Cambridge IGCSE Economics: The market economic system and market failure (0455) – 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.

This set tests sections 2.9 and 2.10 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. All names and figures are invented. Teaching is in the study guide and the revision notes. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

Questions

1. Define a market economic system. [2]

2. Explain two advantages of a market economic system. [4]

3. Explain two disadvantages of a market economic system. [4]

4. A fish-processing plant (invented) has a private cost of 35 per tonne. Its waste harms a nearby fishing village at a cost of 14 per tonne.

(a) Calculate the social cost per tonne. [1] (b) The plant processes 3,000 tonnes. Calculate the total external cost. [1] (c) Explain why the plant ignores this cost when it decides how much to produce. [2]

5. A village of 400 households (invented) needs a flood-warning siren costing 8,000. The cost would be shared equally, but payment is voluntary and only 60 households pay.

(a) Calculate each household’s equal share. [1] (b) Calculate the revenue collected and the shortfall. [2] (c) Explain why this shows that a private firm is unlikely to provide the siren. [3]

6. Adult literacy classes (invented) give each learner a private benefit of 45 and an external benefit of 18.

(a) Define a merit good. [2] (b) Calculate the social benefit per learner. [1] (c) Explain why the classes are likely to be under-consumed if left to the market. [3]

7. In Country A (invented) 12,000 units a month of a harmful product are bought. The socially best level is 9,000.

(a) Calculate the over-consumption as a percentage of the socially best level. [2] (b) Explain why consumption of a demerit good is above the socially best level. [3]

8. Before one ferry company takes over all routes in Region S (invented), the fare is 40 and 5,000 passengers travel a week. Afterwards the fare is 52 and 3,500 travel. The cost of carrying each passenger is 30.

(a) Calculate the percentage change in the fare and in the number of passengers. [2] (b) Calculate the company’s weekly profit before and after the takeover. [2] (c) Explain how this is an abuse of monopoly power and a market failure. [3]

9. A quarry in District V (invented) closes and 360 workers lose their jobs. A new depot offers 90 jobs locally.

(a) Calculate the percentage of the 360 workers who remain unemployed if all 90 jobs are filled by them. [2] (b) Explain how geographical and occupational immobility can each stop the remaining workers finding work. [4]

10. Good M is a merit good and Good N is a demerit good (both invented).

	Quantity bought in the market	Socially best quantity
Good M	2,400	3,200
Good N	7,800	6,000

(a) Calculate the under-consumption of Good M as a percentage of the socially best quantity. [2] (b) Calculate the over-consumption of Good N as a percentage of the socially best quantity. [2] (c) Explain what these figures show about the allocation of resources. [4]

11. “A market economic system always allocates resources efficiently.” Discuss this view. [8]

Answers

1. A system in which buyers and sellers decide what, how and for whom to produce through the price mechanism [1], with most resources privately owned and little government direction [1]. [2] Examiner insight: A definition that mentions only “free trade” gains less than one that names the price mechanism and private ownership.

2. First advantage: consumer choice [1]; firms compete to supply what people will pay for, so a wide range of goods is available [1]. Second advantage: efficiency [1]; competition pushes firms to cut costs and prices, and profit rewards firms that use resources well [1]. [4] Examiner insight: Each advantage needs a developed reason. A list of four labels with no explanation does not show understanding.

3. First disadvantage: public goods are not provided [1]; non-payers cannot be excluded, so firms cannot earn revenue [1]. Second disadvantage: inequality [1]; those with little income have little buying power, so their wants go unmet even when needs are great [1]. [4] Examiner insight: Two different disadvantages are asked for. Two points about the same problem in different words show only one idea, so choose two clearly different ones.

4. (a) 35 + 14 = 49 per tonne [1]. (b) 14 × 3,000 = 42,000 [1]. (c) The plant pays only its private costs [1]. The village bears the harm and it does not appear in the plant’s accounts, so it does not reduce the plant’s profit [1]. [4] Examiner insight: Show the addition and the multiplication. State which cost is external; do not use “social cost” for the 14.

5. (a) 8,000 ÷ 400 = 20 [1]. (b) Revenue = 60 × 20 = 1,200 [1]. Shortfall = 8,000 − 1,200 = 6,800 [1]. (c) The siren is non-excludable, so households that do not pay still benefit [1]. This gives them an incentive to free ride, as 340 did here [1]. The firm cannot cover its cost of 8,000, so it will not supply the siren although everyone would gain [1]. [6] Examiner insight: The words “free rider” are useful but need linking to lost revenue. Naming the term alone gains little.

