Edexcel A Level Economics A
Edexcel A Level Economics A 1.3 Market Failure Exam Questions
Free Edexcel A Level Economics A exam questions on 1.3 Market Failure, with mark schemes. Covers externalities, public goods and information gaps.
1.3 Market Failure exam questions
1 question pack of real past exam questions with its mark scheme. Answer every question without notes, then mark your answers line by line against the mark scheme.
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Edexcel A Level Economics A 9EC0 Flashcards (Anki & Quizlet)
Every answer is written in mark scheme wording, so you learn exactly what examiners give marks for. Use them on Anki or Quizlet, then test yourself with the questions on this page.
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About Edexcel A Level Economics A 1.3 Market Failure
1.3 explains why free markets can misallocate resources. It is a favourite for longer questions, which usually ask you to draw an externality diagram and identify the welfare loss.
What you need to know
- Market failure Market failure is when the price mechanism leads to a misallocation of resources, so society's welfare is not maximised.
- Externalities Costs or benefits to third parties. Know private, external and social costs and benefits, and draw negative production and positive consumption externality diagrams showing the welfare loss triangle.
- Public goods Non-rival and non-excludable, so the free rider problem means they are under-provided or not provided by the market. Quasi-public goods have some of these features.
- Information gaps Symmetric and asymmetric information lead to the misallocation of resources, for example in second-hand cars, insurance or health care.
Common mistakes in 1.3 Market Failure
- Shading the wrong triangle as the welfare loss. It points towards the socially optimal output.
- Defining a public good only as something the government provides. Use non-rival and non-excludable.
- Describing an externality without saying it affects a third party not involved in the transaction.
- Confusing merit goods with public goods.
Try three 1.3 Market Failure exam-style questions
1. Define a negative externality. (2 marks)
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A cost of production or consumption (1) that is imposed on a third party not involved in the transaction (1).
2. With the help of a diagram, explain why a negative production externality leads to market failure. (6 marks)
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Diagram with MPC, MSC above it and MPB = MSB (1), free market output at MPC = MPB and socially optimal output at MSC = MSB (1), welfare loss triangle shaded (1). Firms ignore external costs such as pollution (1), so output is higher than the social optimum (1) and resources are over-allocated to the good, reducing welfare (1).
3. Explain why street lighting is an example of a public good. (3 marks)
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It is non-rival: one person using it does not reduce what is available to others (1). It is non-excludable: people who do not pay cannot be stopped from benefiting (1). So free riders mean firms cannot charge, and the market will not provide it (1).
1.3 Market Failure FAQs
What does Edexcel A Level Economics 1.3 cover?
Types of market failure, externalities with their diagrams, public goods and the free rider problem, and information gaps.
Which externality diagrams do I need?
Negative production externalities and positive consumption externalities, each showing private and social curves, the free market and social optimum outputs, and the welfare loss.
Is 1.3 tested in long answer questions?
Yes. Market failure is commonly assessed in data response and essay questions, often linked to government intervention in 1.4.
Revise this topic with flashcards: Edexcel A Level Economics A 9EC0 Flashcards, with mark scheme answers for Anki and Quizlet.
