OCR A Level Economics: The environment and market failure (H460) – Revision Notes

These notes condense the topic Environment in Component 1, Microeconomics, of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. The whole specification is A Level and no content is labelled AS or Extension. Full explanations and worked examples are in the study guide. All figures here are invented and illustrative. Find the OCR Economics hub, the printable checklist and the free diagnostics to check progress.

Key definitions

Term	Definition to learn
Provider of resources	The environment supplies raw materials, energy, water and food
Provider of amenities	The environment gives enjoyment, health and recreation, such as landscape and clean air
Absorber of waste	Air, water and land take in and break down waste, up to a limit
Externality	A cost or benefit that lands on someone outside the transaction and is left out of the price
MPC, MEC, MSC	Marginal private, external and social cost; MSC = MPC + MEC
MPB, MEB, MSB	Marginal private, external and social benefit; MSB = MPB + MEB
Environmental Kuznets curve	An inverted U: degradation per head rises with income per head, peaks, then falls
Sustainable development	Meeting people’s needs today in a way that leaves future generations able to meet their own
Decoupling	Output growing while environmental harm stays level or falls
Tradable pollution permit	A tradable right to emit a set amount, with the total capped

The three functions

• Resources: renewable (forests, fish) and non-renewable (fossil fuels, minerals).
• Amenities: unpriced enjoyment of landscape, air and wildlife.
• Waste absorption: limited by assimilative capacity, beyond which harm appears.
• The functions conflict, so using one has an opportunity cost in the others.
• Market failure link: the environment is largely unpriced, so users ignore the cost they impose.

Diagrams in words

Case	Curve that shifts	Result at the market output
Negative externality of production	MSC above MPC	MSC above MSB: overproduction
Negative externality of consumption	MSB below MPB	MSB below MSC: overconsumption
Positive externality of production	MSC below MPC	Output too low
Positive externality of consumption	MSB above MPB	Consumption too low

• Market output: where MPB = MPC. Social optimum: where MSB = MSC.
• Welfare loss: the triangle bounded by MSC, MSB and the market output, covering the excess (or shortfall) of output.
• Label both axes (price or cost, and quantity), every curve, the market point, the social point and the triangle.
• Depletion: future generations bear an external cost, so use is too fast.

Method in steps: externality calculation

1. Write the equations for MPB and MPC.
2. Add the constant MEC to MPC (or take it from MPB) to get MSC (or MSB).
3. Market: set MPB = MPC.
4. Optimum: set MSB = MSC.
5. Welfare loss = ½ × MEC × (market quantity − optimum quantity).
6. Tax to reach the optimum = MEC per unit. Revenue = MEC × optimum quantity.

Reminder (study guide example). MPB: P = 120 − 2Q, MPC: P = 20 + 2Q, MEC = £20. Market Q = 25 at £70. Optimum Q = 20 at £80. Welfare loss £50. Tax revenue £400.

Environmental Kuznets curve

• Shape: inverted U. Degradation per head against income per head.
• Reasons it may turn: scale effect up, then a composition effect (towards services), a technique effect (cleaner technology), higher demand for a clean environment and stronger regulation.
• Turning point of D = a + bY − cY²: Y = b ÷ 2c.
• Evaluation: stronger for local pollutants than global ones; pollution may be exported; damage may be irreversible before the turn; it describes a pattern, not a law; policy can bring the turn earlier.

Does growth cause degradation and limit sustainable development?

For	Against
More output uses more resources and creates more waste	Growth funds clean technology and enforcement
Non-renewable stocks are finite	Higher prices push substitutes and recycling
Poor economies may rely on cheap, dirty energy	Services and efficiency can decouple growth from harm
Damage to ecosystems may be irreversible	New reserves and better extraction

• Emissions growth factor = (1 + GDP growth) × (1 − fall in emissions per unit of GDP).
• Break-even fall in intensity = 1 − 1 ÷ (1 + GDP growth).
• Judgement depends on the type of growth, the resource, technology, policy and time horizon.

Policies at a glance

Policy	How it works	Main strength	Main limit
Indirect tax	Raises price to match MEC	Uses the price mechanism and raises revenue	MEC hard to measure; regressive; weak if demand is inelastic
Subsidy	Cuts the cost of clean output	Encourages cleaner choices	Costly; may reward what would happen anyway
Regulation, environmental standards	Legal limits and bans	Certain and fast	Monitoring cost; no incentive to beat the limit
Tradable permits	Cap on total, trade between firms	Cuts the total at the lowest cost	Cap may be set too high; hot spots; monitoring
Information provision	Labels, campaigns, reporting	Cheap and supportive	Slow and hard to measure
Government expenditure	Clean-up, conservation, research, transport	Acts where markets will not	Opportunity cost; may be badly targeted
Public and private partnership	Shared finance, risk and running	Private capital and expertise	Long contracts; value for the public

• Elasticity: percentage change in quantity = PED × percentage change in price.
• Regulation deterrence: expected fine = probability of detection × fine. It must exceed the compliance cost.
• Permits: firms trade until marginal abatement costs are equal. The permit price equals that common marginal cost.

