A-Level Economics Market Failure Revision Notes
Master A-Level Economics Market Failure using simple revision notes, key facts and practice questions — all generated by AI for your exam.
Market failure occurs when the allocation of goods and services by a free market is not efficient. This can lead to a loss of economic welfare and is often due to issues like externalities, public goods, and information asymmetry.
Key Concepts
- 1Externalities: Costs or benefits that affect third parties not involved in a transaction.
- 2Public Goods: Goods that are non-excludable and non-rivalrous, leading to underproduction in a free market.
- 3Information Asymmetry: Situations where one party has more or better information than the other, causing market inefficiencies.
- 4Monopoly Power: When a single firm dominates the market, leading to higher prices and reduced output.
- 5Inequality: Market outcomes can lead to unequal distribution of wealth and resources, necessitating government intervention.
Simple Explanation
Market failure happens when the market doesn't work efficiently, meaning resources are not used in the best way possible. This can happen for various reasons, like when some costs or benefits affect people who aren't part of a transaction. It can also occur with public goods that everyone can use, or when one side of a deal knows more than the other, leading to unfair situations.
Memory Trick
“Remember 'PEE-MI' for Market Failure: Public Goods, Externalities, Equality issues, Monopoly Power, and Information Asymmetry.”
Flashcards
What are externalities?
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Exam Questions
Describe and explain the concept of market failure. [6 marks]
6 marksView mark scheme hint▾
Define market failure, explain causes (externalities, public goods, information asymmetry), and provide examples.
Explain how externalities can lead to market failure. [4 marks]
4 marksView mark scheme hint▾
Define externalities, discuss positive and negative examples, and explain their impact on social welfare.
What is meant by public goods? [2 marks]
2 marksView mark scheme hint▾
Define public goods and explain their characteristics of non-excludability and non-rivalry.
Practice Quiz
What is a common cause of market failure?
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