Exam-style question
Try this first
Confidence survey on 3.1.8.4 Positive and negative externalities in consumption and production: which option best explains the economic mechanism in Individuals, firms, markets and market failure?.
- A.Distinguish externalities from the nearest misconception, then use price, quantity, incentives or welfare to explain the economic consequence.
- B.A tax shifts demand rather than affecting supply incentives and costs.
- C.Regulation is the same policy as a subsidy because both involve government.
- D.Give a definition of externalities only, without application, chain of analysis, evaluation or judgement.
Model answer
What a good answer should say
- Correct answer: Distinguish externalities from the nearest misconception, then use price, quantity, incentives or welfare to explain the economic consequence..
- It is correct because it links 3.1.8.4 positive and negative externalities in consumption and production to producer decisions and keeps the reasoning within the evidence supplied by the question.
Explanation
Why this works
The reasoning should move from cause to transmission mechanism to consequence. Use a diagram, calculation or data point if it is relevant, then test the answer with Economics evaluation: size of effect, time period, elasticity or responsiveness, assumptions, and distribution of gains and losses.
This keeps the response specific to The market mechanism, market failure and government intervention in markets rather than repeating a generic question template.
Common mistake
No common mistake is linked to this question yet.