources. This means that the government decides what gets produced, how resources are
allocated and which businesses are allowed to operate. Not only does the control of resources lead
to a threat to democracy but it damages the level of efficiency between firms as they are
government owned. As there is no private enterprise these firms have no reason to compete or
innovate. Lack of competition causes many issues for consumers such as falls in quality of goods and
services, increase in waste which could damage unit cost and lead to higher prices and also a lower
level of choice. This leads to a fall in consumer utility and welfare. However, to evaluate, although
consumers may feel the drawbacks of a lack of competition, they can feel safe in knowing that basic
necessities will be provided and key industries will not be exploiting them. This means that the
quality of life in planned economies may be relatively good as there are no monopoly firms
exploiting for profit reasons.
7. Assess the importance of the state in a mixed economy
A mixed economy is an economic system whereby parts of the economy are organised by the private
sector and parts of the economy organised by the government. One reason as to why the state is
vital in a mixed economy is that it ensures higher levels of equality and lower levels of poverty. This
is carried out by the government via providing a safety net. This is where the government supports
people during times of difficulty, for example by paying unemployment benefits and supporting
firms and consumers during uncertain times or external shocks such as the pandemic. This means
that there is likely to be a more equal society. This is mainly because the poorer in society are
protected whilst the richer are taxed. This means that less people are likely to fall into poverty
because if they lose their jobs the government will be there to pay benefits and offer housing etc. As
a result, living standards have improved. However, to evaluate, it can be argued that the state is not
important. This is because people may become over reliant on the state. This means the benefits
they receive may be preferred to working hard for an income. As a result it could lead to an
economy that is filled with inefficiency and low levels of productivity.

Another reason the state can be considered extremely important is due to the fact that it can
improve social welfare. This is the main objective of the government and is the assumption made by
economists. The state does this in numerous ways, apart from the safety net mentioned above, the
government also aims to control the supply and demand of goods and services to an extent. For
example, this includes the provision of public goods such as defence and street lighting. It also
includes the control and monitoring of demerit and merit goods. This means that the state corrects
market failure such as underconsumption of healthy products and the overconsumption of
unhealthy products. This leads to an improved social welfare which can impact the health service. As
a result there will be less of a strain on the NHS. However, to evaluate, governments do not always
maximise social welfare. This is because some states can make decisions which negatively impact
consumers. An example of this could be allowing firms to buy and sell demerit goods so that the
government can gain tax revenue from this.

Another reason for the state being vital in a mixed economy is due to the improvements they can
make in markets and efficiency levels. The state can do this by putting legislation and regulation in
place. For example, they can provide subsidies or remove bureaucracy to make it easier for firms to
start up. This means that supply in a market will increase which will increase the level of competition
in the industry. As a result, firms will be incentivised to increase their spending on research and
development and innovate in order to attract customers. This means that consumers benefit
through higher levels of utility and lower risk of exploitation and the economy in general benefits
through higher levels of productivity. This can lead to an improvement in the productive capacity
which can shift the PPF curve outwards. However, to evaluate, firms may compete by lowering costs.
This can be done by firing workers or using lower quality raw materials which can damage consumer
welfare.
8. Assess 2 factors which influence price elasticity of demand
Price elasticity of demand measures the responsiveness of consumers' demand to a change in price.
One factor which can affect PED is the number of close substitutes available to consumers.
Substitutes are alternative products, example two substitutes could be cars and bikes. If a product,
such as breakfast cereal brands, has a larger number of substitutes it will imply that the product will
be relatively elastic. This is because if the price of one cereal brand increases, consumers will be
responsive and switch to an alternative as there are many substitutes. This means that the
percentage change in quantity demanded is larger than the percentage change in price. As a result,
the PED of the product (cereal brands in this case) will be less than -1. However, to evaluate,
although there could be a large number of substitutes available, consumers could behave
irrationally. This is because consumers could be loyal to a brand or have a preference. This means
that consumers may be unresponsive to changes in price.

