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The correct term is market failure."},{"text":"social optimum","correct":false,"explanation":"The social optimum is the output level that maximises society’s welfare. It is the benchmark used to identify market failure, not the failure itself."}]},{"id":"4a1efc24-e6ae-41eb-ac77-bee1d428d9ad","cardType":"cloze","points":null,"front":"A market failure occurs when the free market allocates resources inefficiently, so society's welfare is not maximised. [ ] occurs when a market is missing and the good is not provided.","back":"A market failure occurs when the free market allocates resources inefficiently, so society's welfare is not maximised. Complete market failure occurs when a market is missing and the good is not provided.","mcqOptions":[{"text":"Complete market failure","correct":true,"explanation":"Complete market failure occurs when no market exists for a good, so the good is not provided through the free market."},{"text":"Partial market failure","correct":false,"explanation":"Partial market failure occurs when a market exists but provides the wrong quantity. A missing market with no provision is complete market failure."},{"text":"Market failure","correct":false,"explanation":"Market failure is the general case of inefficient free-market resource allocation. The specific situation where a market is missing is complete market failure."},{"text":"Social optimum","correct":false,"explanation":"The social optimum is the welfare-maximising output level, not the absence of a market. A missing market and unprovided good indicate complete market failure."}]},{"id":"ef069099-03d3-4322-9410-265774e6df97","cardType":"cloze","points":null,"front":"[ ] occurs when a market provides the wrong quantity. The social optimum is the output level that maximises society's welfare, accounting for all social costs and benefits.","back":"Partial market failure occurs when a market provides the wrong quantity. The social optimum is the output level that maximises society's welfare, accounting for all social costs and benefits.","mcqOptions":[{"text":"Partial market failure","correct":true,"explanation":"Partial market failure occurs when a market exists but supplies an output different from the social optimum, so resources are allocated inefficiently."},{"text":"Complete market failure","correct":false,"explanation":"Complete market failure means the market is missing and the good is not provided. An existing market supplying the wrong quantity is partial market failure."},{"text":"Market equilibrium","correct":false,"explanation":"Market equilibrium is where demand equals supply, but that output may not maximise social welfare. The wrong quantity relative to the social optimum indicates partial market failure."},{"text":"Social optimum","correct":false,"explanation":"The social optimum is the welfare-maximising output level itself. Providing the wrong quantity compared with it is known as partial market failure."}]},{"id":"0fb04a28-219a-47d6-8c6b-44d77afe4056","cardType":"cloze","points":null,"front":"Partial market failure occurs when a market provides the wrong quantity. The [ ] is the output level that maximises society's welfare, accounting for all social costs and benefits.","back":"Partial market failure occurs when a market provides the wrong quantity. The social optimum is the output level that maximises society's welfare, accounting for all social costs and benefits.","mcqOptions":[{"text":"social optimum","correct":true,"explanation":"The social optimum is the output level that maximises society’s welfare by accounting for all relevant social costs and benefits."},{"text":"market equilibrium","correct":false,"explanation":"Market equilibrium is determined by private demand and supply and may ignore external costs or benefits. The welfare-maximising output is the social optimum."},{"text":"productive efficiency","correct":false,"explanation":"Productive efficiency concerns producing at the lowest possible average cost. The output that maximises total social welfare is the social optimum."},{"text":"allocative efficiency","correct":false,"explanation":"Allocative efficiency describes a situation where output reflects social costs and benefits. The specific welfare-maximising output level is called the social optimum."}]},{"id":"308ca397-44bc-4f91-b4b8-89f64e6c6dc9","cardType":"cloze","points":null,"front":"An [ ] is a cost or benefit affecting a third party outside the transaction. Asymmetric information occurs when one party has more or better information than the other.","back":"An externality is a cost or benefit affecting a third party outside the transaction. Asymmetric information occurs when one party has more or better information than the other.","mcqOptions":[{"text":"externality","correct":true,"explanation":"An externality is a cost or benefit imposed on a third party outside the buyer-seller transaction, so it is not fully reflected in market decisions."},{"text":"asymmetric information","correct":false,"explanation":"Asymmetric information occurs when parties to a transaction possess unequal information. A third-party cost or benefit is instead an externality."},{"text":"private cost","correct":false,"explanation":"A private cost is paid by a participant in the transaction. A cost affecting someone outside that transaction is an externality."},{"text":"public good","correct":false,"explanation":"A public good is non-rival and non-excludable. A third-party effect from production or consumption is an externality."}]},{"id":"52ca6103-e151-4299-8a90-d3115b89fdc5","cardType":"cloze","points":null,"front":"An externality is a cost or benefit affecting a third party outside the transaction. [ ] occurs when one party has more or better information than the other.","back":"An externality is a cost or benefit affecting a third party outside the transaction. Asymmetric information occurs when one party has more or better information than the other.","mcqOptions":[{"text":"Asymmetric information","correct":true,"explanation":"Asymmetric information exists when one party in a transaction has more or better information than the other, potentially causing inefficient decisions."},{"text":"Externality","correct":false,"explanation":"An externality affects a third party outside the transaction through a cost or benefit. Unequal information between transaction participants is asymmetric information."},{"text":"Moral hazard","correct":false,"explanation":"Moral hazard involves changing behaviour after an agreement because actions are difficult to monitor. The broader information imbalance described is asymmetric information."},{"text":"Information failure","correct":false,"explanation":"Information failure means relevant information is absent or inaccurate, causing poor decisions. The specific imbalance where one party knows more is asymmetric information."}]},{"id":"c04cfa4d-5c4c-420a-9979-703cfe42200e","cardType":"basic","points":3,"front":"What are the three main sources of market failure?","back":"

