Market Failure and Government Intervention | Edexcel A-Level Economics B (9EB0)

Market Failure and Government Intervention

91 questions
6 subtopics
Theme 1: markets, consumers and firms
Paper 1 and Paper 3

Market Failure and Government Intervention is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business.

It covers private, external and social costs, private, external and social benefits, externalities in production and consumption, strengths and weaknesses of the market economy, the purpose and methods of government intervention and government failure.

Sample questions from Market Failure and Government Intervention

Answer each one closed book first, then open the answer.

Private, external and social costs

Who is the third party when a factory discharges waste into a river?

Show the answer
The anglers, water companies and residents downstream, who bear the cost of the pollution without taking any part in the factory's transactions.
Private, external and social costs

Define welfare loss.

Show the answer
Welfare loss is the loss of net benefit to society that results from producing at the free-market level of output rather than at the socially optimal level.
Private, external and social benefits

Give two external benefits created when a firm trains its workforce.

Show the answer
Other employers gain skilled staff when trained workers move on, and higher productivity raises output and tax revenue across the whole economy.
Private, external and social benefits

Define a merit good.

Show the answer
A merit good is one whose consumption yields greater benefits than the consumer realises or values, so it is under-consumed if left entirely to the market.
Externalities in production and consumption

Give an example of a positive consumption externality.

Show the answer
A homeowner restoring a run-down period property, which raises the appearance and the value of the whole street.
Externalities in production and consumption

Explain what would happen to the price and quantity of petrol if its full external costs were reflected in it.

Show the answer
The supply curve would shift up by the value of the external cost, so the price would rise and the quantity bought would fall towards the socially optimal level.
Strengths and weaknesses of the market economy

Define market failure.

Show the answer
Market failure is the failure of a free market to allocate resources efficiently, leaving society's welfare lower than it could be.
Strengths and weaknesses of the market economy

How does the immobility of labour cause market failure?

Show the answer
Workers cannot always move between regions or acquire new skills quickly, so labour remains unemployed in one place while vacancies go unfilled in another.

The 6 subtopics

One subtopic is one session. Work down the list.

Subtopic	What it covers	Questions
Private, external and social costs	Private, external and social costs and calculating social cost, the external costs of road haulage and coal power, third parties, why firms ignore external costs, marginal social cost against marginal private cost, over-production, welfare loss on a diagram, and measuring external costs in money.	15
Private, external and social benefits	Private, external and social benefits and calculating social benefit, the external benefits of training and solar panels, marginal social benefit against marginal private benefit, why goods with external benefits are under-consumed, merit goods, under-investment in research and development, and positive externalities.	14
Externalities in production and consumption	Externalities in production and consumption, negative and positive examples of each, over-production and under-consumption, the socially optimal level of output, a negative production externality on a diagram, the full external cost of petrol, demerit goods, missing price signals, and property rights.	15
Strengths and weaknesses of the market economy	How the price mechanism allocates resources and when it does so efficiently, the strengths of the market economy and competition, market failure from external costs and benefits, public goods, information failure and labour immobility, inequality, whether failure justifies intervention, and allocative efficiency.	14
The purpose and methods of government intervention	The purpose of intervention in markets with external costs and benefits, regulation and legislation with their advantages and weaknesses, indirect taxes and how they internalise external costs, inelastic demand, subsidies and grants, and voluntary agreements.	17
Government failure	Government failure and its main causes, distorted price signals from subsidies and maximum prices, unintended consequences and black markets, administrative costs, information gaps and setting a pollution tax, regulatory capture, minimum wages and rent controls, agricultural markets, and time lags.	16

Market Failure and Government Intervention is 91 of the 2,933 questions in the guide.Get the guide, £8

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.

Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
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.
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.