Another factor which influences the PED is the nature of the good. This is because the degree of
necessity/luxury of a good or service will determine how consumers respond to changes in price.
This means that products that are necessities are likely to have a lower PED whereas luxuries are an
optional spend. For example, fuel such as petrol/diesel is likely to be a highly inelastic product due to
the fact that it is a necessary product for most due to people needing it for travel to work. This
means that if there was a rise in the price of fuel, consumers will most likely be unresponsive and
continue buying similar quantities. The percentage change in quantity demanded is likely to be much
lower than the percentage change in price. Whereas a luxury such as a holiday is likely to bring an
elastic response from consumers as they can survive without it, therefore a percentage change in
the price of holidays will lead to a larger percentage change in demand. However, to evaluate, the
degree of necessity of a product can change over time. This is because new products can be
introduced and innovation can change markets. An example of this is electric powered vehicles
which could give an alternative to petrol thus making petrol more elastic.
9. Assess 2 factors which influence price elasticity of supply
Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. One
factor which can influence PES is spare production capacity. This is how much additional resources,
such as capital/machinery and labour, firms have at their disposal. If a firm has plenty of spare
capacity then it is likely to have an elastic supply. This is because the firm can respond to changes in
the market and increase output easily. For example if a car manufacturer had spare machinery and
the demand for cars increased, the firm could respond and use the spare capacity to meet demand
relatively quickly. This means that supply would be relatively elastic and the percentage change in
supply will be larger than the percentage change in price. However, to evaluate, the extent to which
firms are elastic depends on the amount of spare production capacity that they have. If it is not
enough to match demand then firms may only respond in the short run to a small extent and then
not have enough capacity to continue producing at the same rate.

Another factor that can affect the PES is ease and cost of factor substitution. This looks at how
mobile factors of production are in the production process such as capital and labour. This means
that if it is easy to substitute capital for labour and vice versa, then the supply of a product is likely to
be relatively elastic. For example in the car production example, if there is an increase in the demand
for cars, whether or not firms can respond will depend on if they can switch their machines with
their workers. If workers cannot be reallocated to new tasks to produce cars then the supply is likely
to be inelastic. This means that the percentage change in price will be higher than the percentage
change in supply. However, to evaluate, the ease and cost of factor substitution is something that
can be changed over time. If labour does not have the ability to switch with capital, they can be
trained so that elasticity levels may change over time and firms can become more price elastic.
10. Assess the importance of demand elasticities to firms and governments
Price elasticity of demand measures the responsiveness of consumers' demand to a change in price. One
reason it is important to firms is because it helps them with pricing decisions and predictions on the
impact of these decisions. This is because if a firm is selling products with a price inelastic demand then it
can influence their pricing as they will be able to raise prices. This means that if the firms’ cost of
production was to increase, they could pass it on to consumers. As a result, there will be a smaller fall in
the percentage change in quantity demanded. This will lead to a rise in revenue and ultimately an
increase in profits. As a result, firms can meet their objectives of profit maximisation due to
understanding their PED. However, to evaluate, it is difficult to accurately predict and calculate price
elasticity of demand. This is because different groups of people may have different elasticities. As a result,
changes in price may not have the expected effect.

Price elasticity of demand measures the responsiveness of consumers' demand to a change in price. One
reason it is important to governments is because it can help the government with decision making when
implementing taxes and subsidies. The government can estimate the revenue that they may receive from
the implementation of indirect taxes such as VAT. For example, if the government places an indirect tax,
such as the sugar tax on fizzy drinks, they can calculate the revenue they would receive and the impact it
can have. This tax may be implemented to correct market failure. The tax would shift the supply curve
inwards and as the product is inelastic, the percentage change in price will be larger than the percentage
change in demand. As a result, government revenue will increase but the small change in demand would
imply that the tax has not been successful in correcting the market failure to a large extent. This means
that PED can play a role in government decision making on taxes as well as subsidies. However, to
evaluate, the government does not always make the best economic decisions. As a result of a lack of
information, they may not make accurate use of PED figures or may not be able to accurately gain the
PED figures of different products. This means that PED may not be effective in helping them make
decisions.