Externalities
Under-provision of public goods
Information gaps

","mcqOptions":[{"text":"

Externalities
Under-provision of public goods
Information gaps

","correct":true,"explanation":"Externalities, under-provided public goods, and information gaps are the three main sources of market failure because private decisions can diverge from social welfare."},{"text":"

Inflation
Under-provision of merit goods
Income gaps

","correct":false,"explanation":"Inflation and income gaps are macroeconomic or distributional issues, while merit goods are not one of the three listed main sources. The correct sources are externalities, public goods, and information gaps."},{"text":"

Externalities
Over-provision of private goods
Price controls

","correct":false,"explanation":"Externalities are a source, but over-provision of private goods and price controls do not complete the standard list. Public goods and information gaps are required."},{"text":"

Market power
Under-provision of common resources
Unemployment

","correct":false,"explanation":"Market power and unemployment can affect economic outcomes, but this combination omits externalities, public goods, and information gaps, the three main sources in this specification."}]},{"id":"ebcd344f-0362-414f-b76f-050f77b41736","cardType":"basic","points":1,"front":"Which costs and benefits do self-interested buyers and sellers consider?","back":"They consider only private costs and benefits.","mcqOptions":[{"text":"They consider only private costs and benefits.","correct":true,"explanation":"Self-interested buyers and sellers base decisions on costs and benefits directly affecting themselves, ignoring external costs and benefits affecting third parties."},{"text":"They consider only social costs and benefits.","correct":false,"explanation":"Social costs and benefits include external effects on third parties. Self-interested market participants normally consider only their own private costs and benefits."},{"text":"They consider only external costs and benefits.","correct":false,"explanation":"External costs and benefits affect third parties outside the transaction. Self-interested buyers and sellers focus on private effects, not external ones alone."},{"text":"They consider private costs and external benefits.","correct":false,"explanation":"Private decision-makers may ignore external benefits rather than systematically include them. Their usual calculation considers only private costs and benefits."}]},{"id":"e7f753ad-13ae-404b-b589-5d122cc05c9d","cardType":"basic","points":3,"front":"Which two characteristics cause a public good to be under-provided?","back":"

Non-rival
Non-excludable

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Non-rival
Non-excludable

","correct":true,"explanation":"Public goods are non-rival because one person’s consumption does not reduce availability, and non-excludable because non-payers cannot be prevented from consuming them."},{"text":"

Rival
Non-excludable

","correct":false,"explanation":"A rival good becomes less available when consumed, so rivalry is not a defining public-good characteristic. Public goods are non-rival and non-excludable."},{"text":"

