AQA A-level Economics: The price mechanism and the meaning of market failure (7136) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover the How markets and prices allocate resources and The meaning of market failure sub-sections of AQA A-level Economics (7136), from the AQA specification version 1.3 (29 June 2022), numbered 3.1.8.1 and 3.1.8.2 on the AQA website. All figures are invented. Revise first with the study guide and the revision notes. See also the course hub, the checklist and the free diagnostics.

Questions

1. Define market failure and give one example. [3]

2. In Country C the market for flower bunches has Qd = 840 − 40P and Qs = 60P − 160, with P in pounds.

(a) Calculate the equilibrium price and quantity. [2]

(b) Demand rises to Qd = 940 − 40P. Calculate the shortage at the old price. [2]

(c) Explain how the three functions of price remove the shortage. [3]

3. Explain the difference between complete and partial market failure, with one example of each. [4]

4. A firm can make its output with method A (6 workers, 2 machines) or method B (2 workers, 4 machines) per day. A machine costs £150 per day.

(a) Calculate the daily cost of each method when the wage is £100. [2]

(b) Calculate the costs when the wage falls to £40 and state which method is chosen. [2]

(c) Explain what this shows about how goods are produced in a market economy. [1]

5. Assess the view that the price mechanism is an impersonal method of allocating resources. [6]

6. A library in Country D charges a fee of £2 per loan. Monthly loans fall from 50,000 to 31,000.

(a) Calculate the percentage fall in loans. [2]

(b) Calculate the monthly fee revenue. [1]

(c) Explain how introducing the fee could change the nature of the activity. [3]

7. Three neighbours would pay £9, £7 and £5 a month for a community alarm. It costs £18 a month. Explain why this is a missing market, using the figures. [5]

8. A market has marginal private benefit 30 − 0.1Q and marginal private cost 6 + 0.1Q. Each unit imposes an external cost of £4. Calculate the market output, the socially optimal output and the welfare loss. [6]

9. For each scenario, name the cause of market failure and say whether it is complete or partial. [4]

(i) A sole supplier restricts output and raises price.

(ii) Nobody can be stopped from using a flood barrier, so no firm will build one.

(iii) Too few people take up a health screening whose benefits they undervalue.

(iv) Households on the lowest incomes cannot afford an essential service that is priced at cost.

10. A service costs £18. Household X has a monthly income of £900 and household Y has £300. Calculate the price as a percentage of each income and explain whether the outcome is market failure. [4]

11. Evaluate whether charging a market price for entry to a public park would improve resource allocation. [8]

Answers

1. Market failure occurs when a market leads to a misallocation of resources [1], so that output or price differs from the socially best level [1]. Example: a factory’s smoke harms neighbours who are not compensated, so too much is produced [1]. [3] Examiner insight: A definition earns most when it uses the idea of misallocation, not just “the market does not work”.

2. (a) Set demand equal to supply: 840 − 40P = 60P − 160 [1]. So 100P = 1,000, giving P = £10 and Q = 440 [1]. (b) At £10, Qd = 940 − 400 = 540 and Qs = 440 [1]. The shortage is 100 bunches [1]. (c) Signalling: the shortage lets sellers raise price, telling everyone demand has risen [1]. Rationing: the higher price (£11) cuts quantity demanded as marginal buyers drop out [1]. Incentive: higher price and profit raise quantity supplied to 500 until the market clears [1]. [7] Examiner insight: Show the substitution into the old price; a bare “100” gives nothing to build on if the arithmetic slips.

3. Complete failure: the market does not exist [1], for example a public good such as street lighting [1]. Partial failure: a market exists [1] but produces the wrong quantity or price, for example tobacco being over-consumed [1]. [4] Examiner insight: Each type needs its own example; a pair of definitions alone usually leaves marks unclaimed.

4. (a) A: 6 × 100 + 2 × 150 = £900 [1]. B: 2 × 100 + 4 × 150 = £800 [1]. (b) A: 6 × 40 + 300 = £540 and B: 2 × 40 + 600 = £680 [1]. Method A is now chosen [1]. (c) Firms choose the cheapest method at current relative input prices, without being told [1]. [5] Examiner insight: Cost both methods before choosing one; a conclusion with only one total shown cannot be checked.

