Market Failure (Externalities, Public Goods, Information Asymmetry)

    OCR
    GCSE

    Market failure represents the inability of the free market mechanism to achieve allocative efficiency, resulting in a net welfare loss to society. This study area necessitates rigorous analysis of the divergence between private and social costs/benefits, the non-rival and non-excludable nature of public goods, and the distortions caused by asymmetric information. Candidates must evaluate the efficacy of government interventions—including Pigouvian taxes, subsidies, and regulation—while acknowledging the potential for government failure.

    5
    Objectives
    4
    Exam Tips
    3
    Pitfalls
    4
    Key Terms
    4
    Mark Points

    Learning Objectives

    What you need to know and understand

    • Definition of Market Failure: Misallocation of resources by the free market.
    • Characteristics of Public Goods: Non-excludability and Non-rivalry.
    • Third Party Impact: The definition of externalities as effects on those not involved in the transaction.
    • Social Cost Formula: Social Cost = Private Cost + External Cost.
    • Intervention Methods: Indirect taxes, subsidies, regulation, state provision, and information provision.

    Marking Points

    Key points examiners look for in your answers

    • Award marks for explicit definitions of market failure as a misallocation of resources, not just 'high prices'.
    • Credit responses that accurately distinguish between private costs/benefits and social costs/benefits when explaining externalities.
    • Candidates must analyse the mechanism of intervention: explain exactly how a tax shifts supply left and raises price to internalise the externality.
    • Reward evaluation that questions the effectiveness of intervention, such as the difficulty in quantifying the monetary value of an external cost.

    Examiner Tips

    Expert advice for maximising your marks

    • 💡When defining public goods, you must use the terms 'non-excludable' and 'non-rival' to gain AO1 marks.
    • 💡In 6-mark 'Analyse' questions, ensure you have two distinct chains of reasoning linked to the context; do not just list points.
    • 💡For 12-mark 'Evaluate' questions, the conclusion is critical; justify why one policy is better than another based on the specific data provided.
    • 💡Use the 'It depends on' rule for evaluation: consider price elasticity of demand when discussing the impact of indirect taxes.

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Confusing 'public goods' (non-excludable/non-rival) with 'merit goods' (provided by the state for social benefit).
    • Asserting that taxation 'stops' consumption completely rather than reducing it via the price mechanism.
    • Failing to link the specific government policy (e.g., regulation) to the specific market failure identified in the case study.

    Study Guide Available

    Comprehensive revision notes & examples

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    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

    State
    Explain
    Calculate
    Analyse
    Evaluate
    Discuss

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