Non-rival
Excludable

","correct":false,"explanation":"Excludability means suppliers can prevent non-payers from consuming a good. Public goods are non-excludable as well as non-rival."},{"text":"

Rival
Excludable

","correct":false,"explanation":"Rivalry and excludability describe private goods, for which consumption can reduce availability and non-payers can be excluded. Public goods have neither characteristic."}]},{"id":"471a67d0-e49d-46fd-ae9a-b734e262ff5a","cardType":"basic","points":2,"front":"How does non-rivalry affect other consumers?","back":"One person's consumption does not reduce availability to others.","mcqOptions":[{"text":"One person's consumption does not reduce availability to others.","correct":true,"explanation":"Non-rivalry means consumption by one person does not use up the good or reduce the amount available for other consumers."},{"text":"One person's consumption reduces availability to others.","correct":false,"explanation":"Reducing availability is rivalry, not non-rivalry. With a non-rival good, one person’s consumption does not reduce what remains available to others."},{"text":"One person's consumption prevents access for others.","correct":false,"explanation":"Preventing access describes exclusion, not rivalry. Non-rivalry concerns whether one person’s consumption reduces the good’s availability to others."},{"text":"One person's consumption increases the price for others.","correct":false,"explanation":"A price increase is not the defining effect of non-rivalry. The characteristic means one person’s consumption does not reduce availability to others."}]},{"id":"57da11d9-b1d3-49e4-90b7-ae79d57411fa","cardType":"basic","points":2,"front":"What does non-excludability imply once a good is provided?","back":"Non-payers cannot be prevented from consuming it.","mcqOptions":[{"text":"Non-payers cannot be prevented from consuming it.","correct":true,"explanation":"Non-excludability means that once the good is supplied, it is impossible or impractical to prevent people who have not paid from consuming it."},{"text":"Non-payers can be prevented from consuming it.","correct":false,"explanation":"The ability to exclude non-payers is excludability, the opposite of this characteristic. Non-excludability means non-payers cannot be prevented from consuming the good."},{"text":"Only payers can be required to consume it.","correct":false,"explanation":"Non-excludability does not restrict consumption to paying users. It means suppliers cannot prevent non-payers from consuming the good once provided."},{"text":"Non-payers must be charged before consuming it.","correct":false,"explanation":"Charging before consumption requires effective exclusion. A non-excludable good cannot reliably prevent non-payers from consuming it after provision."}]},{"id":"ac27f271-26e2-4803-bb5c-26b33c8c20b4","cardType":"basic","points":2,"front":"What follows when output diverges from the social optimum?","back":"Resources are misallocated, causing a welfare loss.","mcqOptions":[{"text":"Resources are misallocated, causing a welfare loss.","correct":true,"explanation":"When output differs from the social optimum, resources are not directed toward their highest social-value use, reducing total welfare and creating a welfare loss."},{"text":"Resources are efficiently allocated, causing a welfare gain.","correct":false,"explanation":"Divergence from the social optimum indicates inefficient allocation, not efficiency. The resulting reduction in potential social welfare is a welfare loss."},{"text":"Resources are misallocated, causing a welfare gain.","correct":false,"explanation":"The misallocation is correctly identified, but it reduces society’s welfare rather than increasing it. The consequence is a welfare loss."},{"text":"Resources are under-utilised, causing a constant welfare level.","correct":false,"explanation":"The issue is not necessarily under-utilisation, and welfare does not remain constant when output diverges from the optimum. Resources are misallocated, causing a welfare loss."}]},{"id":"26ad5eac-62a9-44fe-89e2-18e6e8851083","cardType":"basic","points":2,"front":"Why does a negative externality cause over-production?","back":"Firms ignore external costs, so output is above the social optimum.","mcqOptions":[{"text":"Firms ignore external costs, so output is above the social optimum.","correct":true,"explanation":"Firms base supply on private costs and omit external costs. This makes production appear cheaper than it is socially, leading to output above the social optimum."},{"text":"Firms include external costs, so output is at the social optimum.","correct":false,"explanation":"Including external costs would align private and social costs and could produce the optimum. Negative externalities cause over-production because firms ignore those costs."