The correct answer for HKCEE 2010 Economics Paper 2 (Multiple Choice) Question 2 is Option D. Question Summary
To correct the market failure, the government could impose a Pigovian tax equal to the marginal external cost per unit. This raises the firm’s marginal private cost to MSC, internalizing the externality and restoring the social optimum. The tax is economically efficient and raises public revenue but requires accurate estimation of the external cost and effective enforcement; misestimation leads to inefficiency. Alternatively, the government can set emission standards or limits (regulation). Standards guarantee pollution reduction but can be less cost-effective because firms face different marginal abatement costs. Tradable permits (cap-and-trade) combine certainty about total emissions with cost-effectiveness: firms with low abatement costs sell permits to high-cost firms. Downsides include administrative complexity, initial permit allocation issues, and the need for robust monitoring. hkcee 2010 econ paper 2 q2
Common Error: Choosing an option that suggested a good becomes "free" because it is provided by the government. The correct answer for HKCEE 2010 Economics Paper
Subjectivity of Cost: Opportunity cost is not just about the money paid; it includes the value of the time and the next best alternative. Even if two people pay the same price for a ticket, their opportunity costs differ if their next best way to spend that time has different values. Convert this into a formatted essay of a
Step 3 – Tax burden.
Central planners cannot gather all the dispersed information about consumer preferences and resource availability. This results in misallocation of resources—producing the wrong goods or using inefficient methods—leading to shortages or surpluses.