Edexcel Economics A-Level Past Paper Questions on Externalities

What is the Edexcel A-Level Economics test?

The Edexcel A-Level Economics test is an economics-focused qualification offered to British students in their final two years of secondary school study. A-levels are typically taken as courses intended to lead to University or other further education. A-level economics students will often go on to study economics or a similar subject at University.

Pearson Edexcel offers the Edexcel A-Level Economics test. The main alternative to Edexcel is the AQA A-Level Economics course.

Edexcel is a privately-owned British education and exams body founded in 1996. Edexcel has been owned by Pearson plc. since 2005. Edexcel produces qualifications and tests for the British education system and is the UK’s largest entity offering educational qualifications.

Where did we get these Edexcel Economics A-Level Past Paper externalities Questions?

We found these Edexcel Economics A-Level Past Paper externalities questions by going through past Edexcel A-Level Economics papers according to the current specification. We picked out externalities questions and put them together in this list so that you can go through them without having to search through the different Edexcel A-Level Economics papers currently online.

What is a negative externality?

A negative externality is a cost borne by a third party as the result of the production or consumption of a product. A third party is someone who is not a party to the production, purchase, or consumption of a product.

If my friend Dave bought a sports car from a local dealership, I am a third party in that exchange because I neither produced nor bought nor consumed the car. The noise Dave’s sports car makes is a negative externality because it harms me, a third party.

What is a positive externality?

A positive externality is a benefit enjoyed by a third party as the result of the production or consumption of a product. A third party is someone who is not involved in the production, purchase, or consumption of a product.

For example, I am a third party to my neighbour Sandra’s home renovation because I did not participate in the remodelling. However, when those improvements increase the value of my home by making the neighbourhood more appealing, I benefit. That increase in the value of my home is a positive externality of Sandra’s renovation.

What is the externalities diagram?

The externalities diagram is a graph that demonstrates the costs or benefits born by third parties in the sale of a good or service.

A negative externality diagram shows the difference between the private marginal cost of a product and the social marginal cost of a product. The private cost of a product is the costs the supplier pays in order to make the product like the costs of labour and raw materials. The social cost of a product is its private cost plus any external costs born by third parties.

A positive externality diagram shows the difference between the private marginal benefit of a product and its social marginal benefit. The private marginal benefit of a product is the benefit enjoyed by the purchaser of the product. The social marginal benefit of a product is its private benefit plus any external benefit enjoyed by third parties to the transaction.

Question 1: Edexcel 9ECO November 2021 Paper 1

Extract A

Marginal productivity of cabin crew

Cabin crew are responsible for loading passengers and providing in-flight meals. United Airlines is planning to reduce the number of its cabin crew members onboard international flights. The airline currently operates its planes with one more cabin crew member than its competitors. The marginal productivity of this additional crew member may be low. By reducing the number of its cabin crew members United Airlines will be able to operate more efficiently and compete more effectively.

Extract B

Thomas Cook’s environmental impact

Thomas Cook Group plc’s operations included its airline and 560 high street travel agents providing flights, hotels and package holidays.

The environmental impact of the travel industry is significant. It accounts for 8% of all global carbon emissions. Thomas Cook recognised the risks presented by climate change and actively engaged in reducing their airline emissions. Its plans included using more efficient aircraft and using lower-carbon fuel. In 2018, Thomas Cook was included in the top 10 of the world’s most fuel-efficient airlines.

Extract C

Why did Thomas Cook shut down?

Thomas Cook Group plc ceased trading on 23 September 2019. The collapse of Thomas Cook left 600 000 travellers stranded overseas and approximately 21 000 worldwide employees were left without a job.

Thomas Cook’s management said that the failure of rescue talks between banks, shareholders and the UK Government meant it had no choice but to shut down the business. But in truth the tour operator’s problems go back much further. A disastrous merger in 2007, increased debts, the internet revolution in holiday booking and Brexit uncertainty all contributed to the failure of the business.