},{"text":"Firms ignore external benefits, so output is below the social optimum.","correct":false,"explanation":"Ignoring external benefits explains under-production from a positive externality. A negative externality is an omitted external cost, causing output above the social optimum."},{"text":"Firms include external costs, so output is above the social optimum.","correct":false,"explanation":"Including external costs would discourage socially excessive production. Output exceeds the social optimum when firms ignore the external costs imposed on others."}]},{"id":"f118f262-5b3f-40c1-a54b-67298f65aac0","cardType":"basic","points":2,"front":"Why does a positive externality cause under-production?","back":"Buyers ignore external benefits, so output is below the social optimum.","mcqOptions":[{"text":"Buyers ignore external benefits, so output is below the social optimum.","correct":true,"explanation":"Buyers consider their private benefits but ignore benefits received by third parties. Demand is therefore too low, causing output below the social optimum."},{"text":"Buyers include external benefits, so output is at the social optimum.","correct":false,"explanation":"Including external benefits would make demand reflect total social benefit and could achieve the optimum. Under-production occurs because buyers ignore those benefits."},{"text":"Buyers ignore external costs, so output is above the social optimum.","correct":false,"explanation":"Ignoring external costs is the mechanism behind over-production from negative externalities. Positive externalities cause under-production because external benefits are ignored."},{"text":"Buyers include external benefits, so output is below the social optimum.","correct":false,"explanation":"Including external benefits would increase the perceived value of consumption, not leave output below the optimum. Under-production results when those benefits are ignored."}]},{"id":"e6a29685-e2ba-4ee9-8585-2d8a2828be8f","cardType":"basic","points":2,"front":"Why does non-excludability discourage firms from supplying public goods?","back":"Firms cannot charge users, so earn insufficient revenue to cover costs.","mcqOptions":[{"text":"Firms cannot charge users, so earn insufficient revenue to cover costs.","correct":true,"explanation":"Because non-payers cannot be excluded, firms struggle to collect payment from every user. Revenue may therefore be insufficient to cover the costs of provision."},{"text":"Firms can charge users, so earn sufficient revenue to cover costs.","correct":false,"explanation":"Non-excludability prevents firms from reliably charging all users. This creates insufficient revenue to cover costs, discouraging private supply of public goods."},{"text":"Firms cannot charge users, so earn excessive revenue above costs.","correct":false,"explanation":"If firms cannot charge users, revenue is restricted rather than excessive. The resulting insufficient revenue may fail to cover the costs of supplying the good."},{"text":"Firms can exclude users, so earn insufficient revenue to cover costs.","correct":false,"explanation":"The inability to exclude non-payers, rather than the ability to exclude users, creates the revenue problem. Firms cannot charge reliably, so revenue may not cover costs."}]},{"id":"db4191c9-8aed-4260-b788-91d15d7ea843","cardType":"basic","points":2,"front":"How does the free-rider problem cause market failure?","back":"People consume without paying, causing missing or heavily under-provided goods.","mcqOptions":[{"text":"People consume without paying, causing missing or heavily under-provided goods.","correct":true,"explanation":"Free riders receive the benefits without contributing to provision costs. Firms cannot collect enough revenue, so public goods may be missing or heavily under-provided."},{"text":"People pay without consuming, causing over-provided private goods.","correct":false,"explanation":"Free riding involves consuming without paying, not paying without consuming. It reduces suppliers’ revenue and causes public goods to be missing or under-provided."},{"text":"People consume and pay fully, causing efficiently provided public goods.","correct":false,"explanation":"Full payment removes the free-rider problem rather than creating it. Free riders consume without paying, weakening revenue and leading to missing or under-provided public goods."},{"text":"People avoid consuming, causing fully provided public goods.","correct":false,"explanation":"Avoiding consumption does not describe free riding. Free riders consume without paying, which prevents sufficient revenue and can leave public goods missing or under-provided."}]},{"id":"8bce9407-1e55-412b-b11a-170a264db6ce","cardType":"basic","points":3,"front":"What consumption errors can information gaps cause?","back":"

