Explanation​:
Health care and health insurance are both examples of merit goods that generate positive externalities of consumption.

Choices A, B, and D do not correctly fill in the blanks in the sentence.

Explanation​:
Subsidising public transportation would likely decrease income inequality, as lower-income households devote a higher percentage of their income to public transportation than higher-income households.

Choice B is likely, as a subsidy may require an increase in taxation in the future if the government borrows to fund the subsidy.

Choice C is likely, as cheaper public transportation would reduce demand for private transport, as the two are substitutes.

Choice D is likely, as subsidies cause a deadweight loss, so the price is no longer determined solely by market forces.

Explanation​:
Subsidies granted to cocoa farmers may guarantee them a fairer income, but it will only further encourage unsustainable production by causing increased deforestation.

Market failure is corrected by implementing policies to raise the cost of production, and thus bringing the market equilibrium quantity closer to the socially optimum output:

• Choice A will raise the cost of production for chocolate manufacturers and thus discourage production
• Choice B will increase the cost of clearing forest land and encourage more sustainable use of the common pool resource.
• Choice C will increase the costs of production for all participants in the supply chain and encourage more sustainable and equitable practices.

Statement II is correct: government investment in infrastructure projects is an example of direct provision designed to correct the underprovision of infrastructure by the free market.

Statement III is incorrect: infrastructure projects are likely to be under-provided by the free market because of the positive externalities they generate.

Revenue is maximised at the level of output where MR = 0. As output approaches this point from the left, MR is positive, so more output increases total revenue. After this point, MR is negative, so additional output causes total revenue to decline.

Choice A is the profit-maximising level of output, and Choice C is the allocatively efficient level of ouput. At point D, total revenue is minimised, because P = 0.

Explanation​:
In theory, contracting out should be transparent and fair, but in practice this is not always the case. Contracting out to the private sector can often create opportunities for corruption and lack of transparency.

Choice A is true because the free-rider problem is the reason the private sector will not provide public goods.

Choice B is correct because any government expenditures will always entail an opportunity cost and could be used elsewhere (like building schools or hospitals).

Choice D is correct because public goods generate positive externalities of production and consumption, and they benefit both consumers and society as a whole.

Explanation​:
When PED > PES, producers pay a higher proportion of the tax. If PED is high, producers cannot transfer as much of the tax onto consumers—who are price sensitive—as they can when PED is lower.

Choices A and D are incorrect, as when PED = PES, an equal amount of the tax is paid by producers and consumers.

Choice C is incorrect as when PED < PES, a higher proportion of an indirect tax is paid by consumers. Consumers are insensitive to price, so producers are able to shift the tax burden onto them.

Explanation​:
Firms with market power tend to be larger, and larger firms benefit from economies of scale, which drive down unit costs.

Choices B and D are wrong as larger firms with greater market power also earn higher profits and have higher barriers to entry.

Choice A is wrong as there is no pattern for how the level of product differentiation varies. For example, monopolistically competitive firms engage in greater product differentiation compared to perfectly competitive firms. On the other hand, monopolies, being the sole suppliers in their markets, do not require product differentiation.

The intersection of MSB and MSC determines the socially optimum output (300 000 $kg$). The size of the externality is determined by the vertical distance between MSC and MPC, therefore it is $\text{\$}$1.

Explanation​:
Market structures that are monopolistically competitive have low barriers to entry and are characterised by product differentiation. In the long run, at the profit maximising level of output, firms operating under monopolistic competition will set price (P) higher than marginal cost (MC), making them allocatively inefficient.

Choice A describes perfect competition, not monopolistic competition.

Choices C and D are incorrect as monopolistic competition has low to no barriers to entry or exit.

Explanation​:
While licensing and certification requirements are examples of signaling as a private response to address problems of asymmetric information, they can also create barriers to entry and limit competition if the requirements are overly restrictive.

Choices A, B, and C are correct. Licenses and certifications signal to potential consumers that a producer is competent and qualified, and thus provide the potential consumer more information from an independent third-party.

Ending a milk subsidy would increase the cost of production, causing supply to shift to the left. A fall in the price of coffee would increase demand for milk, as milk and coffee are complementary goods.

Explanation​:
A non-binding price floor$\text{—}$a minimum price set below the equilibrium price (P1​)$\text{—}$would have no effect on the market. Therefore, the quantity demanded associated with that price (Q1​) would still be the quantity demanded after the imposition of the minimum price.