Income elasticity of demand measures the responsiveness of changes in income on quantity demanded.
One reason this is important for firms is because it helps them decide which type of goods to produce.
For example, during times of economic boom and high levels of activity, the demand for labour tends to
increase. This means that average income levels will rise. As a result, in order for firms to make high
levels of profit they may choose to produce more luxury goods. This is because as income increases, the
demand for luxuries increases too. This means that the firm can decide the best product to produce
depending on the state of the economy. However, to evaluate, there are always fluctuations in the
economy. The trade cycle shows that after a boom, a recession may follow. This means that firms could
be stuck with a large amount of inventory of products that are no longer in demand.

One reason why income elasticity of demand is relevant to governments is because they will be able to
estimate the impact of tax changes on different key industries across the country. This is because, if the
government decides to raise income taxes, it means people will have a lower disposable income. This
means that there will be an increase in the demand for inferior goods such as store branded food
products as inferior goods have a negative YED. As a result, the government can predict the impact this
may have on the supermarket industry in terms of job losses or job opportunities. However, to evaluate,
the government does not always make the best economic decisions. As a result of a lack of information,
they may not make accurate use of YED figures or YED figures may be constantly changing for different
products, luxuries, inferior and normal goods can change. This means that YED may not be effective in
helping them make decisions.
11. Assess 2 factors which can influence the market equilibrium price of a good or service
The equilibrium price of a good or service is determined by the interaction of supply and demand.
One factor that can influence the equilibrium price is a change in a demand factor. Demand is the
willingness and ability of consumers to purchase goods and services at a given price. A change in
interest rates can affect demand. A fall in interest rates will mean the cost of borrowing money is
lower and the reward for saving is lower. This means that consumers will be more encouraged to
take out loans and buy goods on credit, for example appliances, furniture, cars and property.
Homeowners will also have a higher disposable income after paying their mortgage monthly. This
will ultimately lead to the demand curve for many industries shifting out. This increases the
equilibrium price and quantity. However, to evaluate, the extent to which the demand curve shifts
out depends on whether consumers are looking to take out loans. If the state of the economy is
concerning, it damages confidence which might in fact still encourage consumers to save their
money. This means that the equilibrium price may not see a significant change.

Another factor that can influence the equilibrium price is a change in supply. Supply is the amount of
a good/service that firms are willing and able to provide to the market at a given price. One factor
affecting supply is the exchange rate. This is the value of one currency in terms of another. If there is
an appreciation in the GBP against the Euro for example, it would mean that importing raw materials
from abroad is cheaper. This means that firms in the UK can purchase their raw materials at a lower
cost, hence lowering the cost of production for importing firms. As a result, firms will be able to
supply more goods and services, thus shifting the supply curve out to the right. This leads to a fall in
the equilibrium price as firms are able to pass on lower costs to consumers in the form of lower
prices. However, to evaluate, exchange rates tend to fluctuate extremely often. This means that
these lower costs may only be applicable in the short term. Due to an increase in the demand for
foreign currency, it could lead to a weakening of the GBP which will ultimately once again raise the
cost of importing. This factor is also only really valid for firms that import raw materials rather than
source domestically.
12. Assess 2 types of market failure
Market failure is when there is a misallocation of resources. This means that there is an over/under
consumption or over/under production of goods and services. One type of market failure is called an
externality. Externalities are the costs/benefits to a third party that is unaccounted for. An example
of a negative externality is the costs associated with smoking cigarettes. This is because consumers
of tobacco products tend to have ill health such as cancer. This means that they require more
treatment which ultimately places a burden on the NHS. This means that taxpayers are paying for
the behaviour and habits of others. As a result of this overconsumption, the consumer of the
tobacco is causing damage that they are not accountable for. However, to evaluate, it is extremely
difficult to calculate the monetary impact of negative externalities. This is because certain elements
are not monetary in nature, for example pollution causing damage to the air. This makes it harder to
make consumers and producers accountable for negative externalities.

