Edexcel Economics Market Failure Revision Notes
Master Edexcel 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. It leads to a net social welfare loss, meaning that resources are not being used in the best possible way.
Key Concepts
- 1Types of market failure include public goods, externalities, information asymmetry, and market power.
- 2Public goods are non-excludable and non-rivalrous, leading to underproduction.
- 3Externalities occur when a third party is affected by a transaction, causing social costs or benefits.
- 4Information asymmetry arises when one party has more or better information than the other, leading to suboptimal decisions.
- 5Market power, such as monopolies, can lead to higher prices and reduced output.
Simple Explanation
Market failure happens when the market doesn't provide goods and services efficiently, which can hurt society. For example, when a factory pollutes the air, it affects everyone, not just the factory owner. This means that the costs of production are not fully reflected in the prices, leading to problems like pollution or underfunded public services.
Memory Trick
“Remember 'P.E.I.M' for Market Failure: Public goods, Externalities, Information asymmetry, and Market power.”
Flashcards
What are public goods?
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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 types (public goods, externalities, information asymmetry, market power), and provide examples.
Explain how externalities can lead to market failure. [4 marks]
4 marksView mark scheme hint▾
Define externalities, differentiate between positive and negative externalities, and explain their impact on social welfare.
What is meant by information asymmetry? [2 marks]
2 marksView mark scheme hint▾
Define information asymmetry and provide an example of how it affects market transactions.
Practice Quiz
What is a characteristic of public goods?
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