Market Failure Across the Economy

What Market Failure Across the Economy covers

Market Failure Across the Economy is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business. It covers merit and demerit goods, factor immobility and information failure, externalities and social costs and benefits, environmental externalities and environmental change and policies to correct market failure.

The 5 subtopics

Each one has its own page.

• Merit and demerit goodsMerit goods and examples, under-consumption and the consequences of under-provided healthcare and education, information failure and income, demerit goods and examples, the social consequences of alcohol over-consumption, addiction, sellers' incentives, demerit goods against goods harmful only to the buyer, merit goods as a value judgement, and effects on firms.Open →
• Factor immobility and information failureFactor immobility, occupational and geographical immobility of labour and their causes in the UK, structural unemployment, immobile capital, lost efficiency, policies to reduce immobility, higher costs for firms, imperfect and asymmetric information, the second-hand car market, market failure, moral hazard, and closing the information gap with customers.Open →
• Externalities and social costs and benefitsExternalities, private, external and social costs and calculating social cost, social benefit, examples of negative and positive externalities in production and consumption, over-production and under-consumption, marginal social against marginal private cost on a diagram, welfare loss, internalising an externality, and setting a tax equal to the external cost.Open →
• Environmental externalities and environmental changeEnvironmental externalities from road transport, the atmosphere as a common resource and the tragedy of the commons, climate change as a global externality, undervalued future damage, overfishing, the consequences of environmental change for businesses and agriculture, regulation as a business opportunity, the polluter pays principle, landfill tax, valuing damage, growth against the environment, and greenwashing.Open →
• Policies to correct market failurePublic goods and the free rider problem, state provision of merit goods and its drawbacks, indirect taxes on demerit goods and inelastic demand, tradable pollution permits and their weakness, information provision, legislation against taxation, the short-term and long-term effects of a carbon tax, and why policies can fail over time.Open →

What you need to know

Answer each one before you reveal it.

Take Market Failure Across the Economy further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Private cost vs Social cost

  Private cost: what the firm or consumer carrying out an activity pays for it themselves. Social cost: The full burden an activity places on the economy, being what the decision-maker pays plus what falls on everyone else.

• Negative externality vs Demerit good

  Negative externality: a burden arising from a transaction that falls on a third party who is neither the buyer nor the seller. Demerit good: A product that is worse for the buyer and for society than the buyer realises, so it is over-consumed in a free market.

• Occupational immobility vs Geographical immobility

  Occupational immobility: being unable to take a job in another line of work because skills do not transfer between them. Geographical immobility: Being unable to relocate to where the jobs are, because of housing costs, family ties or the expense of moving home.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is a merit good?

   Model answer

   A merit good is one that is better for the consumer and for society than the consumer realises, so it is under-consumed in a free market.

2. 2

   Give three examples of merit goods.

   Model answer

   Education, healthcare and vaccination.

3. 3

   Why are merit goods under-consumed in a free market?

   Model answer

   Consumers undervalue the long-term private benefit and ignore the benefit to others, so they buy less than the socially optimal amount.

4. 4

   What are the consequences of under-provision of healthcare?

   Model answer

   There is more untreated illness, a less productive workforce, higher treatment costs later, and greater inequality between those who can and cannot pay.

5. 5

   How does under-consumption of education harm the economy in the long run?

   Model answer

   A less skilled workforce has lower productivity, which limits growth, tax revenue and the ability of firms to compete internationally.

6. 6

   Explain why information failure lies behind the under-consumption of merit goods.

   Model answer

   People cannot easily judge a benefit that will arrive decades later, so they discount it heavily and spend on immediate wants instead.

What is inside Levo

Six ways to work the same material.

Market Failure Across the Economy revision questions

What does Market Failure Across the Economy cover in Edexcel A-Level Economics B?

5 subtopics: merit and demerit goods, factor immobility and information failure, externalities and social costs and benefits, environmental externalities and environmental change and policies to correct market failure. Each one has its own page with questions and model answers.

How is Market Failure Across the Economy organised?

By the Edexcel 9EB0 specification, subtopic by subtopic, so it matches the order you are taught it in.