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1.7 Why do some markets fail?

What students need to learn:

Students should be able to:
Additional Guidance Notes
Market failure
Define and understand different types of market failure.
Students should understand that market failure is when the price mechanism causes an inefficient allocation of resources.

The types of market failure considered at AS level are externalities, public goods, imperfect market information, labour immobility and unstable commodity markets.
Illustrate external costs and external benefits using marginal analysis, distinguishing between the market and social optimum positions. The welfare loss or gain areas are required.

Understand the impact of externalities and government intervention in various markets, for example, transport, health
care, education, environment, waste disposal and recycling.
Students are required only to illustrate the external costs from production and external benefits from consumption.

Students should assess the costs and benefits from major investment projects such as sporting events and transport infrastructure improvements.
Public goods
Explain why public goods may not be provided by the market.

Distinguish between public and private goods.
Students should understand the free rider and valuation problems.
Imperfect market information
Distinguish between symmetric and asymmetric information.

Understand how imperfect market information may lead to a misallocation of resources, for example, health care, education, pensions, tobacco and alcohol.

Labour immobility
Understand geographical and occupational immobility of labour may result in structural unemployment.

Assess government measures to reduce factor immobility such as training programmes and relocation subsidies.
Students should understand the significance of house prices for restricting the geographical mobility of labour and the skills shortage for restricting the occupational mobility of labour.
commodity markets
Understand the causes and effects of fluctuating commodity prices on consumers and producers.

Assess the impact of government intervention in the form of minimum prices and buffer stocks. Use diagrammatic analysis for minimum prices and buffer stocks.
Students should understand how uncertainty in production (for example, climatic) and time lags may affect supply and the significance of price and income elasticity of demand.

Students are not expected to use diagrammatic analysis of the cobweb model.

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