Edexcel A · Theme 1: Introduction to markets and market failure · 1.3 Market failure
Edexcel A Economics past paper questions: Market failure
Every Edexcel A question on Market failure from 2016 to 2025: 6 essays, 13 data response questions, 14 short answer questions and 12 multiple choice questions. It covers Government intervention, How markets work and Nature of economics. Each question links to its paper, mark scheme and examiner report.
SubtopicsGovernment intervention 10How markets work 4Nature of economics 1
Essay questions on market failure
Case study: The market for plastic in the UK
Evaluate methods of government intervention which could be used to reduce the market failure associated with plastic waste. Use a diagram to support your answer.
Examiner insight
- What to cover
- Consider a plastic tax, deposit return schemes, subsidies for recycling, bans and regulation. Show how each moves production or disposal toward the socially optimum level.
- Watch out
- Describing each policy in turn and never comparing which best reduces plastic waste.
Case study: The market for fish
Some economists suggest that the market price of cod does not result in the socially optimum level of output. Evaluate the likely external costs from the over-fishing of cod. Use an appropriate diagram in your answer.
Examiner insight
- What to cover
- Identify external costs such as depleted stocks for future fishers, damage to the marine ecosystem and lost income in dependent communities. Show why market output exceeds the social optimum.
- Watch out
- Listing environmental harms without showing why the market price of cod fails to reflect them.
Case study: The market for fish
Other than using a TAC, evaluate the policy options which could be used to reduce market failure resulting from over-fishing. Use at least one appropriate diagram in your answer.
Examiner insight
- What to cover
- Consider a tax on catch, tradable fishing permits, clearer property rights, minimum net sizes and marine protected areas. Show how each raises private cost toward social cost.
- Watch out
- Building the answer around a total allowable catch when the question has ruled that out.
Case study: The market for higher education in the UK
Evaluate whether government intervention is able to correct market failure in education.
Examiner insight
- What to cover
- Explain state provision, subsidies, compulsory schooling and information campaigns. Show how each raises consumption of education toward the social optimum where MSB equals MSC.
- Watch out
- Listing policies with no reference to the social optimum or to whether the market failure is removed.
In September 2016 the government approved the building of an £18 billion nuclear power station, Hinkley Point C, which will supply 7% of UK electricity for up to 60 years. The power station is funded by Chinese and French investment. Evaluate the likely private costs and external costs involved in such major power station construction projects. Use an appropriate externalities diagram in your answer.
Examiner insight
- What to cover
- Private costs are the construction, financing, labour and material costs borne by the investors. External costs are disruption, habitat loss, radioactive waste and long term decommissioning risk falling on third parties.
- Watch out
- Private costs fall on the firm and external costs on third parties, so do not merge the two categories.
Case study: Energy markets
Using the concept of external costs, evaluate whether nuclear power is under-provided or over-provided in the energy market. Use an appropriate diagram in your answer.
Examiner insight
- What to cover
- Identify external costs of nuclear power such as waste storage and accident risk, and the external benefit of displacing fossil fuels. Compare free market output with the social optimum.
- Watch out
- Asserting over or under provision without comparing market output to the social optimum on the diagram.
Data response questions on market failure
Case study: The impact of subsidies on farmer income, in England, 2018–2019 (£000 per farm)
With reference to Extract A, discuss the likely private costs and external costs caused by meat farming. Use an appropriate diagram in your answer.
Examiner insight
- What to cover
- Private costs are the farmer's own, such as feed, land, labour and vet bills. External costs fall on third parties, such as methane emissions, slurry in waterways and lost habitat. Use Extract A.
- Watch out
- Putting a cost the farmer actually pays, such as feed, into the external cost list.
Case study: The market for plastic in the UK
Discuss the likely private costs and external costs of the production of plastic.
Examiner insight
- What to cover
- Private costs are the firm's own, such as oil feedstock, energy, labour and machinery. External costs fall on third parties, such as air pollution, litter and harm to marine life.
- Watch out
- Mixing the two, for example calling the firm's own energy bill an external cost.
Case study: The UK online streaming services market
With reference to Extract C, discuss the likely private and external benefits of viewing educational websites and TV programmes.
