Economics AQA Unit 1 January 2012- Context B answers

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Unit 1 January 2012 ­ Context 2
Question 1.
An external cost can be defined as a cost faced by a third party for which no compensation is
forthcoming when producing or consuming a good. If there are any external costs in consuming the
good, the social cost will be greater than the private cost. The occurrence of an external cost may
lead to market failure. This is because the free market forces generally ignore the external cost. For
example, driving a car imposes a private cost to the driver but driving a car also creates a greater
social cost for other people (the third party) in society such as; Noise and Air Pollution.
Question 2.
From Extract D, I have observed that the cost of operating a speed camera per site is approximately
about £21093. This is higher than the cost of operating per traffic light camera, for which the cost is
about £14693.
I have also observed that the annual fine income generated by speed cameras is higher at
£6,730,000 than that of the annual fine income generated by traffic light cameras, which is at
Question 3.

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A merit good is a good or service which generally consist of positive externalities that benefit the
greater society in general. These good/services are provided by the state as the market forces fail
to provide them at an optimal output.
Merit goods are often underprovided because the consumers of these merit goods do not consider
the greater social benefit and mostly the private benefit of consuming the good. This means that the
positive externalities are not taken into consideration.…read more

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The diagram illustrates that the increased cost of speed camera provision will result in increased cost
for the individual and society, thus making it a demerit good. This means that the cost to the
individual at Q1 from being fined will result in an increase in the cost to society Q2 to Q1 as a result of
increased external costs.
To conclude, it can be said that the provision of speed cameras is a source of government failure.…read more

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