Choice B is incorrect as Q2​ would be the quantity supplied had the question been about a maximum price.

Choice C is incorrect as Q3​ would be correct if the question was about a maximum price.

Choice D is incorrect as Q2​Q3​ would be the shortage caused had the question been about a maximum price.

Explanation​:
The diagram depicts a natural monopoly, which is a particular kind of monopoly. Natural monopolies exist when the market can only sustain one firm. Having more than one firm would lead to a wasteful duplication of resources, as these industries have very high start-up costs, with continuously falling average costs in the long run as quantity increases, due to economies of scale.

Choices A, B, and D are incorrect as those market structures all have average costs curves that eventually increase in the long run due to diseconomies of scale and in the short run due to diminishing marginal returns.

Explanation​:
The firm in the diagram has a downward-sloping AR curve and is making normal profit (as AR=AC at the profit-maximising level of output). Monopolistically competitive firms can only make normal profit in the long run.

Choice B is incorrect as perfectly competitive firms have a horizontal AR curve.

Choice C is incorrect as a collusive oligopoly behaving like a monopolist would most likely be earning a supernormal profit.

Choice D is incorrect as the firm in the diagram is making normal profit.

Explanation​:
Adverse selection refers to a situation where one party has more information about their own characteristics, risks, or behavior than the other party during the transaction. This information asymmetry can lead to an imbalance in the selection of goods, services, or insurance contracts, as those with higher risks or undesirable characteristics are more likely to participate.\

Moral hazard (Choice A) arises when one party alters their behavior or takes on more risks due to the presence of insurance or a contract, knowing that they will not bear the full consequences of their actions. Moral hazard is another problem associated with asymmetric information.

Choices C and D are private responses to the problems associated with asymmetric information.

Key idea​:
Allocative efficiency occurs when the total benefit to demanders and suppliers is maximised. On a diagram this is seen at the quantity where:

• demand = supply
• price = marginal cost
• demand = marginal cost

Explanation​:
The level of output at point C corresponds with a price that is equal to marginal cost. When P = MC, economic welfare is maximised, and there is no deadweight loss. At this point, demand is equal to supply.

Explanation‾Explanation​:
The size of the indirect tax per unit that would eliminate the externality equals the vertical distance between MPB and MSB ($2).

The total tax revenue that the government would collect equals:

tax per unit × quantity bought and sold after

= $2 × 600 000 units

= $1 2000 000

The price that consumers pay after the imposition of the tax is $\text{\$}$8 because the indirect tax will shift the MPC curve up until the new quantity is $600000$ units. At this quantity, the externality is eliminated and the socially optimum output is produced.

Choices A and D are incorrect because they mix the market equilibrium quantity with the socially optimum output, and overstate the tax revenue.

Choices C and D are incorrect because they mix the price paid by the consumer after the tax is imposed with the price received by the producer.

Explanation​:
Defense and security are public goods that are non-excludable and non-rivalrous, meaning it's difficult to exclude people from benefiting from the good and one person's consumption does not lessen the amount of the good available to everyone else.

Choices A, B, and C do not correctly complete the sentence.

Explanation​:

The imposition of the maximum price PMax​ causes excess demand of Q2−Q1​. This excess demand is eliminated when the subsidy shifts the supply curve down.

Choice A is incorrect, as a minimum price could not be imposed if a maximum price is in effect. Further, effective minimum prices cause excess supply.

Choices C and D are incorrect as these indirect taxes would shift the supply curve to the left.

Explanation​:
Consumer nudges are typically more allocatively efficient than other forms of government intervention, as they cause consumers to change their behaviour voluntarily. Changes in quantity demanded will therefore be caused by a shift in demand, meaning there will not be a deadweight loss.

Choice A is incorrect, as a price ceiling will cause an oversupply of the good.

Choices B and D are incorrect as both interventions will create a deadweight loss.

Choices A, B and C are all possible outcomes of high indirect taxes on cigarettes.

Explanation​:

The above blue area is the amount of the indirect tax paid by producers. Producers receive $\text{£}$7 per unit sold, and with a $\text{£}$7 per unit tax on each unit, the new market price is $\text{£}$14. As the initial equilibrium price was $\text{£}$10, producers pay $\text{£}$3 of the tax per unit, and consumers pay $\text{£}$4.

Choice A is incorrect, as that is the amount of the tax paid by consumers.

Choice B is incorrect as that is the total amount of the tax.

Choice D is incorrect as that is total revenue (to the government and producers).