Examiner insight
- What to cover
- Separate private benefits, better grades and higher future earnings for the viewer, from external benefits, a more productive workforce, higher tax revenue and lower welfare spending. Marginal social benefit therefore exceeds marginal private benefit.
- Watch out
- Blurring private and external benefits together when the question asks you to discuss both.
Case study: The market for television content
With reference to Extract B, explain two external benefits associated with the consumption of ‘public service broadcasting’ (line 2).
Examiner insight
- What to cover
- Give two benefits gained by third parties, such as a better informed electorate and improved education or social cohesion. Explain who gains beyond the viewer, using Extract B.
- Watch out
- Giving private benefits to the viewer, such as entertainment, and labelling them external.
Case study: The market for television content
‘Television content is a public good’ (Extract B). Assess this statement.
Examiner insight
- What to cover
- Test television content against non rivalry and non excludability. A broadcast signal is non rival, but subscription and encryption make streaming excludable, so it is not a pure public good.
- Watch out
- Judging it a public good simply because some television is free at the point of use.
Case study: The market for television content
Discuss likely reasons why the market price of streaming television content is increasing. Draw a supply and demand diagram to support your answer.
Examiner insight
- What to cover
- Give reasons such as rising demand for streaming and rising costs of producing content and buying rights. Show demand shifting right and supply shifting left, both raising price.
- Watch out
- Explaining rising costs only and never shifting a curve on the diagram.
Case study: The market for fish
Explain the likely impact of the new 2020 TACs on the price of cod. Include a supply and demand diagram in your answer.
Examiner insight
- What to cover
- A total allowable catch is a quota that caps the quantity of cod landed. Supply is restricted below the free market quantity, so there is a shortage at the old price and price rises.
- Watch out
- Shifting demand, or forgetting that capping quantity is what forces the price up.
Case study: The market for fish
With reference to the information provided, calculate the new quantity demanded of bags of chips from fish and chip shops, following a 2% increase in the price of fish. You are advised to show your working.
Case study: The travel and tourism industry
Examine the likely impact of Thomas Cook’s plan ‘to reduce their airline emissions’ (Extract B, line 6) on the social optimum position. Use an appropriate externalities diagram in your answer.
Examiner insight
- What to cover
- Explain that cutting airline emissions reduces the external cost of flights, so marginal social cost falls towards marginal private cost. The market output moves closer to the social optimum and the welfare loss shrinks.
- Watch out
- Shifting the demand curve instead of moving the MSC curve, so the new social optimum is never shown.
Case study: The market for higher education in the UK
With reference to Extract A, explain one likely private benefit to students and one likely external benefit of higher education.
Examiner insight
- What to cover
- Give one private benefit the student captures, such as higher lifetime earnings, and one external benefit third parties gain, such as higher national productivity or lower crime. Use Extract A.
- Watch out
- Offering two private benefits, or calling a benefit external when the student receives it.
Case study: Health provision
Explain how ‘asymmetric information’ (Extract B, line 30) can lead to market failure in health provision.
Examiner insight
- What to cover
- Doctors and insurers know more than patients. Patients cannot judge what treatment they need, so they may buy too much or too little and resources are misallocated away from the social optimum.
- Watch out
- Confusing asymmetric information with imperfect information that both sides share equally.
Case study: Health provision
‘Public parks are a public good’ (Extract C, line 1). Assess this statement.
Examiner insight
- What to cover
- Test parks against non rivalry and non excludability using Extract C. Explain the free rider problem and why a private firm may not supply parks profitably.
- Watch out
- Calling parks a public good simply because the local council provides them free of charge.
Case study: The market for cigarettes
Explain why ‘bans on tobacco advertising’ (Extract A, line 7) may result in a decrease in the revenue of tobacco firms. Include a supply and demand diagram in your answer.
Examiner insight
- What to cover
- An advertising ban weakens brand loyalty and persuasion, so demand for tobacco falls. Price and quantity both fall, so total revenue falls. Link the chain to Extract A.
- Watch out
- Shifting supply, or showing a movement along demand, instead of shifting demand to the left.
