Markets and Market Failure · 7136/1
AQA A-level Paper 1, Specimen
All 14 written questions from AQA A-level Paper 1 (Specimen), Markets and Market Failure. Case studies: The UK energy market and Inequality. Each question shows its marks and topic, with an examiner insight on 10, and opens the question paper and mark scheme at the right page.
Context 1
The UK energy market
Extracts: Average household dual fuel bills August 2009–2013 (£) · Are energy firms exploiting their market power? · Are price rises inevitable?
Q1
Using the data in Extract A, calculate, to two decimal places, the overall percentage change in household bills from 2009 to 2013.
TopicMarket structuresMonopoly & market power
Q2
Explain how the data in Extract A show that energy companies have exploited their market power.
TopicMarket structuresMonopoly & market power
Q3
Extract B (lines 11–12) states that there is ‘no evidence of collusion between energy suppliers to date.’
With the help of a diagram, explain how collusion between energy suppliers could affect the retail prices paid by consumers.
With the help of a diagram, explain how collusion between energy suppliers could affect the retail prices paid by consumers.
TopicMarket structuresOligopoly
Examiner insight
- What to cover
- Explain how colluding firms act like a single monopolist: they restrict output and raise price above the competitive level. Link to the few large energy suppliers in the extract.
- Diagram
- Joint profit-maximising (monopoly) diagram: MC = MR sets output, price read off AR, compared with the competitive P = MC outcome.
- Watch out
- Do not just define collusion. Marks come from the chain: agreement, lower output, higher price, higher profit.
Q4
In Extract C, (lines 9–10) Ed Miliband is quoted as saying that a future Labour government would impose “a price freeze for twenty months because the market is not working”.
Using the data in the extracts and your economic knowledge, assess whether you agree that fixing a maximum price for energy that is sold to households is the best way of dealing with market failure in the UK energy industry?
Using the data in the extracts and your economic knowledge, assess whether you agree that fixing a maximum price for energy that is sold to households is the best way of dealing with market failure in the UK energy industry?
TopicMarket failure and government interventionPrice controlsMarket failure (general)
Examiner insight
- What to cover
- Set out why the energy market fails (market power, possible collusion, inelastic demand) and how a price cap changes prices and profits.
- Diagram
- Maximum price below equilibrium, showing excess demand and possible fall in supply.
- Evaluation
- Weigh the cap against alternatives: competition policy, regulation (RPI-X), help for switching. Judge by elasticity of supply, time period, and the risk of lower investment.
- Watch out
- Many answers only describe the cap. Compare it with at least one other policy to answer "best way".
Context 2
Inequality
Extracts: The effects of taxes and benefits in the UK on household income by quintile · In favour of inequality · Against inequality
Q5
Using the data in Extract D, calculate the difference between the mean original income and the mean final income of the five quintile groups.
TopicDistribution of income and wealthInequality & poverty
Q6
Explain how the data in Extract D show that taxes and benefits have been successful in reducing inequalities in household income in the UK.
TopicDistribution of income and wealthInequality & poverty
Q7
Extract F (lines 9–10) states that ‘concentrating income in fewer and fewer hands eventually leads to bubble economies in which the prices of assets, such as houses and shares, rise continuously’.
With the help of a diagram, explain how growing inequality might lead to a persistent rise in the price of houses.
With the help of a diagram, explain how growing inequality might lead to a persistent rise in the price of houses.
TopicDistribution of income and wealthInequality & poverty
Examiner insight
- What to cover
- Unequal income means more wealth held by high earners who buy assets. Show demand for housing rising faster than supply.
- Diagram
- Housing market diagram with a highly inelastic supply curve and repeated rightward shifts of demand.
- Watch out
- Keep the focus on price rises being persistent: stress the inelastic supply of land and new homes.
Q8
Extract E (lines 6–7) states that ‘growing inequality would create incentives, kick-start enterprise, boost growth and is good for us all’.
Using the data in the extracts and your economic knowledge, assess the view that inequality is ‘good for us all.’
Using the data in the extracts and your economic knowledge, assess the view that inequality is ‘good for us all.’
TopicDistribution of income and wealthInequality & poverty
Examiner insight
- What to cover
- Give the case for inequality (incentives, enterprise, savings and investment) and the case against (lower mobility, poorer health, lower demand, social costs).
- Diagram
- A Lorenz curve can support the analysis but is optional.
- Evaluation
- Judge by the degree of inequality, whether it comes from reward for effort or from inherited wealth, and use the data in the extracts.
- Watch out
- Avoid a one-sided moral argument. The examiner wants economic reasons on both sides.
