Examiners reports!

• (a) (i) Identify 2 characteristics of a public good

A very small number of candidates failed to identify the two characteristics as instructed, and whilst marks were awarded for explanations which were clear and accurate, in a few cases marks were lost because the instruction word was not followed

• (ii) Explain 2 reasons why "education" is not a public good

A common error was to try to explain rivalry in terms of the existence of several competing schools in local areas whilst examiners were looking for some explanation of rivalry in consumption – namely that the use of education by one candidate may well diminish the quality/availability of education available to others.
In addition, whilst many answers gained reward for stating that education could be seen as being excludable because some parents cannot afford fees or because people live outside of a school’s catchment area, a number of candidates tried to explain excludability in terms of one candidates use of education limiting another’s. This was clearly not accepted as an explanation of excludability.

• (b) (i) Explain what is meant by externality

This question was well answered with a large majority of answers receiving both marks for a simple explanation of externalities being effects upon a third party.

• (ii) Identify one possible example of a positive externality arising from education.Explain why this is a positive externality

Quite often candidates failed to respond adequately to the second instruction within the question – to explain why this was a positive externality. Whilst simple reference, for example, to social benefits exceeding private benefits would have gained both explanation marks this was often missing as candidates simply explained the nature of the benefit in much more detail. Such answers which often lacked relevant economics usually only gained one mark for the identification.

• (iii) Using a diagram,explain how the existence of positive externalities can lead to market failure.

Given that a sizeable minority of diagrams had shown supply shifting, it was not surprising that some responses then went on to explain how subsidies could be used to overcome market failure. This ignored what the question asked – namely, how the existence of positive externalities resulted in market failure.
Better answers focused upon the issue of under consumption and explained that this would arise as a result of individuals basing their consumption decisions solely upon their private benefits and, therefore, ignoring the external benefits of their actions. This was then developed in terms of the resulting underproduction leading to allocative inefficiency and a misallocation of resources. Clearly such responses which answered the question directly using accurate economic terminology were well rewarded.

• (c) (i) explain why market dominance can lead to economic inefficiency.

Weaker responses tended to ignore the economic efficiency aspect of the question and, instead, focused simply upon the ability of dominant firms to raise their prices with little real development of this. Specific reference to, and use of, productive and allocative efficiency were needed for full marks on this question.

• (ii) Explain how competition policy can be used to stop firms abusing their market dominance

The most common mistake on this question was to look at the advantages of increased competition rather than how the government could use its competition policy to stop the abuse of market power – quite a different question. Unfortunately, where candidates mistakenly took such an approach, then very few marks could be awarded.

• (d) The information provide states that the government may subsidies the supply of products which generate positive externalities.Discuss the effectiveness of subsidies as a solution to a market failure arising from positive externalities.

Even where relevant evaluation was lacking, candidates often gained up to six marks by analysing the impact of subsidies, often using an accurate diagram.
The only difficulty arose where candidates used this question as an opportunity to write about other forms of government intervention. Unfortunately, given that the question required specific discussion of subsidies, such answers could not be credited.
Overall, with candidates clearly well prepared for this final question, the responses were generally very pleasing indeed.