Demerit goods: over-consumed
Merit goods: under-consumed

","mcqOptions":[{"text":"

Demerit goods: over-consumed
Merit goods: under-consumed

","correct":true,"explanation":"Information gaps make consumers underestimate the harm from demerit goods and fail to recognise the full benefits of merit goods, so demerit goods are over-consumed and merit goods under-consumed."},{"text":"

Demerit goods: under-consumed
Merit goods: over-consumed

","correct":false,"explanation":"This reverses the information-gap effects. Consumers typically underestimate demerit goods’ harms and undervalue merit goods’ benefits, causing demerit goods to be over-consumed and merit goods under-consumed."},{"text":"

Demerit goods: over-produced
Merit goods: under-produced

","correct":false,"explanation":"The issue is consumption rather than production. Information gaps affect consumers’ perceived private benefits and harms, leading to over-consumption of demerit goods and under-consumption of merit goods."},{"text":"

Demerit goods: under-consumed
Merit goods: under-consumed

","correct":false,"explanation":"Only merit goods are generally under-consumed because their benefits are undervalued. Demerit goods are usually over-consumed because consumers underestimate their private harm."}]},{"id":"32c4f700-095a-4ca7-a58e-0f136d133793","cardType":"basic","points":2,"front":"Why are merit goods under-consumed?","back":"People undervalue their private benefits, causing under-consumption.","mcqOptions":[{"text":"People undervalue their private benefits, causing under-consumption.","correct":true,"explanation":"Merit goods provide benefits that consumers do not fully appreciate, so their perceived private benefit is below the true benefit. This results in a market quantity below the socially optimal level."},{"text":"People overvalue their private benefits, causing under-consumption.","correct":false,"explanation":"Overvaluing private benefits would encourage consumers to buy more, not less. Merit goods are under-consumed because people undervalue their private benefits, reducing demand below the social optimum."},{"text":"People undervalue their external benefits, causing under-consumption.","correct":false,"explanation":"The external benefits of merit goods may be overlooked, but the specific information failure is that consumers undervalue their private benefits. This lowers perceived demand and causes under-consumption."},{"text":"People overestimate their private costs, causing under-consumption.","correct":false,"explanation":"Overestimating private costs can reduce consumption, but it is not the stated explanation for merit goods. They are under-consumed because consumers undervalue their private benefits."}]},{"id":"83e715c2-0e5c-4360-8c16-091dc9d7f455","cardType":"basic","points":2,"front":"Why are demerit goods over-consumed?","back":"People underestimate their private harm, causing over-consumption.","mcqOptions":[{"text":"People underestimate their private harm, causing over-consumption.","correct":true,"explanation":"Consumers do not fully recognise the personal damage caused by demerit goods, so the perceived private cost is too low. Demand and consumption therefore exceed the socially optimal level."},{"text":"People overestimate their private harm, causing over-consumption.","correct":false,"explanation":"Overestimating private harm would make demerit goods seem more costly and reduce demand. Over-consumption occurs because people underestimate their private harm."},{"text":"People underestimate their external benefit, causing over-consumption.","correct":false,"explanation":"An underestimated external benefit would not explain excessive consumption of a demerit good. The relevant information failure is underestimating private harm, which makes consumption appear less damaging."},{"text":"People overestimate their private benefit, causing over-consumption.","correct":false,"explanation":"Overestimating private benefit can encourage greater consumption, but the standard explanation for demerit goods is that consumers underestimate their private harm, making the perceived cost too low."}]},{"id":"a16e3e11-97c8-45a2-9115-85bef838c26d","cardType":"basic","points":2,"front":"Why does the market over-supply output from a river-polluting factory?","back":"The firm ignores the river's external pollution cost.","mcqOptions":[{"text":"The firm ignores the river's external pollution cost.","correct":true,"explanation":"Pollution imposes a cost on people and the environment outside the firm’s market transaction. Because this external cost is excluded from private production costs, market output is higher than the social optimum."},{"text":"The firm ignores the river's private production cost.","correct":false,"explanation":"Private production costs, such as labour and raw materials, are normally considered by the firm. The over-supply arises because it ignores the external pollution cost imposed on others."