Market failure

Planners aim to enlarge a large retail shopping district in a city. It is believed that the plan would generate hundreds of jobs, make the shops profitable, but lead to severe traffic congestion. Which economic concepts are directly involved in this statement?

May/June 2016

Developers plan to expand a large retail shopping district in a city. It is believed that the scheme would generate hundreds of jobs, make the shops profitable, but lead to severe traffic congestion. What economic concepts are directly involved in this statement?

May/June 2016

During January and February 2014, pressure mounted on the UK Government to construct more flood defences. Flooding damaged homes, factories and other resources, and some were destroyed. It was argued that state intervention was necessary in this situation because there was evidence of market failure.

May/June 2016

In 2013, the Mexican Government was thinking about introducing a sales tax of one peso per litre on the selling price of fizzy drinks. The Government wanted to reduce fizzy drink consumption because people in Mexico drink 40% more fizzy drinks per person than in the United States of America. Several multinational fizzy drinks companies said they would leave the country if taxes were raised.

May/June 2016

In Australia, there was a plan for a project to develop one of the world’s largest coal mines. The project was expected to cost $\text{US}\$12.5$ million. It would generate jobs but endanger species that are at risk, since large coal ships would harm the Great Barrier Reef. What effects would this project have on the following costs and benefits?

May/June 2017

A beekeeper keeps hives of bees in order to produce honey. The bees may pollinate nearby fruit trees belonging to neighbours, but they can also inflict a painful sting on gardeners. If both of these events take place, what effect will they have on costs and benefits?

May/June 2017

Bottled water sales in China were twice as high in 2015 as they had been in 2010. In 2013 China replaced the USA as the largest market for water by volume, although not by value because a bottle cost more in the USA. Rising global consumption of bottled water has enlarged the firms that make it, but it has also added to pollution.

May/June 2017

Oil was found in Kenya in 2012, yet by 2014 a US company had abandoned its plans to search for oil in the Arabuko Sokoke forest in the country. The proportions of Kenya’s primary, secondary and tertiary sectors are shifting. The quantity of capital goods in the country is also rising.

May/June 2017

Which circumstance in the building industry would be most likely to be examined by a government authority created to regulate restrictive practices?

May/June 2018

Which scenario in the building industry would be most likely to be examined by a government body established to regulate restrictive practices?

May/June 2018

The table presents government estimates of the private and external benefits and costs of constructing a new dam. What is the difference between the social benefits and social costs of constructing the dam?

May/June 2018

What gives rise to market failure?

May/June 2019

An airline improves its service by using larger aircraft. The airline says this will cut catering waste and reduce carbon ($\text{CO}_2$) emissions per passenger journey, even though fares may increase. State a private cost and an external benefit of this decision?

May/June 2019

Give one example of an external benefit that arises when an individual cycles to work rather than drives.

May/June 2021

Which problem would be eased by a government subsidy to a firm?

May/June 2021

A patch of litter in the Pacific Ocean, known as the Great Pacific Garbage Patch, is around three times the size of France. It is composed of waste such as discarded fishing nets, though most of it is plastic rubbish. By 2050, it is predicted that there will be more plastic than fish in the Pacific Ocean. Several islands in the Pacific Ocean depend on fishing as a specialist activity. More pollution will raise the fishing industry’s social cost.

May/June 2021

A government chooses to cut air pollution in city centres by providing financial support to bus companies, lowering their production costs and the fares paid by passengers. What type of policy measure is this?

May/June 2023

For certain illnesses, face masks are beneficial because they may stop people from becoming infected. However, not everyone is prepared to wear face masks. Using the statement above, why would face masks be allocated inefficiently in the free market?

May/June 2023

What could be one external advantage of an increase in the number of university graduates in an economy?

May/June 2023

Which option gives a correct definition of a demerit good?

May/June 2024

Which characteristic applies to a demerit good?

