Subject: Economics
Level: A Level
Exam Boards: All


Market Failure

Markets can fail for lots of reasons:

  1. Negative externalities (e.g. the effects of environmental pollution) causing the social cost of production to exceed the private cost
  2. Positive externalities (e.g. the provision of education and health care) causing the social benefit of consumption to exceed the private benefit
  3. Imperfect informationor information failure means that merit goods are under- produced while demerit goods are over-produced or over-consumed
  4. The private sector in a free-market cannot profitably supply to consumers public goods that are needed to meet people's needs and wants
  5. Market dominance by monopolies can lead to under-production and higher prices than would exist under conditions of competition, causing consumer welfare to be damaged
  6. Factor immobility causes unemployment and a loss of productive efficiency
  7. Equity (fairness) issues. Markets can generate an 'unacceptable' distribution of income and consequent social exclusion which the government may choose to change

Questions

It is generally accepted that we need to adopt new ways of charging for the use of our roads. This is partly because of worsening congestion, but is also due to the reduction in revenue generated from taxes on fuels as a result of more fuel-efficient vehicles.

  1. Explain why, in the absence of government intervention, too many journeys are likely to be made by road and too few by rail. (15)
  2. Assess the view that a system of road-pricing is the best way to tackle the problem of worsening traffic congestion in the UK.(25)



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