A Level Economics (A2) chapter 2: Government microeconomic intervention MCQs with answers
By Team Megalecture · Updated 4 Nov 2026
64 exam-style questions on Government microeconomic intervention, each with the answer and a short explanation. Ten of them are below to try. The chapter test draws ten fresh questions each time and is marked the moment you finish, with your score by topic.
Government policies to achieve efficient resource allocation and correct market failure20 questions
Equity and redistribution of income and wealth15 questions
Labour market forces and government intervention29 questions
Ten Government microeconomic intervention questions with answers
Try each one, then open the answer. These ten stay the same; the test draws new ones every time.
1. In a competitive labour market, a trade union negotiates a wage above the equilibrium. If the demand for labour does not change, what is the likely effect?
A
the wage rises but employment falls
B
the wage and employment both rise
C
the wage rises and employment is unchanged
D
employment rises but the wage falls
Show answer
Answer: A. At the higher wage firms move up their demand curve and employ fewer workers. A union can raise both wages and employment only in special cases, such as bargaining with a monopsony employer.
2. A government believes that each unit of a good gives an external benefit of $10, so it pays a subsidy of $10 per unit. In fact the marginal external benefit is constant at $4 per unit. What is the result?
A
output rises but remains below the socially optimal level
B
output rises to exactly the socially optimal level
C
output rises beyond the social optimum, causing a welfare loss
D
output falls below the free market level
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Answer: C. A subsidy of $4 would have been enough to reach the optimum. The $10 subsidy pushes output past it, onto units whose marginal social cost exceeds their marginal social benefit: government failure caused by imperfect information.
3. Which statement best shows the difference between efficiency and equity?
A
an allocation in which everyone has an equal share must be Pareto optimal
B
an allocation can be Pareto optimal even if a few people own almost everything
C
an equitable allocation of resources is always productively efficient
D
a market where price equals marginal cost gives every household the same income
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Answer: B. Pareto optimality requires only that no one can gain without someone losing, which can hold for a very unequal distribution. Efficiency concerns how well resources are used; equity concerns whether the distribution is fair.
4. Why are tradable pollution permits said to reduce pollution at the lowest total cost?
A
firms that can cut pollution cheaply do so and sell spare permits to firms facing higher costs
B
every firm is required to cut its pollution by exactly the same percentage as every other firm
C
each firm pays a tax equal to the marginal external cost of each tonne of its pollution
D
firms may pollute as much as they wish provided they compensate the victims of the pollution
Show answer
Answer: A. The total number of permits fixes the amount of pollution. Trading means the cuts are made by the firms that can make them most cheaply, which is not the case when every firm must make the same cut.
5. A government wants to use an indirect tax to correct a negative production externality. Ideally, what should the tax per unit equal?
A
the marginal private cost at the free market output
B
the total external cost at the free market output
C
the marginal private benefit at the socially optimal output
D
the marginal external cost at the socially optimal output
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Answer: D. A tax equal to the marginal external cost at the optimum raises the MPC curve to meet MSB at the socially optimal output, so producers pay for the harm they cause (the externality is internalised).
6. A factory’s waste pollutes a lake used by a fish farm. How could giving the fish farm legal property rights over the lake reduce the market failure?
A
the government would then own the lake and could ban all fishing and all waste in it
B
the fish farm could sue or charge the factory, making pollution a cost the factory must pay
C
the factory would then no longer need to take the cost of its pollution into account
D
the fish farm would receive a government subsidy to move to a cleaner lake
Show answer
Answer: B. Clear property rights let the injured party demand compensation, turning an external cost into a private cost for the polluter. The factory then has an incentive to cut pollution towards the socially optimal level.
7. Why may policies that increase equity reduce efficiency?
A
more equal incomes always increase the total output of goods and services
B
efficiency is concerned only with how income is shared between people
C
high tax rates and benefit withdrawal may weaken incentives to work and invest
D
equity can be measured in money, but efficiency cannot be measured
Show answer
Answer: C. Redistribution relies on taxes and benefits that change incentives: if people keep less of each extra dollar earned, they may work, save or invest less. This is the equity–efficiency trade-off.
8. In a perfectly competitive labour market, why is a firm’s marginal revenue product curve its demand curve for labour?
A
the firm employs workers until the MRP of the last worker falls to zero, whatever the wage rate is
B
the firm hires up to where MRP equals the wage, so at each wage the MRP curve shows how many it hires
C
the firm employs workers until the wage rate equals the average product of labour at that level of employment
D
the firm employs workers up to the point where MRP is at its maximum, since that is where profit is greatest
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Answer: B. Each worker is worth hiring while the revenue they add is at least the wage. So at any wage the firm chooses the employment where MRP = wage, and the downward-sloping part of the MRP curve traces out its demand for labour.
9. Which is an example of a ‘nudge’?
A
banning the sale of sugary drinks in all of the country’s schools
B
placing a specific tax of 20 cents on each can of sugary drink
C
automatic enrolment in a pension scheme, with the right to opt out
D
providing free school meals for all children in state schools
Show answer
Answer: C. A nudge changes the way a choice is presented to steer behaviour without removing options or changing prices. A ban removes the choice, while a tax or free provision changes the price.
10. Which change is most likely to increase the demand for nurses at every wage rate?
A
the wage rate paid to nurses falls
B
an ageing population increases the demand for health care
C
new equipment takes over many of the tasks nurses used to do
D
more young people train to become nurses
Show answer
Answer: B. More demand for health care raises the demand for the nurses who provide it, shifting the demand curve to the right. A lower wage causes a movement along the curve, and more trainees increase the supply of nurses.
Government microeconomic intervention: questions students ask
How many Government microeconomic intervention MCQs are there?
64, each with the answer and a short explanation, across 3 topics: Government policies to achieve efficient resource allocation and correct market failure, Equity and redistribution of income and wealth, Labour market forces and government intervention. Every chapter test draws ten of them, so you can take it many times.
Is the A Level Economics (A2) chapter 2 test free?
Yes. The test, the answers and the explanations are free and need no sign-up. Sign in only if you want your scores kept across devices.
How is the chapter test marked?
The moment you press Finish: your score, the right answer and an explanation for every question, and the ones you got wrong saved in My mistakes to retry.
