A Level Economics AQA Practice Exam

What is market distortion?

1. A situation where prices are perfectly competitive

2. A scenario where prices are affected by external incidents

3. A condition where prices are too low for public goods

4. A practice of increasing demand through advertising

The correct answer is: A scenario where prices are affected by external incidents

Market distortion occurs when market prices do not reflect the true supply and demand for a good or service, often due to external factors or interventions that affect market equilibrium. In the context of this question, the scenario where prices are influenced by external incidents captures the essence of market distortion effectively. These external incidents could include government policies, regulations, taxes, subsidies, or unforeseen events such as natural disasters, which can disrupt the normal functioning of the market and lead to prices that do not accurately signal the scarcity or abundance of a product. The other options do not encapsulate the concept of market distortion. A state of perfectly competitive prices implies that the market is functioning efficiently, with no distortions present. A situation where prices are deemed too low for public goods pertains more to the issue of under-provision rather than a distortion of market forces. The practice of increasing demand through advertising relates to tactics used by firms to boost sales, which does not inherently cause a distortion in the market's pricing mechanism. Thus, the scenario where prices are affected by external incidents is the most accurate definition of market distortion.