In a free market, market failure occurs when the price mechanism fails to allocate resources efficiently. Which of the following situations is a clear example of market failure?
A private healthcare provider restricts the supply of vaccinations to individuals willing and able to pay, resulting in a level of output where marginal social benefit exceeds marginal social cost (MSB>MSCMSB > MSCMSB>MSC).
An agricultural firm experiences a harvest failure due to adverse weather conditions, causing the market supply curve to shift to the left and the price to rise.
A multinational telecommunications company experiences internal diseconomies of scale as it expands, leading to higher long-run average costs.
A local retail shop goes bankrupt because a larger, more efficient supermarket chain opens nearby and undercuts its prices.
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.