In 2007 it merged with MyTravel. Thomas Cook directors had an objective of rapid company growth over short-term profitability. The merger was supposed to create a European giant, promising £75 million-a-year cost savings and a springboard to challenge emerging internet rivals. In reality, Thomas Cook was merging with a company that had only made a profit once in the previous six years, and the deal left the Group with huge debts. In May 2019, the firm reported a £1.5 billion loss.

The role of the management in Thomas Cook’s collapse is being investigated by the UK Government. Thomas Cook executives’ salaries and bonuses have been questioned. Directors received salaries totalling £20 million in the five years before its collapse. The Chief Executive Officer (CEO) earned a £500 000 cash bonus in 2017 and about £8.5 million in his five years with the company. It seems that around £4 million of this was in the form of shares. The share price reached £1.46 in 2018, but each share is now worthless.

The CEO said that the directors had worked “exhaustively” to rescue Thomas Cook and create a long-term turnaround strategy. “It is a matter of profound regret to me and the rest of the board that we were not successful.”

The UK prime minister admitted that the government refused to grant £150 million as a subsidy to help rescue Thomas Cook in the short run. The UK prime minister stated: “Clearly, that is a lot of taxpayers’ money and sets up, as people will appreciate, a moral hazard in the case of future such commercial difficulties that companies face. I have questions about whether it’s right that the directors, or whoever, the board, should pay themselves large sums when businesses can go down the tubes like that. One is driven to reflect on whether the directors of these companies are properly incentivised to sort such matters out”.

(a) Explain the likely impact of diminishing marginal productivity of labour on cabin crew staffing levels. Refer to Extract A in your answer. (5 points)

(b) Examine the likely impact of Thomas Cook’s plan ‘to reduce their airline emissions’ (Extract B, line 6) on the social optimum position. Use an appropriate externalities diagram in your answer. (8 points)

(c) With reference to Extract C, assess whether Thomas Cook’s failure was caused by the principal-agent problem. (10 points)

(d) With reference to Extract C, discuss the proposed government subsidy to prevent Thomas Cook from reaching its shut-down point. (12 points)

(e) With reference to the information provided, discuss the decision by Jet2 to increase its package holiday prices. (15 points)

Question 2: Edexcel 9ECO November 2020 Paper 1

The external benefits of higher education include increased tax revenue, faster economic growth, greater innovation and labour market flexibility.

(a) Draw an externalities diagram to show the likely impact of the consumption of higher education. (4 points)

(b) On average, in the UK, a working-age graduate earns approximately £10 000 more per year than a non-graduate.

This suggests a university degree provides a substantial (1 point)

A external benefit

B external cost

C private benefit

D social cost

Question 3: Edexcel 9ECO November 2020 Paper 1

The International Energy Agency has predicted that oil use by cars will peak in 2025 because of the increasing number of drivers switching to electric vehicles.

Evaluate the likely microeconomic consequences of consumers shifting from vehiclespowered by fuel obtained from oil to electric-powered vehicles. (25 points)

Question 4: Edexcel 9ECO June 2018 Paper 1

In September 2016 the government approved the building of an £18 billion nuclear power station, Hinkley Point C, which will supply 7% of UK electricity for up to 60 years. The power station is funded by Chinese and French investment. Evaluate the likely private costs and external costs involved in such major power station construction projects. Use an appropriate externalities diagram in your answer. (25 points)

Question 5: Edexcel 9ECO November 2021 Paper 2

It has been estimated that if climate change led to the world’s temperature rising 2.5 °C compared to the temperature in 2010, then global GDP per capita would be 15% lower by 2100. If temperatures rise by 4 °C compared to the temperature in 2010, then by 2100 global GDP per capita would decline by more than 30%. 

Evaluate the potential trade-offs between environmental protection and other macroeconomic objectives. (25 points)

macroeconomic objectives. (25 points)

Question 6: Edexcel 9ECO June 2017 Paper 3

Extract A

Chile’s economic outlook brightens

Chile has been hit hard by a worldwide fall in commodity prices since 2011. Copper accounts for 20% of Chile’s GDP and 60% of its exports; one third of the world’s copper is produced by Chile. China purchased 40% of the world’s copper, so a slowdown in China combined with increased global over-supply has meant copper prices have collapsed (see Figure 1). Chilean government income from copper exports had reached $11.5 billion a year before copper prices fell, but now tax revenues from this source have fallen drastically. Growing numbers of copper mines struggle to break even at current prices.