Q9Essay 1
Explain why firms, such as Apple, might be able to charge different prices for the same product in different markets.
Essay stimulus. Apple sells iPhones and iPads at considerably lower prices in the USA than in the UK market, but sources the products from the same factories in the Far East.
TopicMarket structuresMonopoly & market power
Examiner insight
- What to cover
- State the conditions for price discrimination: market power, separable markets, different price elasticities, no resale.
- Diagram
- Two-market diagram: higher price where demand is more price inelastic.
- Watch out
- Use the Apple example. Generic lists of conditions without application score lower.
Q10Essay 1
Discuss the view that price discrimination only benefits suppliers, such as Apple.
Essay stimulus. Apple sells iPhones and iPads at considerably lower prices in the USA than in the UK market, but sources the products from the same factories in the Far East.
TopicMarket structuresMonopoly & market power
Examiner insight
- What to cover
- Explain supplier gains (higher revenue and profit, conversion of consumer surplus).
- Diagram
- Price discrimination diagram showing transfer of consumer surplus.
- Evaluation
- Consumers can gain: lower prices for price-elastic groups, output that would not exist otherwise, profit funding innovation. Judge by who pays and how profits are used.
- Watch out
- Do not treat "all consumers lose" as fact. The best answers identify winners and losers.
Q11Essay 2
Using examples to illustrate your answer, explain how anchoring and loss aversion can affect an individual’s choices when deciding how to spend or save their income.
Essay stimulus. Traditional economic theory assumes that consumers make rational decisions that maximise their economic welfare, but behavioural economists disagree.
TopicIndividual economic decision makingBehavioural economics
Examiner insight
- What to cover
- Define anchoring (people judge value from a first reference point) and loss aversion (a loss feels worse than an equal gain). Apply each: a "was £100, now £60" sale anchors spending; savers keep money in low-risk accounts or hold losing shares to avoid realising a loss.
- Watch out
- Two developed examples beat a list of biases. Link each bias to a spend or save decision, as the question asks.
Q12Essay 2
The Government would like to improve the well-being of the population by encouraging people to adopt a healthy diet. Using your knowledge of both traditional economic theory and behavioural economics, assess alternative policies that the Government might adopt to try to achieve its objective
Essay stimulus. Traditional economic theory assumes that consumers make rational decisions that maximise their economic welfare, but behavioural economists disagree.
TopicIndividual economic decision makingBehavioural economics
Examiner insight
- What to cover
- Compare traditional policies (taxes, subsidies, information, regulation) with behavioural ones (nudges, choice architecture, framing, default options).
- Diagram
- A negative externality or demerit good diagram helps for a tax on unhealthy food.
- Evaluation
- Judge effectiveness, cost and unintended effects, such as regressive taxes or nudges that fade over time. Give a supported conclusion.
- Watch out
- You must use both traditional and behavioural theory. Answers that ignore one side are capped.
Q13Essay 3
Explain why, in the absence of government intervention, too many journeys are likely to be made by road and too few by rail.
Essay stimulus. It is generally accepted that we need to adopt new ways of charging for the use of our roads. This is partly because of worsening congestion, but is also due to the reduction in revenue generated from taxes on fuels as a result of more fuel-efficient vehicles.
TopicMarket failure and government interventionExternalitiesGovernment intervention (micro)
Examiner insight
- What to cover
- Road users ignore external costs (congestion, pollution, accidents), so private cost is below social cost. Rail has external benefits that users do not count.
- Diagram
- Negative externality diagram for road travel and positive externality diagram for rail.
- Watch out
- Name the external costs precisely and link them to over-consumption. Do not drift into policy.
Q14Essay 3
Assess the view that a system of road-pricing is the best way to tackle the problem of worsening traffic congestion in the UK.
Essay stimulus. It is generally accepted that we need to adopt new ways of charging for the use of our roads. This is partly because of worsening congestion, but is also due to the reduction in revenue generated from taxes on fuels as a result of more fuel-efficient vehicles.
TopicMarket failure and government interventionExternalities
Examiner insight
- What to cover
- Explain how road pricing makes users pay the external cost and moves output towards the social optimum.
- Diagram
- Negative externality diagram with a charge equal to marginal external cost.
- Evaluation
- Compare with fuel taxes, better public transport and regulation. Consider price elasticity of demand, equity (regressive effect), cost of the technology and political acceptance.
- Watch out
- Do not assume the charge can be set exactly. Valuing external costs is hard, which is a key evaluation point.
Question text is quoted from the question papers, © AQA, for students’ private study. Open the official papers and mark schemes from the links on each question. Examiner insights are written with AI assistance and moderated by Finn.