Grade 8 Economics ,3rd Term 2025

Learning Objectives Simplified

1. Market Failure – Markets don’t work well for society.

2. External Costs/Benefits – Cause market failure (e.g., pollution,

vaccines).

3. Information Failure – People don’t know enough (e.g., junk food

risks).

4. Demerit Goods – Harmful, overused (e.g., cigarettes).

5. Public Goods – Everyone uses, no one pays alone (e.g., streetlights).

6. Monopoly Power – One firm controls prices (bad for choice).

7. Factor Immobility – Resources stuck (e.g., workers can’t move for

jobs).

8. Consequences – Wasted resources, inequality, pollution.

1. Negative Externalities – Harmful side effects on outsiders (not

buyers/sellers).

o Example: Smoking harms non-smokers (secondhand smoke).

2. Merit Goods – Goods good for society but underused without help.

o Example: Education (people may not see full benefits).

3. Social Cost & Benefit – Full impact on society (private + external

effects).

o Example: Car use = Private cost (fuel) + Social cost (pollution).

4. Private Cost & Benefit – What only the buyer/seller faces.

o Example: A factory’s private cost = materials; social cost =

pollution.

5. Subsidies – Govt pays part of cost to encourage good things.

o Example: Solar panel subsidies to boost green energy.

Solution
Chapter 13: Market economic

system
Suggested answers to multiple choice questions and

four-part question
Multiple choice questions

1B

Consumers determine what is produced in a market economy. Poverty and

unemployment can occur in a market economy. Firms having considerable
market power may be a disadvantage, as they would be able to charge high
prices.
2A

Firms that produce what consumers want are likely to sell more products and
earn higher profits.

3B

Supply is exceeding demand. The surplus will cause the price to fall. A lower
price will result in a contraction in supply and an extension in demand.

4A

In a competitive market, firms have to keep costs down to retain their

customers.

5C

Production points C and D are both inefficient but C is less efficient than D. D
is closer to the production possibility curve and hence closer to productive
efficiency.

The movement from production point B to C and from A to D both represent

a reduction in

productive efficiency. Points A and B are equally efficient.

Four-part question as given above.

a.
Private sector firms are owned by individuals or shareholders and aim to make profit. Public
sector firms are owned by the government and focus on public welfare. The private sector is
driven by competition and efficiency, while the public sector often operates in areas that benefit
society, like healthcare or education. This difference in ownership and goals shapes how each
sector uses resources and delivers services.

b.
In a market economy, consumers decide what is produced by influencing prices. If demand rises,
prices go up, encouraging firms to supply more. If demand falls, prices drop, leading firms to
produce less. This price mechanism ensures resources are allocated based on consumer choices.

c.
Profit drives firms in a market economy to produce efficiently and respond to demand. Higher
prices signal higher demand, encouraging more output. Cutting costs raises profit, pushing
innovation. Successful firms grow, while inefficient ones exit, improving overall resource use.

d.
Market economies often keep prices low due to competition and profit motives. Firms cut costs
to stay competitive. However, high-demand goods may still be pricey. If there’s limited
competition or immobile resources, prices can rise. Efficiency depends on market conditions.

Chapter 14: Market failure

1 a The merit good and equity arguments.

b Education is likely to be under-consumed, if left to market forces as people

underestimate its value to themselves. Also, while making their consumption
decisions, they do not take into account the associated benefits to others.

2 a Alcohol is a demerit good, as it is more harmful to drinkers than they

realise and causes
harmful effects on third parties including rowdy behaviour and road
accidents.

b The UK government can reduce alcohol consumption by increasing taxes, raising awareness
about its harms, or banning it. Higher taxes raise prices and reduce demand. Information
campaigns may also lower consumption. Bans could stop use entirely but are hard to enforce.

3 Public goods: lighthouse protection for shipping; flood control system.

Private goods: biscuits; public car parking spaces; public library services. In
each of these cases, it would be possible to charge for the product as non-
payers could be excluded.

Individual activities

1 a Among the private costs are the costs of buying the land and the building
materials and the wages of the workers.

b Pollution is an external cost, as it harms those who are not directly involved
in the production and consumption of the products involved. For example,
those living near the factories may suffer from poor health as a result of
carbon dioxide emissions from the factories.
2 a The profit motive. More airlines would fly a particular route, if they think
that they will make a

profit on the route.

b Consumers may benefit from lower prices and increased quality.

Suggested answers to multiple choice questions and

four-part question

Multiple choice questions

1B

If firms are producing above the lowest possible cost, they are failing to
achieve productive

efficiency. A refers to consumer sovereignty, which should result in allocative

efficiency. C and

D refer to markets adjusting to changes in market conditions. They should

result in equilibrium

being restored, eliminating shortages and surpluses.

