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Economics Questions By Topic:

Market Failure (1.3) Mark Scheme

A-Level Edexcel Theme 1

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Table Of Contents

Section A .................................................. Page 1

Section B ................................................. Page 10
 Section A

Question Answer Mark

Number

1 D (1 mark)

 Definition of public good (non-rivalry and non-

excludability characteristics). (1 mark)

 Explanation of free rider problem (once a public

good is provided, it is difficult to make people pay
for the consumption of it / so there is little financial
incentive for firms to supply the good).
(1+1 marks)

 Linked development: application to public goods

such as street lighting, coastal defences, defence.
(1 mark)

Rejection marks
 Option A incorrect since the price mechanism tends
to under-provide or not provide since there is no
way of charging people for consumption of it /
public goods have to be provided by the
government from general taxation. (1 mark)

 Options B and/or C incorrect since there is an

opportunity cost in the production of public goods
as they require scarce resources to provide them
e.g. land, labour and capital. (1 mark)
(4)

1
 Question Answer Mark
Number

2  A (1 mark)

 Definition of market failure (the price mechanism

fails to allocate resources efficiently / leads to a net
welfare loss). (1 mark)

 Definition of public goods (non-rivalry and non-

excludability). Also accept ‘non-rejectable’ if
included as one of the two characteristics required.
(1 mark)

 Definition of a free market economy (resources are

allocated by the price mechanism - so no
government intervention). (1 mark)
NB: a maximum of 2 marks available for
definitions

 Explanation of free rider problem: it is possible for

people to consume street lighting without paying for
it once it is provided / little incentive for producers
to provide sufficient quantities as they cannot
charge consumers of the good.
(1+1 marks.

Rejection marks
 Option B incorrect since an increase in the national
minimum wage which causes unemployment is an
example of government failure. (1 mark)

 Option C incorrect since the price mechanism

internalising external benefits from higher education
means the market is working efficiently as
MSB=MSC / the social optimum output position is
reached. (1 mark)

 Option D incorrect since oil exploration firms exiting

a market in response to a decrease in demand is the
price mechanism operating to allocate resources
efficiently / an example of the market working (4)
efficiently to reach a new equilibrium. (1 mark)

2
 Question Answer Mark
Number

3 • Answer C (1 mark) (4)

• Definition of market failure: the price mechanism fails

to allocate resources efficiently / leads to a
misallocation of resources / leads to a net welfare
loss). (1 mark)

• Definition of external benefits (benefits which the price

mechanism fails to take into account / positive third
party effects / benefits external to a market
transaction / positive spillover effects from
consumption / difference between private benefits and
social benefits) (1 mark)

• Application to bus travel: external benefits include a

reduction in road congestion / positive effects on
environment as it may lead to less consumption of
non-renewable resource). (1 mark)

• There may be under-consumption and under-provision

of bus travel in an economy since social optimum
output position exceeds the market equilibrium output
position. (1 mark)

OR this may be shown by diagrammatic analysis

depicting market quantity X and social optimum
quantity Y / welfare gain or welfare loss or deadweight
loss VRT (1+1 marks)

Costs /
Costs/Benefits
benefits
Welfare gain VRT MPC=MSC
N
V
R R
P1

T
Pe
MSB
MPB

0 X Y Quantity of bus journeys

• Accept supply and demand diagram showing a subsidy

that attempts to correct market failure. (1 mark)

3
 Rejection marks
 Option A is incorrect since this is the price
mechanism operating efficiently to ensure
demand equates with supply / profit motive for
rail firms to raise price. (1 mark)

 Option B incorrect since government taxes on

petrol help to reduce external costs and thus
correct market failure associated with motor
vehicle travel. (1 mark)

 Option D incorrect since loss making firms

exiting the market show that the market is
operating efficiently – there is a reduced
incentive to supply if losses made. (1 mark)

4
 Question Answer Mark
Number

4 Correct option A (1 mark) (4)

• Definition of market failure (the price mechanism

allocates resources inefficiently or leads to a net
welfare loss). (1 mark)

• Definition of free market economy (resources are

allocated by the price mechanism). (1 mark)

• Definition of external benefits (positive third party

effects / benefits external to an exchange /
positive spillover effects / benefits outside a market
transaction / benefits the price mechanism ignores /
the difference between social benefits and private
benefits). (1 mark)
NB: a maximum of 2 marks available for
definitions

• Application: external benefits from education

include a more skilled or productive workforce
which could generate greater income / profits / tax
revenue / quality of life. (1 mark)

• Accept diagrammatic analysis of external benefits in

consumption.(1 mark)

Rejection marks
• Option B incorrect since firms entering the market in
response to an increase in demand indicates that the
price mechanism is working by offering greater
profit incentives. (1 mark)

• Option C incorrect since internalising external costs

mean the social optimum position is reached where
MSB=MSC. (1 mark)

• Option D incorrect since government intervention

which leads to a misallocation of resources is an
example of government failure. (1 mark)

5
 Question Answer Mark
Number
• B (1 mark)
5
• Definition of public goods (non-rivalry and non-
excludability or non-rejectable) (1 mark).

