In a free market, the allocation of resources to the production of industrial chemicals that generate toxic waste is likely to be allocatively inefficient. This market failure occurs because
private chemical manufacturers ignore the external benefits of waste disposal, leading to an underprovision of chemicals.
the price mechanism does not account for the external costs of production, resulting in the marginal social cost exceeding the marginal private cost at the market output.
toxic waste disposal is a public good, meaning that private firms will overproduce chemical products to exploit the free-rider problem.
asymmetric information leads consumers to underestimate the utility of industrial chemicals, resulting in an underconsumption of the good.
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.