2B
One of the characteristics of a merit good is that it is more beneficial than
those consuming it

realise. A merit good does have external benefits. C refers to a demerit good
and D to a public

good.

3C

Demerit goods will be overconsumed and hence overproduced, as their

harmful effects on the

consumers and others are not fully appreciated. A and B are likely to be
underproduced and D,

public goods may not be produced at all.

4B

Information failure is a major cause of market failure. A, C and D should all

promote efficient

working of markets. Competition provides a ‘carrot’ and a ‘stick’ for firms to

be efficient.

Differences in pay between skilled and unskilled workers provide an incentive

for workers to be

productive. Mobility of resources makes it easier and quicker for markets to

respond to changes

in consumer demand.

Four-part question

a.
An external cost is a negative effect on others not directly involved in an activity. For example,
pollution from a factory can harm nearby residents who aren't part of the production or
consumption process.

b.
A merit good has more benefits than consumers realize, so it’s underused without government
help. A demerit good causes harm and is overused. Merit goods have external benefits; demerit
goods have external costs.

c.
Social benefit includes private and external benefits. Education boosts personal skills and
income, while also improving productivity and tax revenue. Society gains through better services
and a more informed population.

d.
Logging in the Amazon brings private gains to firms but causes external costs like habitat loss
and climate impact. These firms ignore the full social costs. Tree-cutting should stop if social
costs outweigh benefits.

Chapter 15: Mixed economic

system

Suggested answers to individual and group activities

1 a The government will benefit in terms of high corporation tax revenue.

There will also be a probable reduction in the amount of unemployment
benefit paid by the government. This is because profitable firms are likely to
expand and take on more workers.

b Private sector firms may be more efficient than state-owned enterprises, as

the market

provides both a ‘carrot’ and a ‘stick’ for them to produce at a low cost and to
make the
products desired by consumers. If firms are efficient, they are rewarded with
high profits and if they are not, they are punished by going bankrupt.

1 a Market forces determine price by the interaction of demand and supply.

b Price controls may distort the market by creating shortages and surpluses.
A maximum price

set below the equilibrium price will lead to demand being greater than
supply. A minimum

price set above the market equilibrium price will result in supply being
greater than demand.

c The extract suggests that Chinese National Development Reform

Commission sets maximum price for the products mentioned. This can be
concluded from the reference to price controls being designed to keep
inflation low and causing a shortage of petrol.

2 a Pollution (air and noise) and accidents.

b It is likely to reduce the number of flights, as it will make travelling more
expensive. Of course, the effect will depend on the size of tax and the price
elasticity of demand for air travel.

c An external benefit is a beneficial effect that third parties enjoy, as a result

of the production or consumption decisions of others. In this case, a new
airport may create work for taxi drivers in the area and may boost other local
businesses also. They may be able to enjoy high profits not as a result of
their own actions but because of people travelling to and from the airport.

3 a An energy-intensive sector is an industry that uses a high amount of

energy per unit
produced.
b An emissions trading scheme may reduce pollution by rewarding firms that
cause little
pollution and punishing those that generate a high amount of pollution.
Permits are issued or sold to firms allowing them to pollute up to a given
level. Those that pollute less can sell their leftover allowance to other firms.
This should enable them to charge lower prices, gain more market share and
reduce the pollution the industry creates.
1 D Private sector firms do not have the financial incentive to produce public
goods, as they cannot

stop non-payers from consuming the product. This means that either state-
owned enterprises
have to produce them or the government has to provide the incentive for
private sector firms to

make them (by paying them). Either way, the government finances their
production.

2 D People travelling on the train benefit car drivers, as their action reduces
the volume of traffic on the roads.

3 C Installing new equipment will increase a firm’s costs but it should reduce
costs on third parties,

including those households who live close to the firm.

4 D The government may try to stop firms abusing their market power. It
would not want to

encourage the consumption of harmful products and it is unlikely to want to

make the

distribution of income more uneven. The role of the price mechanism in

allocating resources will be greatest when there is no state intervention.

Four-part question

a.
A minimum price is set above the market price to be effective. It prevents prices from falling too
low. An example is the minimum wage, which ensures workers are paid at least a certain
amount.

b.
A maximum price only works if set below the market price. It lowers prices but creates
shortages, as demand rises and supply falls. If set above the market price, it has no impact.
c.
Governments can support merit goods by offering subsidies, lowering prices and increasing
demand. They may also make consumption compulsory, like requiring children to attend school.

d.
In a market economy, consumers benefit from choice and low prices due to competition. But in a
mixed economy, government intervention can provide public goods, regulate monopolies, and
support the poor. This can protect consumers better where markets fail.