May/June 2025

Read the source material carefully before answering Question 1. Source material: The future of the economy of St. Kitts and Nevis St. Kitts and Nevis is a small Caribbean nation made up of two islands. Its three main industries are tourism, financial services and agriculture. Visitors are drawn to the country’s beaches, coral reefs, forts, rainforests and shipwrecks. However, if rainforests continue to be cleared and soil erosion keeps contaminating the coral reefs, killing off marine life, tourism may be discouraged. The Government of St. Kitts and Nevis is also worried that the social costs of tourism are greater than the private costs. St. Kitts and Nevis’s financial services include an expanding banking sector. A few foreign multinational companies (MNCs) are among the country’s commercial banks. These MNCs are attracted by the country’s relatively high incomes, the absence of personal income tax and a relatively high literacy rate. Some of the country’s chief agricultural products are carrots, onions, peanuts and sweet potatoes. In 2017, the Government of St. Kitts and Nevis launched a training scheme aimed at increasing the productivity of onion farmers. Other important industries in St. Kitts and Nevis include healthcare and fishing. Table 1.1 shows healthcare spending as a percentage of GDP and life expectancy in six selected countries in 2022. Because St. Kitts and Nevis has a very small fishing industry, it imports large amounts of fish. Its fishing boats are small and some do not have up-to-date equipment. A larger fishing industry, with bigger boats, could provide several benefits to the country. Changes in the structure and performance of industries in St. Kitts and Nevis may alter the country’s price level. From 2018 to 2020, the country had deflation. This influenced people’s purchasing power, saving and debts. It also affected the country’s exports and firms’ investment decisions.

May/June 2025

A developer constructed several large houses in a countryside location that poorer people were unable to buy. The building work damaged an area of natural beauty. What type of market failure was caused by the development?

Oct/Nov 2015

There is growing concern about the manner in which large firms exploit the environment. What is the principal reason for this concern?

Oct/Nov 2015

Give one example of a public good.

Oct/Nov 2015

A developer constructed several large houses in a countryside location that poorer people were unable to buy. The houses damaged a place of natural beauty. What type of market failure resulted from the development?

Oct/Nov 2015

The United Nations’ World Tourism Organisation estimates that by 2020, only 7% of the world’s population will have travelled to another country. A rise in international travel could generate employment and affect incomes. On the other hand, it would also place strain on limited resources and would produce external costs.

Oct/Nov 2015

A rising share of people in both market and mixed economies are becoming overweight. In 2013 the Dubai Government gave residents a gram of gold for each kilogram of weight lost over a 30-day period. This policy step was intended to cut the external costs created by overeating, including eating too much chocolate. To lessen market failure, governments provide subsidies to consumers and producers.

Oct/Nov 2015

The graph displays total global carbon emissions in 1995 and the projected emissions for 2035. If the graph is accurate, what will have occurred by 2035?

Oct/Nov 2016

What shows that external costs are present in an economy?

Oct/Nov 2016

The chart compares total global carbon emissions in 1995 with emissions predicted for 2035. If the chart turns out to be accurate, what will have occurred by 2035?

Oct/Nov 2016

The use of cars in many cities gives rise to negative externalities. The diagram illustrates the free market equilibrium $X_1$ and the socially efficient market equilibrium $X_2$. Using the diagram, which statement is correct?

Oct/Nov 2016

In 2014, the second-largest cigarette producer in the US put forward an offer to buy the country’s third-largest cigarette producer. If the merger had gone ahead, cigarette prices were expected to rise. The size of the resulting change in quantity demanded would depend on the price elasticity of demand.

Oct/Nov 2016

A government permitted a building company to construct new houses, which led to the destruction of an area that had been designated as an area of natural beauty. Which concepts could be applied to this statement?

Oct/Nov 2017

Which effect of economic development counts as an external cost?

Oct/Nov 2017

What could be an external cost of drinking alcohol?

Oct/Nov 2017

Coal production in the UK has fallen in recent years. One explanation for this is that the social cost of producing coal is too large. Which option best explains the social cost of coal production?

Oct/Nov 2018

The government supplies hospital services, and taxation pays for them. Because waiting lists are often long, people are not always able to obtain the treatment they need. This is an example of what?

Oct/Nov 2018

Mexico has lately had fairly low inflation, and the Mexican government wants to preserve this price stability. Even so, its currency has weakened, so each Mexican peso now exchanges for less foreign currency. The government is also trying to cut pollution in the country. A major source of pollution in Mexico is car travel. Driving involves both private costs and external costs.

Oct/Nov 2018

What indicates that market failure exists?

Oct/Nov 2019

In a private market system, some goods and services would not be provided unless the government stepped in. What term identifies this in a private market?

Oct/Nov 2019

The government aims to cut the consumption of cigarettes. Which policy would be most likely to achieve this?

Oct/Nov 2020

Why may a market economy not succeed in making the most efficient use of scarce resources?

