OxfordAQA International A Level Economics
OxfordAQA International A Level Economics 3.1.5 Market Failure and Government Intervention in Markets Exam Questions
Free OxfordAQA International A Level Economics revision for 3.1.5 Market Failure and Government Intervention in Markets: what you need to know, common mistakes and exam-style questions with answers. Covers public goods, externalities, merit and demerit goods, information failure, inequality, taxes, subsidies, price controls, regulation and government failure.
Practise 3.1.5 Market Failure and Government Intervention in Markets with past papers
Once you have learnt this topic, find the 3.1.5 Market Failure and Government Intervention in Markets questions in real OxfordAQA International 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 OxfordAQA International A Level Economics 3.1.5 Market Failure and Government Intervention in Markets
Market failure and government intervention is the final and most essay-heavy section of Unit 1 on the OxfordAQA International AS Economics course. You learn why markets can misallocate resources: public goods and the free rider problem, positive and negative externalities, merit and demerit goods, imperfect and asymmetric information, monopoly power, factor immobility, price instability and inequitable distribution. You then evaluate government responses, including indirect taxes, subsidies, price controls, state provision and regulation, and the risk of government failure. Examiners frequently set externality diagrams, analysis of a named policy such as a sugar tax, and questions asking whether intervention will improve on the market outcome.
What you need to know
- 3.1.5.1 and 3.1.5.2 Market failure and public goods Market failure occurs when the price mechanism misallocates resources. Pure public goods are non-rival and non-excludable, so the free rider problem means markets underprovide them. Quasi-public goods have some of these features.
- 3.1.5.3 Externalities Negative externalities, such as pollution, mean social cost exceeds private cost, so the good is overproduced. Positive externalities, such as education, mean social benefit exceeds private benefit, so it is underconsumed. The welfare loss is shown as a triangle on the diagram.
- 3.1.5.4 Merit and demerit goods Merit goods, such as healthcare, are underconsumed because individuals undervalue their benefits; demerit goods, such as cigarettes, are overconsumed because individuals underestimate their harm. Value judgements are involved in classifying them.
- 3.1.5.5 Market imperfections Imperfect and asymmetric information, monopoly power, immobility of factors of production and price instability can each cause market failure.
- 3.1.5.6 and 3.1.5.7 Intervention Governments use indirect taxes, subsidies, maximum and minimum prices, state provision, regulation, pollution permits and buffer stocks, and may redistribute income to address inequity.
- 3.1.5.8 Government failure Intervention can make allocation worse because of imperfect information, administrative costs, unintended consequences such as black markets, or conflicting objectives.
Common mistakes in 3.1.5 Market Failure and Government Intervention in Markets
- Defining a public good as something provided by the government. It is defined by being non-rival and non-excludable.
- Drawing an externality diagram without labelling marginal private and social cost or benefit, or without showing the welfare loss triangle.
- Saying an indirect tax will solve a negative externality completely. Its effect depends on price elasticity of demand and on whether the tax equals the external cost.
- Forgetting to explain government failure when evaluating a policy. Good answers consider whether intervention could make things worse.
- Confusing merit goods with goods that have positive externalities. Merit goods are about information failure as well as external benefits.
Try three 3.1.5 Market Failure and Government Intervention in Markets exam-style questions
1. Explain why public goods are unlikely to be provided by the market. (4 marks)
Show the mark scheme answer
Public goods are non-excludable, so people cannot be stopped from benefiting without paying; this creates a free rider problem; non-rivalry means extra users cost nothing; firms cannot charge so there is no profit incentive and the market fails to provide the good.
2. Using a diagram, explain why a negative externality in production 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; the market produces where marginal private cost meets demand (marginal private benefit); the socially optimal output is lower, where marginal social cost meets marginal social benefit; so the good is overproduced and priced too low; the shaded triangle shows the welfare loss.
3. Evaluate the use of a minimum price to reduce alcohol consumption. (10 marks)
Show the mark scheme answer
A strong answer would show a minimum price set above equilibrium reducing quantity demanded, aimed at a demerit good with external costs; then evaluate using PED (demand may be inelastic for heavy drinkers), regressive effects on low-income groups, risk of illegal markets, the benefit to firms of higher prices and the difficulty of choosing the right level; and conclude on whether it is better than alternatives such as taxation or education.
3.1.5 Market Failure and Government Intervention in Markets FAQs
What does OxfordAQA International A Level Economics 3.1.5 Market Failure and Government Intervention in Markets cover?
It covers public goods, externalities, merit and demerit goods, market imperfections, inequality, forms of government intervention and government failure.
Which unit is 3.1.5 Market Failure and Government Intervention in Markets examined in?
It is examined in Unit 1 (EC01), The operation of markets, market failure and the role of government, an International AS unit with multiple choice and data response questions. Units 3 and 4 are synoptic, so the ideas can also be used there.
Which diagrams do I need for market failure?
Learn diagrams for negative and positive externalities with the welfare loss, an indirect tax, a subsidy, and maximum and minimum prices. Label every curve and axis and refer to the diagram in your writing.