Another type of market failure is the under-provision of public goods. Public goods have 2 key
characteristics, they are non-rivalrous which means the consumption of this good does not reduce
the amount available for others, and they are non-excludable which means once provided,
consumers can not be stopped from benefitting. This is a form of market failure as they would be
under-provided by the free market. This is because of the free rider problem. This means that
consumers can benefit from the good/service without directly paying for it. An example of this is
street lighting or public defence. Due to the free rider problem, the government intervenes and
provides the public good. This is because there will otherwise be an under-provision and under-
consumption of these goods which can ultimately damage social welfare. As a result, the provision of
these public goods can help affordability and access to key sectors. However, to evaluate, most
goods and services are quasi-public goods or private goods. This is because there is an element of
rivalry or excludability in most goods. For example, healthcare (NHS) and education can be seen as
public goods but demonstrate rivalry (limited space in schools and limited number of hospital beds)
and they demonstrate excludability (private schools require funding and some elements of the NHS
must be paid for).
13. Assess the impact of positive externalities such as education or being vaccinated
A positive externality is the external benefits to a third party from the consumption of a good or
service (education in this case) that is unaccounted for. When students study and complete their
education, from GCSE’s, to A-Levels to Degrees, the social benefits are greater than the private
benefits to the individual. One external benefit could be higher levels of tax received by the
government. This is because education will allow people to become educated and highly skilled. This
means these people are likely to have a higher income, for example doctors, lawyers and
accountants. As a result they would be in a higher income tax bracket. This leads to the government
gaining higher amounts of tax revenue which they can use to invest into different parts of the
economy such as healthcare. This improves social welfare. These external benefits are unaccounted
for as the individual does not get paid for these wider impacts. However, to evaluate there is no
guarantee that a higher level of education will necessarily increase tax revenues. This is because
there are different levels of education and different classes of courses. As a result, a degree may not
lead to somebody earning high incomes. And even those earning really high incomes could find ways
to evade taxes

Market failure exists when there is a misallocation of resources within a market. In this case the
market fails to consider the external benefits of education to society. The market left to its own
devices will produce where MPB=MPC and it will not consider the benefits to society, as such this
equilibrium is inefficient. This means that education is underconsumed by the market. If external
benefits were included, demand for education would be higher which leads to a new equilibrium of
Q2 - where all benefits have been taken into consideration. At this output, the MSB=MSC which is a
socially optimal and allocatively efficient outcome. The welfare gain can be seen by the shaded area.
However, to evaluate in the UK the government provides education for free. This means that there is
not an under consumption of education as people get access to primary school, secondary school
and sixth form without having to directly pay for it. This means that as a society we are actually a lot
closer to the Q2 equilibrium as MSB moves closer to becoming equal to MSC.
14. Assess the impact of negative externalities such as smoking or driving
A negative externality is the external cost to a third party from the consumption/production of a
good or service (driving petrol powered cars in this case) that is unaccounted for. When consumers
purchase and drive their petrol cars the social costs are greater than the private costs to the
individual. One example of an external cost to society is that petrol cars emit high levels of carbon
emissions. This means that the air will be damaged due to this pollution. This layer in the air stops
heat from escaping which leads to the Earth getting warmer. As a result this worsens the problem of
global warming. This means that third parties such as the public who are not driving will be impacted
by this damage to the environment. This leads to people potentially having breathing problems. As a
result more people will have health problems and require treatment from the NHS. This is important
because there will be an increase in the strain on the NHS which is ultimately paid by the taxpayer.
However, to evaluate, with advancements in technology, specifically in the car industry, vehicles are
becoming more and more efficient. This means that these cars are reducing the emissions emitted
and the damage to the environment. As a result the magnitude of the negative externalities are
becoming less significant over time.

