2.8 Market failure: externalities and common pool resources questions for IB Economics

Distinguish between a free market economy and a planned economy in the way each answers the basic economic questions.

Using real-world examples, discuss the view that government intervention in markets does more harm than good.

Define the term common pool resource indicated in bold in the text (Text A, paragraph 1).

Define the term sustainability indicated in bold in the text (Text A, paragraph 3).

Using information from Table 1, calculate the percentage change in the total catch between 2015 and 2025.

Using a production possibilities curve (PPC) diagram, explain how continued overfishing could affect Ombrena's future production possibilities (Text A, paragraph 2).

Using information from the text/data and your knowledge of economics, evaluate the use of village fishing committees to achieve the sustainable use of Lake Sarnu.

Using Table 1, calculate total milk output in Hallestad in 2025 (in million litres per year).

Using Table 1 and your answer to (a)(i), calculate the percentage change in total milk output between 2015 and 2025.

Using Table 1, outline why total milk output fell even though the average output per farm increased.

Milk processors separate raw milk into cream, which is made into butter, and skimmed milk, which is dried into skimmed milk powder. In 2025 demand for butter rose sharply, and processors increased butter production by 12 %.

Outline why the price of skimmed milk powder is likely to fall.

To support dairy farmers, the government is considering a subsidy of HLD 0.05 per litre of milk, where HLD is the Hallestad dollar. Its economists estimate the effects shown in Table 2.

Table 2: Estimated effects of the milk subsidy

Using Table 2, calculate the cost of the subsidy to the government (in HLD million per year).

Using Table 2, calculate the change in farmers' total revenue (including the subsidy) as a result of the subsidy (in HLD million per year).

Explain two reasons, other than the retirement of farmers, why the number of dairy farms in Hallestad may have fallen.

Hallestad's rivers and lakes contain high levels of nitrates from manure. From 2027, new rules will limit the number of cows that may be kept per hectare of land and require farms to build covered manure stores.

Using a demand and supply diagram and the information provided, explain the likely effect of the new rules on the market for milk in Hallestad.

The following information is available about options for the dairy industry:

• The milk subsidy would cost HLD 113 million a year, about 0.1 % of government spending. Environmental groups argue it would encourage more intensive dairy farming, adding to nitrate pollution.

• Investment grants for covered manure stores and low-emission equipment would help farms meet the 2027 rules; they would cost around HLD 250 million in total over three years.

• A training and succession scheme could help young farmers take over farms from retiring owners, through low-interest loans for buying land and herds.

• Some economists recommend no intervention, arguing that larger farms are more efficient and that the fall in total output has been small.

• Milk prices in Hallestad are set largely by prices in neighbouring countries, and processors can import milk if domestic supply falls.

Using the information provided and your knowledge of economics, recommend a policy that the government of Hallestad could introduce to maintain a stable supply of milk while meeting its water-quality targets.

Explain why the atmosphere may once have been regarded as a free good and why its use now involves an opportunity cost.

Using real-world examples, evaluate the view that carbon taxes are the most effective way to reduce greenhouse gas emissions.

Define the term free good indicated in bold in the text (Text A, paragraph 1).

List two factors of production used by the desalination plant (Text A, paragraph 3).

Explain two reasons why fresh water on Coralis can no longer be considered a free good (Text A, paragraphs 2 and 3).

Using a demand and supply diagram, explain why the price of water on Coralis has risen (Text A, paragraphs 2 and 3).

Using Table 1, identify the equilibrium price and quantity of charcoal before the tax.

Using Table 1, show that after the tax is introduced, the equilibrium price paid by consumers will be US$12 per bag.

Calculate the weekly tax revenue the government would receive from charcoal sold in the capital city.

Calculate the amount of the weekly tax revenue that is paid by producers.

Calculate the welfare (deadweight) loss resulting from the tax, assuming the demand and supply curves are straight lines.

Sketch a demand and supply diagram to show the effect of the tax on the market for charcoal, labelling the price paid by consumers and the price received by producers.

Much charcoal is produced informally by small rural producers who are not registered with the tax authority. Charcoal producers can also sell the same wood as poles and timber for construction, whose price is rising quickly as the capital city expands.

Using the information provided, explain two reasons why the tax may not reduce deforestation as much as the government hopes.