CCEA A Level Economics
CCEA A Level Economics AS 1 Market Failures and Imperfections Exam Questions
Free CCEA A Level Economics revision for AS 1 Market Failures and Imperfections: what you need to know, common mistakes and exam-style questions with answers. Covers externalities, market power, public goods, merit and demerit goods, information failure, factor immobility, inequality and poverty.
Practise AS 1 Market Failures and Imperfections with past papers
Once you have learnt this topic, find the AS 1 Market Failures and Imperfections questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics AS 1 Market Failures and Imperfections
Market failures and imperfections explains why free markets may not allocate resources efficiently, and is central to Unit AS 1: Markets and Market Failure. You need to analyse positive and negative externalities of production and consumption using private, external and social costs and benefits, explain why public goods are under-provided, why merit goods are under-consumed and demerit goods over-consumed, and how information failure, market power and factor immobility cause misallocation. The topic also covers inequality and poverty. CCEA papers frequently ask for an externality diagram with the welfare loss shown, followed by an explanation of why the market outcome is inefficient.
What you need to know
- Market failure Occurs when the free market leads to a misallocation of resources and a loss of economic welfare. Complete failure means a missing market; partial failure means the wrong quantity or price.
- Externalities Costs or benefits to third parties not reflected in market price. Social cost = private cost + external cost; social benefit = private benefit + external benefit. Negative externalities lead to over-production; positive externalities to under-production.
- Public goods Non-rival and non-excludable, e.g. street lighting or national defence. The free rider problem means firms cannot charge, so the market fails to provide them.
- Merit and demerit goods Merit goods (education, healthcare) are under-consumed because consumers underestimate their benefits; demerit goods (tobacco, alcohol) are over-consumed because consumers underestimate the harm. Both often involve information failure and externalities.
- Information failure and market power Asymmetric information, e.g. in the second-hand car market or insurance, distorts decisions. Monopoly power lets firms restrict output and raise prices. Occupational and geographical immobility of factors leaves resources unemployed.
- Inequality and poverty Markets may produce an unequal distribution of income and wealth. Absolute poverty means lacking basic needs; relative poverty means income well below the average for that society.
Common mistakes in AS 1 Market Failures and Imperfections
- Drawing the welfare loss triangle in the wrong place; it lies between the social and private curves between the market and socially optimal quantities.
- Calling a good a public good just because the government provides it, such as healthcare; check for non-rivalry and non-excludability.
- Confusing merit goods with public goods; merit goods are rival and excludable.
- Describing an externality without naming the third party affected.
- Saying market failure means the market collapses; it means resources are misallocated.
Try three AS 1 Market Failures and Imperfections exam-style questions
1. Explain the two characteristics of a public good. (4 marks)
Show the mark scheme answer
Non-rivalry: one person's consumption does not reduce the amount available to others; non-excludability: once provided, people cannot be prevented from benefiting, so free riders will not pay and the market will not supply it.
2. Using a diagram, explain why a negative production externality leads to a misallocation of resources. (6 marks)
Show the mark scheme answer
Marginal social cost lies above marginal private cost by the external cost; market produces where MPC = MPB at a higher quantity; social optimum is where MSC = MSB; over-production and price too low; welfare loss triangle between MSC and MSB from optimum to market quantity.
3. Explain how asymmetric information can lead to market failure in the market for used cars. (4 marks)
Show the mark scheme answer
Sellers know more about the quality of their car than buyers; buyers fear buying a poor-quality car and only offer an average price; owners of good cars withdraw them; so fewer good cars are traded and resources are misallocated.
AS 1 Market Failures and Imperfections FAQs
What does CCEA A Level Economics AS 1 Market Failures and Imperfections cover?
Externalities, market power, public goods, merit and demerit goods, information failure, immobility of factors, and inequality and poverty.
Which unit is this topic examined in?
It is in Unit AS 1: Markets and Market Failure, a 1 hour 30 minute paper with short-answer questions, a case study and an extended response question.
Which diagrams do I need for market failure?
Negative and positive externality diagrams for both production and consumption, showing private and social curves, the market and optimal quantities and the welfare loss or gain triangle.
