8. The Market Mechanism, Market Failure & Government Intervention (AQA A Level Economics)

Which one of the following government policies is most likely to reduce market failure and to improve the allocation of resources?

Figure 6 shows the marginal private and social benefit (MPB and MSB) curves and the marginal private and social cost (MPC and MSC) curves in the market for domestically produced solar panels. The initial market equilibrium is at E1.

To correct the market failure, the government introduces a subsidy to domestic manufacturers of solar panels of £200 per unit produced. Which one of the following represents the total amount of subsidy payments made by the government in the first year of the scheme?

Which one of the following is most likely to result in complete market failure? 

A rational, utility maximising consumer is considering the purchase of a used car.  
Her final choice is between two cars which are identical in all respects except for the 
differences shown below. 

Based on the above information, which one of the following is the most likely explanation for the customer’s purchase of Car 2?  She 

The existence of negative externalities in consumption results in a misallocation of 
resources.  This is because at the free market level of output the  

Extract C: Selected indicators of the affordability of buying a house 

Figure 4

Average UK house price, average weekly earnings in nominal terms and their annual 
percentage changes, December 2007 to December 2017 

Source: ONS, February 2018 

To what extent, if at all, do the data suggest that houses in the UK were more  affordable in 2017 than they were in 2007?  You must use the data in Extract C to support your assessment.  

Which one of the following applies to merit goods? 

The diagram below shows the demand curve(D) and two supply curves (S₁ and S₂) in the market for renewable energy.

The renewable energy market is initially in equilibrium at a price of OH.  The government then introduces a subsidy for renewable energy.  

After the introduction of the subsidy, the total amount of money received by the producers from both consumers and the government is 

Which one of the following provides a reason for government intervention in a market? 

Refer Insert

To what extent, if at all, do the data suggest that the reliance on fossil fuels to produce 

energy is falling?  You must use the data in Extract C to support your assessment. 

The diagram below shows the original market demand and supply curves (D and S) for loft insulation. Loft insulation reduces energy consumption.  

The government wishes to meet its energy efficiency target by shifting the market 
demand curve for loft insulation from D₁  to D₂ .  Which one of the following policies is  most likely to enable the government to achieve its objective? 

The tragedy of the commons can be applied to the fishing industry.  What is the 
nature of this market failure? 

Immobility of labour may lead to a misallocation of resources and market failure
because 

The diagram below shows the marginal private and social benefit (MPB and MSB) 
curves and the marginal private and social cost (MPC and MSC) curves in a market 
where there are positive externalities in production. 

At the free market equilibrium, market failure occurs.  Which one of the following is 
correct? 

Refer Insert

Taking into account Extract D, and the original evidence presented in Extracts A, B and C, would you recommend that the government should intervene to support 
the UK steel industry?  Justify your recommendation.  

Using the data in Extract A (Figure 1) calculate the percentage of all plastics produced in the period 1950–2015 which have either been sent to landfill or incinerated. Give your answer to one decimal place

Explain how the data in Extract A (Figure 2) show that higher living standards lead to greater volumes of waste per capita being produced

Extract B (lines 8–10) states: ‘many companies intentionally make it difficult to repair their products in order to increase sales. This is both economically inefficient and environmentally foolish; it imposes costs on the environment even though it may make sense for individual companies.’

With the help of a diagram, explain how the production of goods which are designed not to last long may result in market failure

Critics of the world’s five most valuable multinational technology firms (Google, Amazon, Apple, Facebook and Microsoft) argue that there ought to be greater government intervention to protect consumers’ interests. Several European governments are considering imposing new taxes on the revenues of such firms, rather than their profits.

Discuss whether governments should consider increasing the regulation and taxation of technology firms which have acquired significant global monopoly power

In December 2018, the Competition and Markets Authority (CMA) announced a range of policies to prevent firms charging existing customers more than new customers. Firms supplying financial services, mobile phones and broadband are no longer allowed to discriminate against loyal customers renewing their contracts

Explain why imperfect information can lead to market failure

Extract B states that the global trade in sand has been ‘made possible by cheaper transportation’. With the help of a diagram, explain how cheaper transportation and a construction boom in East Asia have led to growth in the market for sand

Extract B: Is the world running out of sand?

Sand is in high demand. Sand accounts for up to 85% of all mining and the global depletion of sand is rapidly exceeding its natural renewal rate. Sand is mostly used in the construction industry to make concrete and asphalt. Chinese demand has risen significantly, reflecting the country's rapid pace of construction: it built 32.3 million houses and 4.5 million kilometres of road between 2011 and 2014. Sand also has industrial uses: it is used to make glass, electronics, and to help extract oil in the fracking industry. While market demand for industrial sand has tracked overall economic growth in the USA, the demand for fracking sand has been as volatile as oil prices

Vast quantities of sand are dumped into the sea to reclaim land: Singapore, for example, has expanded its land area by over 20% since the 1960s. Much of this sand originates from Indonesia, where sand miners have completely erased over 20 islands since 2005. The Maldives and Kiribati have used sand to shore up their islands against rising sea levels. The United Nations forecasts that, by 2030, there will be over 40 ‘megacities’, home to more than 10 million inhabitants (up from 31 in 2016), which means more housing and infrastructure will need to be built. Also, sea levels will continue to rise and so sand will only become more sought after. But why is there a shortage when sand seems so abundant? Desert sand is too smooth, and so cannot be used for most commercial purposes. Australian sand was shipped to a faraway desert to build Dubai’s Burj Khalifa tower, made possible by cheaper transportation. Most countries have rules in place about where, and how much, sand can be mined. However, surging demand has sparked a lucrative illegal trade in many rapidly developing countries which is damaging the environment, causing pollution and harming local biodiversity

For a long time, supermarkets and other commercial firms have understood the benefits of behavioural economic concepts such as choice architecture and framing. The public sector has been slow off the mark, but at last governments are now taking advantage of the opportunities provided by nudging

Using examples to illustrate your answer, assess the usefulness of behavioural economic theory compared to traditional economic policies in helping governments to correct market failures

‘Each time the Government imposes a minimum price or wage, the result is almost always excess supply. What matters is the extent to which this is a problem.’

Explain how the impact of a minimum price for a good or service is affected by its price elasticity of demand and its price elasticity of supply

Using Extract A, calculate the ratio of customers gained to customers lost by Nationwide. Give your answer correct to one decimal place

According to Public Health England, poor air quality is the largest environmental risk to public health in the UK. In particular, diesel cars are estimated to be responsible for 40 000 premature deaths each year. In response, the Government announced in 2017 that it would ban the sale of new petrol and diesel cars by 2040

Explain why the use of petrol and diesel cars may be a source of market failure

According to Public Health England, poor air quality is the largest environmental risk to public health in the UK. In particular, diesel cars are estimated to be responsible for 40 000 premature deaths each year. In response, the Government announced in 2017 that it would ban the sale of new petrol and diesel cars by 2040

Assess the view that regulation is a better policy for dealing with the problem of air pollution than the allocation of property rights or taxation

Attempts by governments to equalise incomes are well-intentioned but counter-productive. They destroy incentives for people to lift themselves out of poverty

To what extent can the problem of poverty in the UK be solved through the operation of market forces? Justify your answer