• Definition of market failure (price mechanism /

market fails to allocate resources efficiently or
leads to a net welfare loss) (1 mark).

• Definition of a free market economy (the price

mechanism is used to allocate resources) (1
mark).

NB: just a maximum of 2 definition marks

available

• Public goods are under-provided due to the free

rider problem / where it is possible for people to
consume a good without paying for it once it is
provided / inability of firms to collect revenue
from consumers / Examples: defence, street
lighting, lighthouses, flood defence schemes.
(1+1 marks).

Rejection marks

• Option A incorrect since prices falling mean the

market is working to eliminate the surplus. (1
mark).

• Option C incorrect since firms will exit the market

when lack of profits or losses made – a reflection (4)
of the market in operation as resources could be
put to better use (1 mark).

• Option D incorrect since this is government

failure / there is no government intervention in a
free market economy (1 mark).

6
 Question Answer Mark
Number
6 • C (1 mark)

• Explanation of imperfect market information

(people lack knowledge to make informed
choices) (1 mark).

NB: accept an accurate definition of

asymmetric information as an alternative
definition mark.

• Understanding of a pension (e.g. contributions

that workers make from their income which
they can use on retirement) (1 mark).

• Application: workers may be unaware that their

state pension might be insufficient to live off /
the long time period from working to retirement
may lead to people to not make adequate
provision (1+1).

• Definition of market failure (the price

mechanism / market fails to allocate resources
efficiently or leads to a net welfare loss) (1
mark).

• Also award for idea: workers may rely on other

sources of income / wealth (for example,
downsizing their home / sale of second home /
shares and bonds) (1 mark).

NB: a definition of public goods is not

accepted unless used in the context of
rejecting option A.

Rejection marks

• Option A incorrect since pensions are excludable

or rivalrous or rejectable in consumption so not (4)
public goods (1 mark).

• Option B incorrect since there is an opportunity

cost to making pension contributions in terms of
forgoing current spending (1 mark).
• Option D incorrect since tax incentives on
pensions would lead to increased amount of
pension contributions (1 mark).

7
 Question Answer Mark
Number

7 B (1 mark) (4)

• Definition of public goods (non-rivalry and non-

excludability) Also accept non-rejectable as one of
these characteristics. (1 mark).

• Definition of a free market economy (the price

mechanism is used to allocate resources) (1 mark).

• Explanation of free rider problem: it is possible for

people to consume a good without paying for it once it
is provided / so little incentive for producers to provide
sufficient quantities or there is under-provision (1+1
marks).

• Example of a public good, for example, defence, street

lighting, lighthouses, flood defence schemes. (1 mark).

Rejection marks
• Option A incorrect since the resources used to produce
public goods could have been used to produce other
goods. (1 mark).

• Option C incorrect since there is little incentive for

private enterprise to provide public goods due to the
difficulty in making consumers pay – so the government
often finances them (accept provides them). (1 mark).

Note: do not double award if already credited in the

explanation.

• Option D incorrect since people can consume public

goods without paying for them so ‘price’ is irrelevant
here. (1 mark).

8
 Question Answer Mark
Number
8 D (1)

• Definition of public good (a good which has non-

rivalry and non-excludability characteristics) Also
accept non-rejectable (1 mark).

• Explanation of the free rider problem (once a

public good is provided, it is impossible to
prevent people who have not paid it consuming it)
(1 mark) and further development which might
include an example such as street lighting,
pavement, national river flood scheme, sea
defences (1 mark)

• It is very hard to quantify and attach monetary

values to the quantity of a public good each
individual consumes (1 mark). (3)

Also award:
¾ Public goods would be under-provided for if left
to the market (1 mark).

Question Answer Mark

Number
9 B (1)

• Explanation of asymmetric information

(consumers have less market knowledge than
producers) (1 mark).

• Application e.g. consumed may not know

appropriate dental treatment (1 mark). Any
further development which might include
another example (1 mark)

• The producer may act in self-interest by

conducting more treatment in order to gain more
revenue / profits (1 mark).

