Government Policies to Correct Market Failure

    OCR
    GCSE

    Analyze the mechanisms by which governments intervene to correct allocative inefficiency arising from externalities, public goods, information gaps, and merit/demerit goods. Candidates must evaluate the efficacy of fiscal instruments (taxes/subsidies), regulatory frameworks, and market-based solutions (tradable permits) against the risk of government failure. Assessment focuses on the ability to apply diagrammatic analysis to show welfare gains and to critically assess the trade-offs between equity and efficiency in policy implementation.

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    Objectives
    4
    Exam Tips
    3
    Pitfalls
    3
    Key Terms
    4
    Mark Points

    What You Need to Demonstrate

    Key skills and knowledge for this topic

    • Award marks for clear definitions of specific policies (e.g., indirect tax, subsidy) linked to the correct market failure.
    • Credit responses that explicitly shift the correct curve (Supply left for tax, right for subsidy) in diagrammatic analysis.
    • Candidates must link the policy intervention to the specific context provided in the case study (AO2).
    • High-level responses must evaluate the magnitude of impact based on Price Elasticity of Demand (PED).

    Marking Points

    Key points examiners look for in your answers

    • Award marks for clear definitions of specific policies (e.g., indirect tax, subsidy) linked to the correct market failure.
    • Credit responses that explicitly shift the correct curve (Supply left for tax, right for subsidy) in diagrammatic analysis.
    • Candidates must link the policy intervention to the specific context provided in the case study (AO2).
    • High-level responses must evaluate the magnitude of impact based on Price Elasticity of Demand (PED).

    Examiner Tips

    Expert advice for maximising your marks

    • 💡Always draw a supply and demand diagram to support analysis of taxes or subsidies, even if not explicitly requested.
    • 💡When evaluating effectiveness, apply the 'It depends on' rule: consider PED, time lags, and the size of the tax/subsidy.
    • 💡Ensure every analytical point references the specific data or industry mentioned in the text extract.
    • 💡For 12-mark questions, reserve 3-4 minutes for a justified conclusion that weighs the arguments.

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Shifting the Demand curve instead of the Supply curve when analysing indirect taxes or subsidies.
    • Confusing 'public goods' (non-excludable/non-rival) with 'merit goods' (under-consumed due to information failure).
    • Providing generic evaluation (e.g., 'it costs the government money') without referencing opportunity cost or budget deficits.

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    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

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