Reminder (permits, study guide example). Required cut 100 tonnes. Marginal abatement cost: X = 0.2q, Y = 0.8q. Equal cuts of 50 cost £1,250 in total. With trading, X cuts 80 and Y cuts 20 at a permit price of £16, and the total cost falls to £800.

Method for a policy evaluation answer. State how the policy changes incentives, then show the effect on output or pollution with a diagram or figures. Give one strength and one limit, each with a reason. Compare with an alternative if the question asks which is best. End with a judgement tied to the pollutant, the size of the external cost and the level of government that can act.

Levels. Local: city zones and planning rules. National: taxes and standards. Regional: shared schemes across neighbouring countries. Global: treaties facing free riding and weak enforcement.

Evaluation checklist

• Does the policy suit the pollutant (local or global, and how harmful)?
• Is the cost to firms, households and the government acceptable? Who bears it?
• Can it be measured, monitored and enforced?
• How fast does it work, and could it have side effects such as relocation?
• Which level can act, and does it need agreement?

Quick self-test

1. Name the three functions of the environment.
2. A river absorbs 60 tonnes of waste a year. Output is 48 tonnes, rising 10% a year. In which year does it exceed capacity?
3. MPB: P = 50 − Q. MPC: P = 10 + Q. MEC is £6 a unit. Find the market quantity and price, the optimum quantity and the welfare loss.
4. Find the tax revenue if the tax in question 3 equals MEC.
5. D = 4 + 1.8Y − 0.05Y². Find the income at the turning point and the degradation there.
6. GDP grows 4% and emissions per unit of GDP fall 5%. Find the change in emissions.
7. What fall in emissions per unit of GDP keeps emissions constant when GDP grows 4%?
8. PED is −0.5. A tax raises price 8%. Find the change in quantity. What rise cuts quantity 10%?
9. A firm faces compliance cost £600, a 25% chance of inspection and a fine of £1,800. Does it comply? What fine deters it?
10. Firms A and B must cut 50 tonnes in total. Marginal abatement cost: A = 0.4q, B = 1.6q. Find the cuts and permit price with trading.
11. Give one reason the environmental Kuznets curve may not apply to carbon dioxide.

Answers

1. Provider of resources, provider of amenities, absorber of waste.
2. 48 × 1.1² = 58.1 and 48 × 1.1³ = 63.9. It exceeds 60 in the third year.
3. Market: 50 − Q = 10 + Q gives Q = 20, P = £30. MSC = 16 + Q. Optimum: 50 − Q = 16 + Q gives Q = 17. Welfare loss = ½ × 6 × 3 = £9.
4. 6 × 17 = £102.
5. Y = 1.8 ÷ 0.1 = 18. D = 4 + 32.4 − 16.2 = 20.2.
6. 1.04 × 0.95 = 0.988, so emissions fall 1.2%.
7. 1 − 1 ÷ 1.04 = 3.85%.
8. −0.5 × 8 = −4%. A 10 ÷ 0.5 = 20% rise.
9. Expected fine = 0.25 × 1,800 = £450, below £600, so it may not comply. The fine must exceed 600 ÷ 0.25 = £2,400.
10. Set 0.4qA = 1.6qB with qA + qB = 50: qA = 40, qB = 10, price £16. Total cost falls from £625 (equal cuts of 25) to £400.
11. It is a global pollutant, so one country can import goods made elsewhere. Rising income at home does not stop world emissions.

Where marks are usually lost

• Placing MSC beneath MPC, or the optimum to the right of the market output, for an external cost.
• Unlabelled diagrams with no market point, social point or welfare triangle.
• Using price when the question asks for quantity, or the reverse.
• Stating the EKC shape with no reasons for the turn.
• Claiming growth must harm, or must help, the environment with no weighing of both.
• Listing policies and their definitions without evaluating effectiveness at the level the question names.
• Saying a tax always works without considering elasticity.
• Forgetting that a permit scheme fixes the quantity, not the price.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021, Component 1 content, area of study Market failure and government intervention, topic Environment. Practice questions: see the practice set.