},{"text":"The firm includes the river's external pollution cost.","correct":false,"explanation":"Including the external pollution cost would raise the firm’s perceived marginal cost and reduce output. Over-supply occurs because the firm ignores this cost."},{"text":"The firm ignores the river's external production benefit.","correct":false,"explanation":"Pollution from the factory creates an external cost rather than an external benefit. Ignoring that cost makes private marginal cost lower than social marginal cost, causing over-supply."}]},{"id":"a2dd9d61-61bc-470e-aee2-fab7777986c7","cardType":"basic","points":2,"front":"Why is the MMR vaccine under-consumed relative to the social optimum?","back":"Buyers ignore the external benefit of herd immunity.","mcqOptions":[{"text":"Buyers ignore the external benefit of herd immunity.","correct":true,"explanation":"Vaccination protects other people by reducing disease transmission, creating a positive external benefit. Buyers consider mainly their own benefit, so market consumption is below the socially optimal level."},{"text":"Buyers ignore the private benefit of personal immunity.","correct":false,"explanation":"The personal protection from vaccination is a private benefit that buyers generally consider. Under-consumption relative to the social optimum results from ignoring the external benefit of herd immunity."},{"text":"Buyers include the external benefit of herd immunity.","correct":false,"explanation":"If buyers included herd immunity’s external benefit in their decisions, demand would reflect the full social benefit and consumption would move towards the social optimum."},{"text":"Buyers ignore the external cost of herd immunity.","correct":false,"explanation":"Herd immunity is a positive external benefit, not an external cost. Ignoring this benefit means vaccination demand is too low and the MMR vaccine is under-consumed."}]},{"id":"ec7685b5-886e-4e4c-8456-b0b64b2b12f4","cardType":"basic","points":2,"front":"Why are sugary drinks over-consumed?","back":"Consumers underestimate their long-term harm.","mcqOptions":[{"text":"Consumers underestimate their long-term harm.","correct":true,"explanation":"Consumers may focus on the immediate enjoyment of sugary drinks and give insufficient weight to future health damage. Their perceived private cost is therefore too low, encouraging over-consumption."},{"text":"Consumers overestimate their long-term harm.","correct":false,"explanation":"Overestimating long-term harm would make sugary drinks seem more costly and tend to reduce consumption. Over-consumption is explained by underestimating their long-term harm."},{"text":"Consumers underestimate their short-term benefit.","correct":false,"explanation":"Underestimating the immediate benefit would tend to reduce demand, not cause over-consumption. The relevant information gap is underestimating the long-term harm."},{"text":"Consumers overestimate their long-term benefit.","correct":false,"explanation":"Overestimating long-term benefit could encourage consumption, but the standard explanation focuses on consumers underestimating the long-term harm from sugary drinks."}]},{"id":"2d127e01-96b9-4f11-b8f0-6991d809d9db","cardType":"basic","points":2,"front":"Why is a road classed as a quasi-public good?","back":"It is non-rival only until congestion makes consumption rival.","mcqOptions":[{"text":"It is non-rival only until congestion makes consumption rival.","correct":true,"explanation":"One person’s use of an uncongested road does not significantly reduce its availability to others. Once congestion occurs, each additional user reduces road space and journey quality for existing users."},{"text":"It is rival only until congestion makes consumption non-rival.","correct":false,"explanation":"Congestion makes road use more rival because users interfere with one another. Before congestion, road use is generally non-rival, which is why the road is quasi-public."},{"text":"It is non-excludable only until tolls make consumption excludable.","correct":false,"explanation":"Tolls can make access excludable, but that is not the feature defining this classification. A road is quasi-public because it is non-rival until congestion makes use rival."},{"text":"It is rival only until congestion makes consumption more excludable.","correct":false,"explanation":"Congestion changes rivalry, not primarily excludability. Road use is normally non-rival before congestion and becomes rival when additional users reduce access or quality for others."}]}]}],"examCountdown":{"examDate":"2027-05-10","paperLabel":"Paper 1"},"heading":"1.3.1 Types of market failure","title":"1.3.1 Types of market failure Flashcards","topbar":{"backHref":"/a-level/economics/edexcel/a/flashcards"},"topicSidebar":"$L38"}]}],"topicId":"593dbb14-3d94-5f2e-aa7d-9adac8e88053","walled":"$L39"}],"$L3a","$L3b"]