6. (a) A good that society judges to be beneficial [1], and that is under-consumed if left to the market [1]. (b) 45 + 18 = 63 [1]. (c) Learners consider only the private benefit of 45 [1] and may undervalue the long-term gain or be unable to afford the classes [1]. The external benefit of 18 to others goes unrewarded, so less is bought than is socially worthwhile [1]. [6] Examiner insight: Under-consumption needs a reason. State what the buyer leaves out of the decision.

7. (a) Excess = 12,000 − 9,000 = 3,000 [1]. 3,000 ÷ 9,000 × 100 = 33.3% [1]. (b) Consumers may underestimate the harm to themselves, because of poor information or habit [1]. They compare price with private benefit and ignore the full cost to health and to others [1]. Demand is therefore higher than it would be if the full cost were counted, so too many resources go to the product [1]. [5] Examiner insight: The base of a percentage must match the question. Here it is the socially best level, not the market level.

8. (a) Fare: (52 − 40) ÷ 40 × 100 = 30% rise [1]. Passengers: (5,000 − 3,500) ÷ 5,000 × 100 = 30% fall [1]. (b) Before: (40 − 30) × 5,000 = 50,000 [1]. After: (52 − 30) × 3,500 = 77,000 [1]. (c) The firm has no rivals, so it can raise the fare without losing all its customers [1]. Output falls while profit rises, so consumers pay more for less [1]. Resources are under-used on this service relative to what passengers would buy at a competitive fare, which is misallocation [1]. [7] Examiner insight: Mention both price and output, and say why the firm can do this (barriers to entry or no substitutes).

9. (a) Unemployed = 360 − 90 = 270 [1]. 270 ÷ 360 × 100 = 75% [1]. (b) Geographical immobility: workers may not move to jobs in other regions because of family ties or high housing costs [1], so vacancies elsewhere stay unfilled [1]. Occupational immobility: quarry skills may not match the jobs on offer [1], so workers need retraining before they can take them, and some stay unemployed [1]. [6] Examiner insight: Keep the two types separate. Writing “they cannot move” for both loses the distinction.

10. (a) Shortfall = 3,200 − 2,400 = 800 [1]. 800 ÷ 3,200 × 100 = 25% below [1]. (b) Excess = 7,800 − 6,000 = 1,800 [1]. 1,800 ÷ 6,000 × 100 = 30% above [1]. (c) Good M: too few resources go to it, so benefits to society are lost [1], for example in health or skills [1]. Good N: too many resources go to it, so units are produced where social cost exceeds social benefit [1], and those resources could produce goods worth more [1]. [8] Examiner insight: Link each figure to a direction (too little or too much) and to the opportunity cost of misallocated resources.

11. Points for the view: prices signal what consumers want [1]; competition lowers costs [1]; profit directs resources to the most wanted goods [1]. Points against: public goods are not provided [1]; external costs and demerit goods lead to over-consumption [1]; merit goods and external benefits lead to under-consumption [1]; monopoly power restricts output [1]. Judgement: the view holds for goods that can be sold to individuals in competitive markets, but “always” is too strong because the market fails in the areas above [1]. [8] Examiner insight: “Discuss” needs a final judgement that picks a side and gives a reason. Two lists with no conclusion are incomplete.

Where marks are usually lost

• Giving only one feature of a public good. Both non-excludable and non-rival are needed.
• Using “social cost” when only the external part is asked for.
• Describing under-consumption of a demerit good or over-consumption of a merit good.
• Treating a lack of money as the only reason for under-consumption of merit goods.
• Not saying why a monopoly can raise price (barriers to entry, no close substitutes).
• Writing a percentage with the wrong base.
• Leaving out units and working in a calculation.
• Ending an evaluation question without a judgement.

Next steps

• Review the revision notes and the study guide.
• Visit the Cambridge IGCSE Economics hub and the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Cambridge IGCSE Economics 0455, syllabus for examination in 2026, Version 2, published by Cambridge University Press & Assessment (Cambridge Assessment International Education), sections 2.9 and 2.10.