AQA Economics Market Failure Revision Notes
Master AQA 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 can happen due to various reasons such as externalities, public goods, and information asymmetries.
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, leading to market inefficiencies.
- 4Monopoly Power: When a single firm dominates the market, leading to higher prices and reduced output.
- 5Inequality: Market outcomes can lead to significant disparities in wealth and income, necessitating government intervention.
Simple Explanation
Market failure happens when the free market doesn't produce the right amount of goods and services, which can harm society. This can occur because some costs or benefits affect people who aren't directly involved in a transaction, or because some goods are public and not produced enough. It can also happen when one side of a market knows more than the other, leading to unfair advantages.
Memory Trick
“Remember 'E-P-I-M-I' for Market Failure: Externalities, Public Goods, Information Asymmetry, Monopoly Power, Inequality.”
Flashcards
What are externalities?
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Exam Questions
Describe and explain the concept of externalities. [6 marks]
6 marksView mark scheme hint▾
Define externalities, provide examples, and explain their impact on market efficiency.
Explain how public goods can lead to market failure. [4 marks]
4 marksView mark scheme hint▾
Define public goods and discuss the free-rider problem.
What is meant by information asymmetry? [2 marks]
2 marksView mark scheme hint▾
Provide a definition and a brief example.
Practice Quiz
What is a key characteristic of public goods?
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