Market Failure | Edexcel A-Level Economics A (9EC0)
Market Failure
- 69 questions
- 5 subtopics
- Theme 1: introduction to markets and market failure
- Paper 1 and Paper 3
Covers the situations in which markets misallocate resources: externalities and the gap between private and social cost, public goods that no firm will supply, and information gaps that leave buyers unable to judge what they are buying..
It covers what market failure is, and social costs and benefits, externality diagrams and welfare loss, correcting externalities, and who they affect, public goods and information gaps.
Sample questions from Market Failure
Answer each one closed book first, then open the answer.
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What market failure is, and social costs and benefits
Define private costs.
Show the answer
Private costs are the costs of production or consumption borne directly by the producer or consumer. -
What market failure is, and social costs and benefits
Define private benefits.
Show the answer
Private benefits are the benefits of production or consumption received directly by the producer or consumer. -
Externality diagrams and welfare loss
Why do negative externalities of production lead to overproduction?
Show the answer
Because the market ignores external costs, so equilibrium is determined by private costs alone, leading to output beyond the socially optimal level. -
Externality diagrams and welfare loss
Why do positive externalities of consumption lead to underconsumption?
Show the answer
Because the market ignores external benefits, so equilibrium is determined by private benefits alone, leading to output below the socially optimal level. -
Correcting externalities, and who they affect
What happens to output when external costs of production exist?
Show the answer
The market equilibrium quantity exceeds the socially optimal quantity, resulting in overproduction. -
Correcting externalities, and who they affect
What forms of government intervention may be used to correct negative externalities?
Show the answer
Indirect taxes, regulation, or tradable pollution permits to internalise external costs. -
Public goods
If a lighthouse provides light that any passing ship can use regardless of payment, which characteristic of public goods does this illustrate?
Show the answer
Non-excludability, because ships cannot be prevented from benefiting from the light. -
Public goods
Why does the free rider problem arise?
Show the answer
It arises because of non-excludability, meaning consumers cannot be prevented from using the good even if they do not pay.
The 5 subtopics
One subtopic is one session. Work down the list.
| Subtopic | What it covers | Questions |
|---|---|---|
| What market failure is, and social costs and benefits | Recall questions on the types of market failure, private, external and social costs and benefits, and the formulae that relate them. | 12 |
| Externality diagrams and welfare loss | Recall questions on reading MPC, MSC, MPB and MSB curves, locating the social optimum, and identifying welfare loss on a diagram. | 15 |
| Correcting externalities, and who they affect | Recall questions on why externalities cause market failure, the interventions used to correct them, and the economic agents affected. | 17 |
| Public goods | Recall questions on non-rivalry and non-excludability, the free rider problem, and why the market under-provides public goods. | 15 |
| Information gaps | Recall questions on symmetric and asymmetric information, how imperfect information misallocates resources, buyers who know less than sellers, adverse selection, and why prices then fail to reflect marginal social benefit and cost. | 10 |
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
Edexcel A-Level Economics A Active Recall Guide
Every topic, not just this one. 2,508 questions with their answers.