A bakery is considering developing a production method that keeps bread fresh for longer. The bakery bases its decision only on private costs and private benefits. Other bakeries could learn from the method without paying. No other costs or benefits arise.
| Estimated value over the useful life of the method | Amount |
|---|---|
| Private benefit to the bakery | £84,000 |
| Private cost paid by the bakery | £90,000 |
| Benefit to other bakeries | £15,000 |
Which statement best explains the likely allocation of resources?
The bakery will not develop the method even though society would benefit overall, so the method is likely to be under-provided.
The bakery will develop the method because its private benefit is greater than its private cost, causing the method to be over-provided.
The bakery will not develop the method and society would also prefer it not to, because third-party benefits are excluded from social benefit.
The bakery will develop the method because the benefit to other bakeries is part of its private benefit, so resources are allocated efficiently.
83 exam-style questions on AQA GCSE Economics 1.6 Market failure, covering 1.6.1a Market failure as misallocation of resources, 1.6.1b Government intervention, 1.6.2a Defining externalities, and 1.6.2b Positive and negative externalities. Each one has a worked solution and a mark scheme showing where the marks go.