Short answer questions on market failure
The government subsidises dental care in the UK through the National Health Service (NHS). There has been a large decrease in the work carried out by NHS dentists. Up to 90% of practices are not accepting new NHS patients. (Source: adapted from https://www.theguardian.com/society/2023/jul/14/ mps-demand-urgent-reform-nhs-dental-services-report) Draw an externalities diagram to identify the welfare gain area from the consumption of dental care in the UK.
Case study: The cost of living in the UK
Explain one reason why consumers buy less than the social optimum quantity of healthy food.
Explain why public goods may not be provided by the private sector.
Case study: The energy market
Examine one likely externality that arises when a producer generates electricity by burning gas. Use a diagram to show the external costs of production.
Examiner insight
- What to cover
- Choose one externality and develop it, such as carbon emissions or air pollution from burning gas. Show marginal social cost above marginal private cost and identify the welfare loss.
- Watch out
- Drawing the diagram without shading and naming the welfare loss area. The question explicitly asks for the external costs to be shown.
Draw an externalities diagram to show the likely impact of the sewage discharge on the local tourist industry.
Case study: The food delivery industry
Using the information provided, explain one externality that arises in the food delivery market.
Explain why flood defences such as those in the Calder Valley are usually provided by the public sector.
Draw an externalities diagram to show the likely impact of the consumption of higher education.
Cuba’s population is estimated to be 11 million. With reference to Statement 1 above, calculate the estimated number of doctors in Cuba. You are advised to show your working.
Define the term ‘asymmetric information’.
Case study: Copper prices, US dollars per tonne, 2007–2015
Examine the likely impact of externalities of copper mining on firms and communities within Chile.
Examiner insight
- What to cover
- Identify negative production externalities from Chilean copper mining, such as water use, pollution and health damage. Marginal social cost exceeds marginal private cost, so communities bear costs the mining firms do not pay.
- Watch out
- Describing pollution in words without ever using the marginal social cost and marginal private cost framework.
Case study: Copper prices, US dollars per tonne, 2007–2015
Apart from externalities, discuss the problems that Chile faces as a result of dependency on copper mining.
Examiner insight
- What to cover
- Link copper price volatility to unstable export revenue, tax receipts and the current account. Add Dutch disease raising the exchange rate and squeezing manufacturing, plus finite reserves and structural unemployment risk.
- Watch out
- Returning to pollution and externalities, which this question explicitly excludes.
Define the term ‘external benefits’.
Annotate on Diagram A the welfare gain area and the new social optimum output resulting from successful government intervention in the market for nursery places.
Multiple choice questions
- AS Paper 1, June 2025, Q1(a)
Spending on capital goods in the UK rose by 4.8% in Quarter 4, 2022. Which one of the following is an example of a capital good?
- AS Paper 1, June 2025, Q3(b)
Which one of the following is the most likely reason why a free market fails to achieve the social optimum position?
- A-level Paper 1, June 2022, Q3(b)
Which one of the following is the most likely effect of the £180 000 fine?
- AS Paper 1, June 2022, Q1(a)
What are the characteristics of a private good?
- AS Paper 1, June 2022, Q4(b)
Which one of the following explains how market failure might occur in a free market economy?
- A-level Paper 1, November 2020, Q2(b)
On average, in the UK, a working-age graduate earns approximately £10 000 more per year than a non-graduate. (Source adapted from: https://assets.publishing.service.gov.uk/government/uploads/…
- A-level Paper 1, June 2018, Q2(c)
The most likely reason for this grant is to ensure the:
- AS Paper 1, June 2018, Q1(a)
Which one of the following best describes the two statements above?
- AS Paper 1, June 2018, Q5(c)
BBC programmes are often referred to as being public goods. This is because:
- A-level Paper 1, June 2017, Q3(c)
One effect of the subsidy is to increase:
- AS Paper 1, June 2017, Q5(b)
Which one of the following statements is correct?
- AS Paper 1, June 2016, Q3(a)
The impact of the flower industry on workers in the fishing industry is an example of:
Question text is quoted from the question papers, © Pearson Edexcel, 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.