5. For: the price mechanism treats every buyer alike, needs no official judging need and avoids favouritism [1]; decisions respond quickly [1]. Against: it allocates by ability to pay, so wealthy buyers win over those in greater need [1]; a price reflects willingness, not need [1]. Judgement: the view is strongest for goods with no substitutes, and weaker where incomes are similar [1]; whether this matters is a normative choice [1]. [6] Examiner insight: A one-sided answer, whichever side, tends to stall; weigh both and make a supported judgement.

6. (a) Change = 31,000 − 50,000 = −19,000 [1]. Percentage = −19,000 ÷ 50,000 × 100 = −38% [1]. (b) 31,000 × £2 = £62,000 [1]. (c) Borrowing was once a shared service open to all, and a price turns it into a purchase [1]. Lower-income readers may be excluded, which changes who uses it [1]. Staff and users may think of it as a commercial transaction rather than a public service, so attitudes and incentives change [1]. [6] Examiner insight: Link the change to incentives or the meaning of the activity; stating only that demand falls does not address the nature of the transaction.

7. Total willingness to pay = 9 + 7 + 5 = £21 [1]. Cost is £18, so net benefit is 21 − 18 = £3 [1]. Provision is worthwhile [1], but no one can be excluded, so each neighbour has an incentive to free ride [1]. A private firm cannot collect revenue, so no market forms. That is a missing market, a complete failure [1]. [5] Examiner insight: Use the given figures to show that benefit exceeds cost; a general statement about public goods does not use the data.

8. Market: 30 − 0.1Q = 6 + 0.1Q [1], so Q = 120 [1]. Social: marginal social cost = 10 + 0.1Q, so 30 − 0.1Q = 10 + 0.1Q [1], giving Q = 100 [1]. Welfare loss = ½ × £4 × (120 − 100) [1] = £40 [1]. [6] Examiner insight: Add the external cost to the cost curve before solving, and state the unit for the welfare loss.

9. (i) Monopoly or other imperfection, partial [1]. (ii) Public good, complete (missing market) [1]. (iii) Merit good, partial [1]. (iv) Inequality in the distribution of income, partial [1]. [4] Examiner insight: Give both the cause and the type; naming only one of them leaves the other point unanswered.

10. X: 18 ÷ 900 × 100 = 2% [1]. Y: 18 ÷ 300 × 100 = 6% [1]. The market allocates at cost, so on narrow efficiency grounds there may be no misallocation [1]. However, allocation follows income, not need, and that is the inequality cause of failure if society judges the outcome unacceptable [1]. [4] Examiner insight: Separate efficiency from fairness; unfairness alone does not prove misallocation without a reasoned link.

11. For: a price rations scarce space, reduces overcrowding [1] and raises revenue to fund upkeep [1], giving a signal of what visitors value [1]. Against: exclusion of low-income users, since parks give benefits to the wider community [1]; the park may lose its character as a shared space [1]; collecting fees costs money [1]. Judgement: it depends on how congested the park is, how large the external benefits are and whether low-income users can be helped, for example by free days [1]; the answer should commit to a supported conclusion [1]. [8] Examiner insight: A conclusion that names the conditions on which the answer depends reads as a judgement; a repeated list of points does not.

Where marks are usually lost

• Defining market failure as “when markets do not work” with no mention of misallocation.
• Forgetting to test the old price when finding a shortage or surplus.
• Naming a function of price but not linking it to the buyers or sellers affected.
• Treating “impersonal” as wholly good or wholly bad.
• Giving a type of failure with no example.
• Confusing complete failure with a market that is small.
• Solving for output without adding the external cost to marginal private cost.
• Leaving out units, such as £ or bunches, on a calculation.

Next steps

• Revisit the study guide and revision notes.
• Open the AQA A-level Economics hub and the checklist.
• Take all free 10-minute diagnostics at /diagnostics/.
• Book a free trial class at /trial/.

Official syllabus

AQA, AS and A-level Economics (7135 and 7136), specification version 1.3, 29 June 2022, sections 4.1.8.1 and 4.1.8.2 as printed in the combined PDF; for first teaching from September 2015.