Market Failure – AS/A LEVELS/IB/IAL

Market Failure – AS/A LEVELS/IB/IAL

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes 

Market Failure

Market failure occurs when the price mechanism of supply & demand fails to efficiently allocate resources.

There are a variety of key exam topics highlighting market failure highlighted below:

  • Public goods – there is usually not enough public good provided in a free market
  • De-Merit goods – people tend to underestimate the cost of a good. Demerit goods can be addictive; hence consumers continue to buy them, and this causes negative externalities
  • Asymmetric information – when one party possess more information than the other and can use this to their advantage by exploiting the other party
  • Negative and Positive Externalities – goods which cause positive externalities are often under consumed in the economy, whereas goods which cause negative externalities are overconsumed; this is indicated by the welfare loss or welfare gain. This causes market failure as there is a misallocation of resources and potentially a lack of knowledge.

AQA Spec – Additional Content

Complete and Partial Market Failure

Complete Market Failure

This occurs when there is a missing market and the markets does not supply the products

Partial Market Failure

Resources are misallocated as the market produces the wrong quantity of a good or sells the good at different price to what it should be


Quick Fire Quiz – Knowledge Check

1. Define ‘Market Failure’ (2 marks)

2. Identify and explain four types of market failure (8 marks)


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