Market Failure & Government is a core part of A-Level Economics. Revise the key concepts and common mistakes below, then lock them in with the free games.
Key concepts
DemandQuantity consumers will buy at each price; falls as price rises.
SupplyQuantity producers will sell at each price; rises as price rises.
Market equilibriumWhere quantity demanded equals quantity supplied.
Price elasticityResponsiveness of quantity to a price change.
Market failureWhen markets allocate resources inefficiently.
ExternalitiesCosts or benefits affecting third parties.
RegulationRules limiting or requiring behaviour.
Tradable PermitRight to emit a fixed amount, freely traded.
Cap and TradeRegulatory system using tradable permits.
Public ProvisionGovernment supplies the good directly.
NationalisationState takeover of an industry.
Government FailureIntervention that creates worse outcomes than the market.
Price CeilingLegal maximum price below equilibrium.
Price FloorLegal minimum price above equilibrium.
Common mistakes to avoid
Questions where students often pick the tempting wrong answer — make sure you know the right one:
What is asymmetric information as a source of market failure?✗ Asymmetric information means a buyer and seller disagree about a price. ✓ When one party in a transaction knows more than the other — leading to problems like adverse selection (used-car market) or moral hazard (insurance). Markets can fail or unravel when information is unequal.
What defines a pure public good?✗ A public good is anything provided by the government. ✓ Non-rivalry (one person's use doesn't reduce others') and non-excludability (you can't stop people benefiting) — e.g. national defence, street lighting.
What is the difference between a shift in demand and a movement along the demand curve?✗ A change in price shifts the demand curve. ✓ A movement along the curve is caused by a change in price; a shift of the whole curve is caused by changes in other factors (income, tastes, substitute prices).
What is the predicted effect of a binding price ceiling like rent control?✗ Price ceilings make goods cheaper for everyone with no downsides. ✓ Shortage in the market — quantity demanded exceeds quantity supplied at the controlled price, leading to queues, black markets and reduced quality.
What is a Pigouvian tax?✗ A Pigouvian tax is a tax that funds government spending. ✓ A tax set equal to the external cost of an activity — designed to internalise the externality so the private cost reflects the social cost. Used for pollution, congestion, sugary drinks.
Practise Market Failure & Government — free games
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