Also award:
¾ Asymmetric information is an example of market (3)
failure (1 mark)

9
 Section B

Question Answer Mark

Number
10(a) Knowledge 2, Application 2, Analysis 2

Knowledge/understanding
2 marks for e.g.
• producers know more than consumers (1) or the
information is incomplete or imperfect (1)
• misallocation of resources (1)

Application
1+1 mark for e.g.
• risk of requiring health care is an unknown (1)
• Doctors know more than patients (1)

Analysis
Up to 2 marks for any one of the following in linked
development to market failure
OR two limited examples of analysis (1+1):
• Under consumption of healthcare (1) so patients’
health conditions deteriorate (1)
• Consumers overcharged for health treatment (1)
as they are unaware of the true cost of health
care (1)
• Unnecessary treatment (1) as consumers
unaware of health needs (1)
• Patients lack of awareness of waiting times and
NHS priorities (1) (6)

10
 Question Indicative content Mark
Number
10(b) Knowledge 2, Application 2, Analysis 2

• Knowledge – public goods are non-excludable and

non-rivalrous
• Application - Extract C suggests public parks exhibit
these features

Reasons why they are public goods

• ‘free use’ i.e. do not have to pay to enter
• ‘share the park with other users’
• ‘no exclusive use of the park’
• Park run users ‘share the park’ with other users
indicating one person using the park for a run does
not have an impact on another person’s enjoyment so
non-rival.

NB Reasons for/against being a public good may be

presented as either KAA or EV

(6)

Level Mark Descriptor

0 A completely inaccurate response.
Level 1 1–2 Displays isolated or imprecise knowledge and understanding
of terms, concepts, theories and models.
Use of generic or irrelevant information or examples.
Descriptive approach which has no link between causes and
consequences.
Level 2 3–4 Displays elements of knowledge and understanding of
economic principles, concepts and theories.
Applies economic ideas and relates them to economic
problems in context, although does not focus on the broad
elements of the question.
A narrow response or the answer may lack balance.
Level 3 5–6 Demonstrates accurate knowledge and understanding of the
concepts, principles and models.
Ability to link knowledge and understanding in context using
relevant and focused examples which are fully integrated.
Economic ideas are applied appropriately to the broad
elements of the question.

11
 Question Indicative content Mark
Number
10(b) Evaluation 4
continued

Reasons against being public good

• Local authorities planning on charging parkrun
participants using public parks
• Public parks already have exclusive areas e.g.
booking tennis courts or football pitches
• Parks may be rivalrous in consumption e.g. Hundreds
of park run participants may get in the way of other
users.
• Parks are also excludable because they already have
exclusive areas, gates can be closed at certain times (4)

Level Mark Descriptor

0 No evaluative comments.
Level 1 1–2 Identification of generic evaluative comments without
supporting evidence/ reference to context.
No evidence of a logical chain of reasoning.
Level 2 3–4 Evaluative comments supported by chains of reasoning and
appropriate reference to context.
Evaluation is balanced and considers the broad elements of
the question.

12
 Question Answer Mark
Number
11 Knowledge, analysis and application (up to 4
marks)
• Definition of asymmetric information (when one
party has less market knowledge than the other (6)
party – usually consumers have less knowledge
than producers) (1 mark).

• Explanation why one party (consumers) have less

market knowledge than producers (up to 3
marks for one point well developed or 2+1 for
two or more points).

¾ Some consumers may not be fully aware of the

dangers from tobacco smoking to their health
and so continue to smoke.

¾ Consumers may be less aware of low tar / high

tar tobacco brands.

¾ Some consumers simply do not believe

government health warnings / see some heavy
smokers reach old age.

¾ Many consumers lack medical knowledge –

whereas producers can employ medical
specialists and scientists.

¾ Some consumers may not be aware of dangers of

passive smoking.

¾ Some consumers may withhold information about

their smoking e.g. for insurance purposes.

¾ Asymmetric information may vary between

countries, for example less developed countries
are likely to suffer from lack of market
knowledge on smoking.

Evaluation (up to 2 marks for any one point)

¾ Asymmetric information does not exist here since
most consumers are aware of dangers from
smoking but are addicted.

¾ Most consumers likely to be aware of dangers

from smoking due to public health campaigns
e.g., education in schools and adverts and
warnings & pictures on cigarette packets.

¾ Time span – smokers believe they may not get

cancer until later in life / do not consider the
issue until the long term.

13