A Level Economics - Market Failure
How can the government reduce the consumption of demerit goods? - correct
answer-Indirect taxes - may be inefficient if PED is inelastic
Minimum prices
Regulations - e.g. age restrictions, needing to have a licence to sell
Information - ensuring people know the long term costs
How can the government try to increase consumption of merit goods? - correct
answer-Subsidies - could be ineffective if PED is inelastic
Maximum prices
Information - make people realise the benefits
Regulations - e.g. vaccine mandates
How does a lack of competition in the market cause market failure? - correct answer-Firms
which dominate their markets will attempt to charge high prices by restricting supply which
they can get away with since consumers have no choice. Thus, consumers can't buy as
much as they would if prices were lower. This leads to allocative inefficiency.
How does factor immobility cause market failure? - correct answer-Factors of production like
land are difficult to transfer from one use to another. In the case of labour, you may have an
employer looking for workers, and lots of unemployed people, but if the people aren't trained
for the job, they won't be employed.
In the housing market, people in social housing can't move because they can't get social
housing in low unemployment areas. High prices discourage northerners from moving to the
south.
How does inequality cause market failure? - correct answer-The market mechanism may
lead to a distribution of income which is unacceptable. Income levels may be so low for
some that they cannot afford necessities. If healthcare is only provided by the private sector,
people may have to go without, so the state needs to intervene.
If private consumption benefits exceed social consumption benefits... - correct answer-then
there are negative consumption externalities
If private production costs exceed social production costs... - correct answer-then there are
positive production externalities.
If social consumption benefits exceed private consumption benefits... - correct answer-then
there are positive consumption externalities
If social production costs exceed private production costs... - correct answer-then there are
negative production externalities.
How can the government reduce the consumption of demerit goods? - correct
answer-Indirect taxes - may be inefficient if PED is inelastic
Minimum prices
Regulations - e.g. age restrictions, needing to have a licence to sell
Information - ensuring people know the long term costs
How can the government try to increase consumption of merit goods? - correct
answer-Subsidies - could be ineffective if PED is inelastic
Maximum prices
Information - make people realise the benefits
Regulations - e.g. vaccine mandates
How does a lack of competition in the market cause market failure? - correct answer-Firms
which dominate their markets will attempt to charge high prices by restricting supply which
they can get away with since consumers have no choice. Thus, consumers can't buy as
much as they would if prices were lower. This leads to allocative inefficiency.
How does factor immobility cause market failure? - correct answer-Factors of production like
land are difficult to transfer from one use to another. In the case of labour, you may have an
employer looking for workers, and lots of unemployed people, but if the people aren't trained
for the job, they won't be employed.
In the housing market, people in social housing can't move because they can't get social
housing in low unemployment areas. High prices discourage northerners from moving to the
south.
How does inequality cause market failure? - correct answer-The market mechanism may
lead to a distribution of income which is unacceptable. Income levels may be so low for
some that they cannot afford necessities. If healthcare is only provided by the private sector,
people may have to go without, so the state needs to intervene.
If private consumption benefits exceed social consumption benefits... - correct answer-then
there are negative consumption externalities
If private production costs exceed social production costs... - correct answer-then there are
positive production externalities.
If social consumption benefits exceed private consumption benefits... - correct answer-then
there are positive consumption externalities
If social production costs exceed private production costs... - correct answer-then there are
negative production externalities.
