An economy experiences various microeconomic market failures. The government is considering different policy interventions to address these issues.
Which row in the table below correctly identifies the market failure type, its economic consequence, and a highly appropriate and effective government intervention to move the market closer to the socially optimum level of output?
| Row | Market Failure Type | Key Economic Consequence | Proposed Policy Intervention |
|---|---|---|---|
| A | Public Goods (non-rival and non-excludable) | Free-rider problem leading to complete market failure (missing market) | State provision funded via general taxation |
| B | Positive externality of consumption | Marginal Social Benefit is less than Marginal Private Benefit (MSB<MPBMSB < MPBMSB<MPB) | A subsidy to consumers equal to the marginal external benefit |
| C | Demerit goods (e.g., high-sugar drinks) | Over-consumption due to information failure and negative externalities | Setting a minimum price below the free-market equilibrium price |
| D | Negative externality of production | Marginal Private Cost exceeds Marginal Social Cost (MPC>MSCMPC > MSCMPC>MSC) | Imposition of a pollution permit scheme with a cap set above current emission levels |
A
B
C
D
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.