Market failure occurs when the free market mechanism leads to an inefficient allocation of resources. This misallocation of resources can be corrected by the government:
setting a minimum price below the market equilibrium for a demerit good.
subsidising the production of goods that generate positive externalities.
relying on voluntary donations to fund the provision of public goods.
imposing a flat-rate tax on the consumption of merit goods.
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.