Chile’s GDP is now growing, helped by a weak currency that has boosted export industries outside the mining sector, such as its successful wine and salmon industries. There are strengths in tourism and high-tech products. Public services are good in Chile, and poverty rates have been falling fast. On top of this, a large and diversified financial sector with high domestic savings provides a useful safety net, given high levels of corporate debt and the government’s need to finance a fiscal deficit of 3% of GDP.

Chile’s economy is often regarded as the best run in the region. This is attributed to the credibility of its financial institutions, relatively low levels of national debt (about 15% of GDP) and its free-trade model, which is unrestricted by government interventionism that has distorted the economies of countries such as Argentina and Venezuela. “Chile is an example of how credible institutions can smooth the economic cycle and make adjustments less traumatic,” said Mr Valdés, the minister of finance in Chile, pointing to its widely respected and independent central bank and a well-established fiscal rule that give officials the freedom to implement counter-cyclical policies.

However, there are worries that without enough spare capacity in the economy, expansionary fiscal and monetary policies could end up increasing inflation rather than economic growth. Meanwhile monetary policy is restricted by inflation that has reached 5%, well outside the central bank’s 2–4% target range, fuelled by a weaker exchange rate.

Crucially, investment remains low because of uncertainty over the outcome of the Prime Minister’s reforms, which are aimed at reducing inequality. A recent rise in corporation tax from 20% to 25% and labour market reforms that strengthen the power of trade unions may have a negative effect on business confidence.

Despite a “mildly contractionary” budget, Valdés insisted that the government would continue with costly reforms. Increased taxes on those on higher incomes are considered by the government to be necessary to sustain economic development in Chile. “We do want to change society, while recognising all the good things that have been done in the past 25 years,” said Mr Valdés, referring to an average growth rate of 5.3% over the past three decades, but under 2% in 2015. There is broad consensus that investment in education is the key to unlocking Chile’s growth potential.

Extract B

Chile’s copper mining on a downward track

There was a time when investing in Chilean mining meant guaranteed success. After 1990, when military rule was replaced by an elected government, market reforms and restored relations with the US and UK meant foreign companies were keen to exploit vast copper reserves. The existence of large copper reserves in a stable country with a business-friendly government is rare, making Chile much more attractive to investors than countries such as Zambia.

By mid-2015, however, the copper price hit a six-year low. Chilean mines are becoming less productive. After 20 years of heavy digging, the ore is lower grade, and much further down. The deeper pits take longer to mine, and use more fuel. Wages are high, and trade unions are powerful. A mining truck driver earns $70 000 a year, $10 000 more than the US equivalent. Many mining projects that were planned are being postponed, and investors are looking to Peru; even the US copper mining industry is becoming more competitive.

Energy supply is also a worry as Chile produces virtually no fossil fuels and relies on imported coal and liquid natural gas to power its mines. Energy costs account for 18% of the cost of copper production.

Water supply is also becoming a major problem. Farmers and communities accuse mining companies of causing water shortages to keep their operations running. A prolonged drought has not helped. Mining firms are turning to desalination plants or using untreated seawater. However pumping water 200 kilometres from the Pacific Ocean to the copper mines is costly.

Chile’s environmentalist movement has forced the government to tighten regulations. In 2001, it took 236 days to get an environmental impact assessment of a new mine approved. By 2013, this had increased to 506 days.

(a) With reference to Figure 2, explain one likely reason for the change in the Chile peso exchange rate between 2013 and 2015. (5 points)

(b) Examine the likely impact of externalities of copper mining on firms and communities within Chile. (8 points)

(c) Apart from externalities, discuss the problems that Chile faces as a result of its dependency on copper mining. (12 points)

EITHER

(d) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of policies that could be used to stimulate economic growth and development in Chile. (25 points)

OR

(e) With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile’s economy of changes in the level of investment. (25 points)