Cambridge International as and a level Economics Ebook

1
Using the above information as a guide, what costs 
and benefi ts would you include in your analysis?
2
What are some of the measurement problems you 
might encounter?
3
On what theoretical basis might you:
■ 
recommend that a new rapid transit system be 
constructed?
■ 
recommend that there is no case for a new rapid 
transit system?
142
Cambridge International A Level Economics

---

Exam-style questions 
1
 
a
Using examples, explain what is meant by a 
negative externality. 
[12]
b
Discuss the extent to which an indirect tax alone 
can rectify the problem of market failure due to 
negative externalities. 
[13]
2
 
a
Using examples, explain why cost–benefit 
analysis is central to the decision making 
process in the allocation of public goods. 
[12]
b
Discuss some of the limitations of cost–benefit 
analysis in the allocation of public goods. 
[13]
SUMMARY
In this chapter it has been shown that:
■
 
Eff iciency is a fundamental concept in 
microeconomics and is used to assess how 
well scarce resources are allocated.
■
 
Economic eff iciency exists when there is 
both productive and allocative eff iciency in 
a market; these conditions only occur when 
there is perfect competition.
■
 
Pareto eff iciency and dynamic eff iciency are 
other forms of eff iciency.
■
 
Markets fail for various reasons, leading to 
an ineff icient allocation of resources.
■
 
Externality is a common reason for market 
failure and results in negative and positive 
externalities for consumers and for firms.
■
 
Cost–benefit analysis is a useful practical 
aid to decision making, especially in 
situations where it is necessary to consider 
the social costs and benefits.