Market failure exists when there is a misallocation of resources within a market. In this case the
market fails to consider the external costs of driving petrol powered vehicles to society. The market
left to its own devices will produce where MPB=MPC and it will not consider the costs to society. The
free market's optimal level of output is Q2, the price ignores the negative externalities of driving
petrol powered cars and as such this equilibrium is inefficient. As such, petrol powered cars are over
consumed and overproduced by the market. If external costs were included, supply/demand for
these cars would be lower which leads to a new equilibrium of Q1 - where all costs have been taken
into consideration. At this output, the MSB=MSC which is a socially optimal and allocatively efficient
outcome. The welfare loss can be seen by the area ABC. However, to evaluate, there are taxes
already in place to make up for these negative externalities in the car industry. For example there is
a tax on fuel, VAT on the car as well as road tax. This therefore means that the negative externalities
are somewhat accounted for and we are actually operating closer to the socially optimal point.
15. Assess the usefulness of trade pollution permits
Pollution permits allow firms to produce a legal
level of pollution per year. They are tradable on
the market and if a firm does not use all of its
permits it can sell to other firms that aim to
pollute above their allowance. One reason for
pollution permits being extremely useful is that
it provides an incentive for firms to reduce
their level of pollution. This is because there is
a financial cost attached to pollution due to this
permit. This means that firms must pay to
purchase these permits from the government
thus increasing their own cost of production.
The government provides a fixed amount as
seen in the diagram with a perfectly inelastic supply curve. If firms require even more permits they
must pay a higher amount on the secondary market (demonstrated by an outward shift in demand).
As a result, firms may be discouraged from polluting as much. This leads to firms being encouraged
to pollute even less and potentially make money by selling permits. However, to evaluate, if the
government lacks the correct information the price and quantity of pollution permits may not be
effective. This is because governments do not always make the best decision makers and
information gaps can cause there to be an oversupply of these permits thus making the policy less
useful.

Another reason for pollution permits being

extremely useful is that it can help correct
market failure. If firms produce carbon and
other pollutants due to production, it causes
many negative externalities. This is because
health/welfare and the environment could get
damaged. It is argued that production is a
massive driver of global warming. The market
left to its own devices will produce where
MPB=MPC and it will not consider the costs to
society. The free market's optimal level of
output is Q2, the price ignores the negative
externalities of production. This means that
the tradable pollution permits include the
external cost which leads to reduced output. At this output, the MSB=MSC which is a socially optimal
and allocatively efficient outcome. The welfare gain loss can be seen by the area ABC. However, to
evaluate, it can be very difficult to measure pollution levels. This is because firms are able to hide the
amount they are polluting and potentially shift production to other countries which have more
relaxed environmental laws.
16. Assess ways in which the government can correct market failure of your choice
Could be to correct positive externalities such as education (underconsumed/underproduced)

Government intervention is when the government intervenes into markets to correct market failure.
Market failure is the misallocation of resources. In the case of education there are numerous
positive externalities but there is an underprovision and underconsumption of education.

One way the government can intervene to correct market failure in education is via state provision.
This is where the government directly supplies a good/service. In this case the government can
increase the amount of education available for the country. For example, the UK government could
build more primary schools, secondary schools, sixth forms and universities. If more schools are built
in more locations, it will increase the access to education sites to more of the population. As a result,
this will correct the market failure problem of under provision. This leads to more people being
educated. This means that the skill set of the future labour force will be improved which will
ultimately improve the productive capacity of the economy along with the living standards of those
individuals. However, to evaluate, there is an extremely large opportunity cost involved with state
provision, specifically with construction. This is because it can cost billions of pounds to build new
schools across the country. This means that there is less funding for other important areas of the
economy such as healthcare or it could mean that the government deficit worsens due to higher
levels of borrowing.

