The Market Mechanism, Market Failure and Government Intervention

What The Market Mechanism, Market Failure and Government Intervention covers

The market mechanism, market failure and government intervention is examined on Papers 1 and 3. It explains how prices allocate resources, catalogues the ways that allocation goes wrong, and works through the tools a government uses to correct it and the ways that too can fail.

The 11 subtopics

Each one has its own page. AQA AS Economics students sit this topic in the first year.

• How markets and prices allocate resourcesThe rationing, signalling and incentive functions of the price mechanism.Open →
• The meaning of market failureComplete and partial market failure, and what a misallocation of resources means.Open →
• Public goods, private goods and quasi-public goodsNon-rivalry and non-excludability, the free rider problem, and how technology can reclassify a good.Open →
• Positive and negative externalitiesPrivate, external and social costs and benefits, and the divergence between market and social optimum.Open →
• Merit and demerit goodsWhy they are over- or under-consumed, and the part played by imperfect information.Open →
• Market imperfectionsMonopoly power, asymmetric information, adverse selection, moral hazard and factor immobility.Open →
• An inequitable distribution of income and wealthWhy an unequal distribution shapes what is produced, and the inefficiency that follows.Open →
• Indirect taxes and subsidiesHow each shifts the supply curve, and how both aim to internalise an externality.Open →
• Price controls, state provision and regulationMaximum and minimum prices and their consequences, and the case for providing or regulating directly.Open →
• Evaluating intervention and the mixed economyWeighing the arguments for and against intervention, and what defines a mixed economy.Open →
• Government failureUnintended consequences, administrative costs, information gaps and distorted incentives.Open →

What you need to know

Answer each one before you reveal it.

Take The Market Mechanism, Market Failure and Government Intervention further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Private cost vs External cost

  Private cost: expense borne by the decision maker. External cost: harm imposed on an uninvolved third party.

• Public good vs Merit good

  Public good: output that is non-rival and non-excludable. Merit good: output consumed less than is socially desirable.

• Government failure vs Market failure

  Government failure: intervention causing a net welfare loss. Market failure: unregulated allocation producing a net welfare loss.

Questions from this topic

Each one with the model answer underneath.

1. 1

   How do higher prices affect the quantity demanded in a market?

   Model answer

   Higher prices reduce quantity demanded, as fewer consumers are willing or able to pay the increased price.

2. 2

   Which consumers are excluded from a market through the rationing function of prices?

   Model answer

   Consumers who are unwilling or unable to pay the market price are excluded from the market.

3. 3

   How is the available supply of a good distributed when prices perform their rationing function?

   Model answer

   Available supply is distributed among the remaining buyers who are willing and able to pay the market price.

4. 4

   How do rising prices affect producer behaviour according to the incentive function?

   Model answer

   Rising prices incentivise producers to increase supply, as higher prices make production more profitable.

5. 5

   What effect do rising prices have on consumer behaviour?

   Model answer

   Rising prices incentivise consumers to reduce their demand for the good or service.

6. 6

   How do falling prices influence producer decisions?

   Model answer

   Falling prices incentivise producers to reduce supply, as lower prices make production less profitable.

What is inside Levo

Six ways to work the same material.

The Market Mechanism, Market Failure and Government Intervention revision questions

Is The Market Mechanism, Market Failure and Government Intervention examined at AS in AQA Economics?

Yes. It sits in Papers 1 and 3, which you take in the first year, so it is on the AS paper as well as counting towards the full A level.

What does The Market Mechanism, Market Failure and Government Intervention cover in AQA AS-Level Economics?

11 subtopics: how markets and prices allocate resources, the meaning of market failure, public goods, private goods and quasi-public goods, positive and negative externalities, merit and demerit goods, market imperfections, an inequitable distribution of income and wealth, indirect taxes and subsidies, price controls, state provision and regulation, evaluating intervention and the mixed economy and government failure. Each one has its own page with questions and model answers.

How is The Market Mechanism, Market Failure and Government Intervention organised?

By the AQA 7136 specification, subtopic by subtopic, so it matches the order you are taught it in.