Oct/Nov 2020

Read the source material thoroughly before answering Question 1. Source material: Forest destruction in Indonesia Indonesia is the world’s biggest producer of palm oil. The expenses of producing palm oil include land rent, fertiliser, palm oil seeds, upkeep of irrigation systems and casual labour. Forests are cleared by setting fires so that palm oil plantations can be created. These fires wipe out the homes of many wildlife species and put harmful gases into the air. Since 2011, the Norwegian government has paid Indonesia to conserve its forests. Although Indonesia is the largest producer of palm oil, it ranks third for rice production. Indonesia sells 85% of its palm oil overseas but sometimes needs to bring in rice to satisfy domestic demand. Trade in palm oil and rice is affected by movements in the foreign exchange rate. The value of the Indonesian currency, the rupiah, dropped in 2017. Rice farming also adds to air pollution. After harvest, rice farmers burn the stubble left in the fields to clear them and to improve soil fertility so that they can grow more rice. Some environmentalists say that stubble burning ought to be outlawed. Both the Indonesian economy and the world economy keep expanding. Economic growth may create pollution. It can also influence a country’s GDP per head ranking and Human Development Index (HDI) ranking, as Table 1.1 shows. Indonesia has net emigration. Some Indonesians work overseas and transfer money back to their families. People also arrive from abroad to work in Indonesia, including some in relatively well-paid jobs in the country’s growing tourism industry. At present, Indonesia attracts fewer tourists than its neighbours, Singapore and Malaysia. Even so, it has many natural tourist attractions and is currently competitively priced.

Oct/Nov 2020

Hungary has the highest obesity rate in Europe. Hungarians consume fewer vegetables than most Europeans and eat more foods that may be classed as demerit goods. In 2017, the Hungarian government brought in a tax on unhealthy food called the chips tax. This tax has had some success in shifting demand towards healthier foods. Some economists argue that governments ought to use price controls as well as taxes to influence the food market.

Oct/Nov 2020

Study the source material closely before you answer Question 1. Source material: Traffic jams in the Philippines Manila, the capital city of the Philippines, has a very high population density and almost no unused land available for development. It is famous for its traffic jams (congestion). People may spend hours travelling only a short distance. The Philippine government is worried that traffic congestion could harm people’s health, put multinational companies (MNCs) off setting up in the country and slow economic growth. It will also prevent the country from reaching full employment and will lower labour productivity. Entrepreneurs and workers frequently arrive at their firms feeling stressed and exhausted. More Philippine workers are relocating to Manila to take jobs in the expanding computer, retail and education industries. One benefit of the Philippine economy is its young, well-educated population. Improvements in the skills of Philippine workers are making it easier for workers to move from shrinking industries to expanding ones. Growth in the country’s population is raising the number of cars on Philippine roads. Driving is also made more attractive by cheap parking and easy access to parking spaces, together with the poor standard of public transport. Manila has too few trains but too many buses. By 2017, deregulation had raised the number of bus companies in the city to more than $1100$. Taxes in the Philippines are fairly high but disposable income has increased. Consequently, consumer spending, including spending on cars, has risen. Some of the cars bought are imported. Table 1.1 shows consumer expenditure and imports in selected countries in 2017.

Oct/Nov 2020

Shifts in tobacco production and consumption may create both microeconomic and macroeconomic consequences. Tobacco plants are cultivated in at least $124$ countries at varied stages of development. A larger share of the poor than of the rich use tobacco products. The cigarette market, which uses tobacco, is changing, and demand for cigarettes and some other demerit goods is falling in many countries.

Oct/Nov 2020

Which combination of features is used to describe a public good?

Oct/Nov 2021

Can you give one example of a public good?

Oct/Nov 2021

In 2018, 54% of Russia’s population was female and the government set out plans to increase the state retirement age. In Russia, the importance of the price mechanism in answering the key resource allocation questions is rising. However, the Russian government raised indirect taxes, partly to reduce market failure.

Oct/Nov 2021

In order to reduce traffic congestion, a government plans to construct a new road. A toll charge will be applied to the new road. What is the main purpose of this government intervention?

Oct/Nov 2022

For what reason does a government supply public goods?

Oct/Nov 2022

What is one possible result of market failure?

Oct/Nov 2022

In 2020, Paraguay’s Consumer Prices Index increased by 3% and its foreign exchange rate moved about. Each year Paraguay records net emigration. People leave a country for a range of reasons. These include a low rate of economic growth and a high level of market failure. The Paraguayan government does intervene in the economy in an attempt to reduce market failure.

Oct/Nov 2023

A government plans to construct a new international airport in an area of exceptional natural beauty. What external cost could result from this decision?

Oct/Nov 2024

What does external benefit mean?

Oct/Nov 2024

A bridge is constructed across a river, cutting journey times. The table gives the costs and benefits of constructing the bridge. private benefit = $12000$, private cost = $10000$, external benefit = $8000$, external cost = $5000$. Which calculation shows social benefit?

Oct/Nov 2025