The Market Mechanism, Market Failure and Government Intervention | AQA A-Level Economics (7136)
The Market Mechanism, Market Failure and Government Intervention
- 249 questions
- 14 subtopics
- Paper 1: Markets and market failure, and available on Paper 3
- Paper 1 and Paper 3
The market mechanism, market failure and government intervention is examined on Papers 1 and 3.
It explains how prices allocate resources, catalogues the ways that allocation goes wrong, and works through the tools a government uses to correct it and the ways that too can fail.
Sample questions from The Market Mechanism, Market Failure and Government Intervention
Answer each one closed book first, then open the answer.
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How markets and prices allocate resources
What role does the price mechanism play in coordinating economic activity?
Show the answer
The price mechanism coordinates the independent decisions of buyers and sellers in a market economy without the need for central planning. -
The meaning of market failure
What happens to the consumption of merit goods in a free market?
Show the answer
Merit goods are underconsumed because consumers undervalue their private benefits. -
Positive and negative externalities
What is a negative externality in production?
Show the answer
A negative externality in production occurs when the production process imposes costs on third parties not involved in the transaction. -
Merit and demerit goods
On a demand and supply diagram for a merit good, how does the free market equilibrium quantity compare to the socially optimal quantity?
Show the answer
The free market equilibrium quantity is below the socially optimal quantity, showing under-consumption and misallocation of resources. -
An inequitable distribution of income and wealth
How does an inequitable distribution of income and wealth affect where resources are directed in the economy?
Show the answer
Resources are allocated towards goods demanded by the wealthy rather than where they may be most needed in society. -
Indirect taxes and subsidies
When a subsidy is granted to correct a positive externality, who receives the payment?
Show the answer
The payment is made to producers. -
Pollution permits and the extension of property rights
How does a cap-and-trade scheme for pollution work?
Show the answer
The government sets a cap on total emissions and issues permits equal to that cap; firms that emit more than their permits allow must buy permits from firms that emit less. -
Evaluating intervention and the mixed economy
What factors should be considered when evaluating which intervention method to use?
Show the answer
The type of market failure, the specific market conditions, and the government's objectives.
The 14 subtopics
One subtopic is one session. Work down the list.
| Subtopic | What it covers | Questions |
|---|---|---|
| How markets and prices allocate resources | The rationing, signalling and incentive functions of the price mechanism. | 30 |
| The meaning of market failure | Complete and partial market failure, and what a misallocation of resources means. | 18 |
| Public goods, private goods and quasi-public goods | Non-rivalry and non-excludability, the free rider problem, and how technology can reclassify a good. | 24 |
| Positive and negative externalities | Private, external and social costs and benefits, and the divergence between market and social optimum. | 30 |
| Merit and demerit goods | Why they are over- or under-consumed, and the part played by imperfect information. | 20 |
| Market imperfections | Monopoly power, asymmetric information, adverse selection, moral hazard and factor immobility. | 24 |
| An inequitable distribution of income and wealth | Why an unequal distribution shapes what is produced, and the inefficiency that follows. | 12 |
| Indirect taxes and subsidies | How each shifts the supply curve, and how both aim to internalise an externality. | 15 |
| Price controls, state provision and regulation | Maximum and minimum prices and their consequences, and the case for providing or regulating directly. | 9 |
| Pollution permits and the extension of property rights | Extending property rights to correct externalities, and tradable pollution permits: how cap-and-trade works, why it cuts pollution at the lowest cost, the EU and UK emissions trading schemes, and how permits compare with taxes and regulation. | 13 |
| Evaluating intervention and the mixed economy | Weighing the arguments for and against intervention, and what defines a mixed economy. | 8 |
| Government failure | Unintended consequences, administrative costs, information gaps and distorted incentives. | 11 |
| Competition policy | Mergers, restrictive practices, promoting competition, and why breaking up a monopoly may not help. | 13 |
| Public ownership, privatisation, regulation and deregulation | The arguments on each side, regulatory capture, and what deregulation is meant to achieve. | 22 |
How the guide is worked
Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.
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Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
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Step 2 · Open book
Go back to the top. Read each printed answer and write it out in full, including the ones you had right.
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Step 3 · Closed book again
Same questions, same order, from memory. The gap between pass one and pass three is the session result.
Read the full method, the return schedule and the research behind it.
Nearby topics
AQA A-Level Economics Active Recall Guide
Every topic, not just this one. 2,344 questions with their answers.