Another way that the government could correct the market failure in education is via provision of
information. This is where the government aims to provide the public with more information on the
benefits of education. These benefits could include higher salaries, better living standards and
improved skill set. This can be done by advertising campaigns on social media or in schools. This
could lead to an increase in the demand for education, particularly at university level and possible
apprenticeships. As a result there will be a correction in the underconsumption problem of
education. The increase in demand leads to a new equilibrium of Q2 - where all benefits have been
taken into consideration. At this output, the MSB=MSC which is a socially optimal and allocatively
efficient outcome. The welfare gain can be seen by the shaded area. However, to evaluate in the UK
the government provides education for free. This means that there is not an under consumption of
education as people get access to primary school, secondary school and sixth form without having to
directly pay for it. This means that as a society we are actually a lot closer to the Q2 equilibrium as
MSB moves closer to becoming equal to MSC.
16. Assess ways in which the government can correct market failure of your choice
Could be to correct negative externalities such as smoking/driving (overconsumed)

Government intervention is when the government intervenes into markets to correct market failure.
Market failure is the misallocation of resources. In the case of driving there are numerous negative
externalities which are due to an overconsumption of petrol powered cars.

One way the government can intervene to correct market failure in the car consumption industry is
via indirect taxes. An indirect tax is a tax on goods and services. If there was an increase in the tax on
fuel (such as petrol and diesel) it could benefit society greatly. This is because it would increase the
cost of production for petrol/diesel producers. This would lead to an inward shift of the supply curve
from S1 to S2 as firms are less willing and able to provide fuel. This will ultimately raise the price of
fuel. This means that the petrol/diesel powered car industry will be affected as they are
complements to fuel. This leads to an increase in the cost of driving which can lead to a fall in the
demand for cars. This means that there will be less cars on the road which reduces the amount of
carbon emissions and pollutants into the atmosphere. This leads to less people being harmed
through poor quality air and also reduces the strain on the NHS. As a result, correcting the market
failure within the car industry. However, to evaluate, the effectiveness of an indirect tax is highly
dependent on the price elasticity of demand. This is because the PED for fuel is likely to be inelastic
due to how necessary it is for people, for using it to get to work on a daily basis. This means that the
percentage change in the demand will fall by a smaller amount compared to the percentage change
in the price. Therefore producers may simply pass the incidence onto the consumer which damages
the welfare of the lower income people in society.

Another way the government could reduce the

overconsumption of cars is by providing subsidies
to a substitute good. Subsidies are government
grants provided to firms in order to increase
production. These subsidies could be provided to
cycle manufacturers. This is because bikes are a
greener alternative to petrol powered cars. This
leads to a fall in the cost of production for cycle
manufacturers. As a result, there will be an outward
shift in supply as firms are more willing and able to
produce bikes. This leads to a fall in the price of
bikes, and hence creates an extension in demand.
This means that the demand for cars should fall as
people switch between the two industries. As a result of this policy, the supply/demand for these
cars would be lower which leads to a new equilibrium of Q1. At this output, the MSB=MSC which is a
socially optimal and allocatively efficient outcome. The welfare loss can be seen by the area ABC.
However, to evaluate, the success of this policy depends. For example, if firms do not correctly and
efficiently use the funding to increase production, it may not be effective. Additionally, if the
subsidies are only a short term provision, bike manufacturers’ costs may rise in the future which will
ultimately cancel out the initial impact on price and quantity.
Another way to resolve the market failure within the petrol powered car industry is to place price
controls such as maximum prices. Maximum price is the legal price ceiling of a good or a service
which firms cannot price above. The government could place maximum prices on substitutes to
petrol powered cars for example on electric scooters, electric cars or even public transport. This
means that these products will have a price which is below the equilibrium level. This leads to an
extension in the demand for these greener and cleaner products. This means that there will be a fall
in the demand for petrol powered cars as they are substitutes and carry out the same task. However,
to evaluate, a maximum price reduces the willingness of firms to supply the goods. This is because it
is less profitable to supply and at such a lower price. As quantity becomes restricted some producers
may sell at an illegal black market higher price. This means that government failure occurs as this
specific policy had led to unintended consequences, the creation of the black market.