A Level H1 Economics Market Failure Quiz

A-Level Economics H1 Quiz - Market Failure: Answer Key

Total Marks: 40
Topic: Market Failure (Theme 2.2)

Section A: Short Structured Questions (1–5)

1. Define market failure. [2]
Answer: Market failure occurs when the free market fails to allocate resources efficiently, so that marginal social benefit (MSB) ≠ marginal social cost (MSC). [1] It results in a net welfare loss (deadweight loss) to society. [1]
Teaching note: Efficiency requires MSB = MSC. When this fails due to externalities, public goods, or information failure, the market outcome is not socially optimal.

2. State two characteristics of a public good. [2]
Answer: Non-rivalry (one person's consumption does not reduce another's) [1]; non-excludability (non-payers cannot be prevented from consuming). [1]
Common mistake: Confusing with merit goods; public goods are not provided profitably by the market.

3. Give one example of a negative externality in consumption. [1]
Answer: Cigarette smoking (passive smoke harms others) / loud music disturbing neighbours. [1]

4. Give one example of a positive externality in production. [1]
Answer: Beekeeping (pollination benefits farms) / factory training workers who later benefit other firms. [1]

5. Explain what is meant by information failure. [2]
Answer: Information failure occurs when consumers or producers lack accurate information [1] leading to decisions that do not reflect true private or social costs/benefits (e.g., under-consumption of merit goods). [1]

Section B: Data and Diagram Interpretation (6–13)

6. [2]
Answer: Both towns' per-household air pollution cost increased from 2018 to 2022. [1] Town A was higher than Town B in both years ($120 vs$90; $180 vs$150) and the gap widened from $30 to$60. [1]
Marking: 1 mark for direction, 1 for comparative magnitude.

7. [2]
Answer: EV subsidy rose steadily from $40m in 2019 to$130m in 2023. [1] Increase was accelerating (15, 15, 25, 35 added each year). [1]

8. [4]
Answer: In the diagram, MPB > MSB by external cost. [1] Market equilibrium at Qm where MPB = MSC. [1] Social optimum at Qs where MSB = MSC. [1] Since MSB < MPB, Qm > Qs, so market overproduces relative to social optimum, causing deadweight loss. [1]
Teaching: Negative consumption externality → private benefit overstates social benefit → excess output.

9. [4]
Answer: MPC > MSC by external benefit. [1] Market equilibrium Qm where MPC = MSB is below Qs. [1] Subsidy lowers MPC to MSC, shifting supply right. [1] New equilibrium at Qs where MSC = MSB, correcting underproduction. [1]

10. [3]
MSC = MPC – MEB (since external benefit reduces social cost relative to private).
Unit 1: 20 – 8 = 12 [1]
Unit 2: 26 – 8 = 18 [1]
Unit 3: 34 – 8 = 26 [1]

11. [2]
Market equilibrium: MPC = MSB → Unit 1 (MPC 20 < 40), Unit 2 (26 < 38), Unit 3 (34 = 34) → Qm = 3. [1]
Social optimum: MSC = MSB → Unit 1 (12 < 40), Unit 2 (18 < 38), Unit 3 (26 < 34), Unit 4 would be needed but not given; highest where MSC ≤ MSB is Unit 3 (26<34) but next would exceed; given data Qs = 3 also, but if MSB at 4 unknown, state Qs ≥ 3. For exam: market = 3, social optimum = 3 on given data but note external benefit means more would be optimal if demand continued. [1]
Simplified marking: Market unit = 3, Social optimal unit = 3 (based on table; explain MEB means more desirable beyond).

12. [2]
Answer: Youths underestimated UV risk (information failure) [1] so they consumed less sunscreen than socially optimal, causing potential health externalities. [1]

13. [3]
Answer: PPC drawn concave. [1] Point A inside curve with low public good Y. [1] Annotation showing under-provision / inefficiency. [1]

Section C: Source-Based and Evaluation (14–20)

14. [1]
Answer: Positive externality in production (beekeeping benefits farms unpaid). [1]

15. [3]
Answer: Beekeepers receive only private benefit (honey) but generate external benefit (pollination). [1] MPC > MSC, so market output below social optimum. [1] Free market under-provides beekeeping relative to MSB = MSC point. [1]

16. [4]
Answer: Street lighting is non-rival (all can use) [1] and non-excludable (cannot fence light) [1] so private firms cannot charge → market fails to provide [1] thus government provision justified to achieve efficiency. [1]
Descriptor: 2 marks for characteristics, 2 for application.

17. [4]
Answer: Carbon tax raises private cost to include external cost, shifting MPC toward MSC. [1] Reduces emissions to social optimum. [1] But tax level hard to set; may hurt competitiveness. [1] Revenue can fund clean tech; evaluation needs balance of equity and efficiency. [1]

18. [2]
Answer: Both firms' external cost per tonne rose (P: 15→25, Q: 22→30). [1] Q remained higher than P in both years; gap narrowed from 7 to 5. [1]

19. [3]
Answer: Government sets total permit cap. [1] Firms trade permits; low-cost reducers sell to high-cost. [1] Achieves emission cut at lowest cost, internalising externality. [1]

20. [4]
Answer: Campaigns improve information, raising merit good consumption. [1] But may not change behaviour if other barriers (price, preference). [1] Need subsidies/regulation alongside. [1] Therefore not sufficient alone; combination policy more effective. [1]