OxfordAQA International GCSE Economics: Market failure and externalities (9214) – 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 follow specification references 3.1.6.1 and 3.1.6.2 in OxfordAQA International GCSE Economics (9214) specification, first teaching September 2023 and first examined May/June 2025. All places, firms and figures are invented and illustrative. Read the study guide first if a topic is new, and use the revision notes to check recall. See also the course hub, the printable checklist and the free 10-minute diagnostics.

Questions

1. Define market failure. [2]

2. A bakery in Country A sells a good with a private cost of 24 per unit. Its fumes impose an external cost of 9 per unit on neighbours.

(a) Calculate the social cost per unit. [2] (b) Express the external cost as a percentage share of the social cost, to 1 decimal place. [2]

3. For each activity, state whether it is a production or consumption externality, and whether it is positive or negative. [4]

(a) Smoke from a brick kiln drifts over a nearby village. (b) A homeowner fits outdoor lights, which makes the street safer for everyone. (c) A firm pays for staff courses, and several staff later join rival firms. (d) Customers leaving a bar late at night wake the local residents.

4. A quarry in Region Z (illustrative) sells stone in blocks of 1,000 tonnes. The external cost of dust is 12 per block. Values are in money units per block.

Block	Private benefit	Private cost
1	70	10
2	60	20
3	50	30
4	40	40
5	30	50

(a) Calculate the social cost of each block. [1] (b) State the output the quarry chooses, with a reason. [2] (c) State the socially best output, with a reason. [2] (d) Calculate the welfare loss on the block that is over-produced. [1] (e) A tax of 12 per block is introduced. Calculate the tax revenue. [1]

5. Explain why a negative externality leads to over-production. [4]

6. A government in Country B taxes a sugary drink, which raises its price by 12%. Price elasticity of demand is -0.5.

(a) Work out by how much quantity demanded changes, as a percentage. [2] (b) Explain why the tax may do little to cut consumption of a good with inelastic demand. [2]

7. A town in Region Y (illustrative) offers adult education courses. Each unit is 100 places and costs 20 to supply. Each unit gives an external benefit of 14.

Unit	Private benefit
1	60
2	48
3	36
4	24
5	12

(a) Calculate the social benefit of each unit. [1] (b) State the output chosen by the market, with a reason. [2] (c) State the socially best output, with a reason. [2] (d) Calculate the gain to society from the unit that is under-provided. [1] (e) A subsidy of 14 per unit is introduced. Calculate the total subsidy bill at the new output. [1]

8. Explain two costs of the misallocation of resources. [4]

9. Explain two methods the government could use to reduce the over-production of a good with a negative externality. [6]

10. “A tax is the best way to deal with a negative externality.” Evaluate this statement. [8]

Answers

1. Market failure is when the market system cannot [1] allocate resources efficiently, so resources are misallocated [1]. [2] Examiner insight: Answers tend to gain more when the definition names both resources and efficiency, since “the market fails” alone repeats the term.

2. (a) Social cost = private cost + external cost [1] = 24 + 9 = 33 per unit [1]. (b) 9 / 33 × 100 [1] = 27.3% [1]. [4] Examiner insight: Showing the division step makes it easier to credit your method if the final rounding is slightly off.

3. (a) Production, negative [1]. (b) Consumption, positive [1]. (c) Production, positive [1]. (d) Consumption, negative [1]. [4] Examiner insight: Ask who creates the effect, the maker or the user, before you decide between production and consumption.

4. (a) Social cost = private cost + 12, giving 22, 32, 42, 52, 62 [1]. (b) The quarry continues while private benefit is at least private cost [1]. Block 4 gives 40 against 40 and block 5 gives 30 against 50, so output is 4 blocks [1]. (c) Society continues while benefit is at least social cost [1]. Block 3 gives 50 against 42, but block 4 gives 40 against 52, so the best output is 3 blocks [1]. (d) Block 4: social cost 52 minus benefit 40 = 12 [1]. (e) 3 blocks × 12 = 36 [1]. [7] Examiner insight: State which columns you are comparing in each part, because the market and social answers use different ones.

5. Producers consider only their private costs [1]. The external cost is paid by third parties and is ignored [1]. Costs to the producer are below the full social cost, so supply is higher than society would choose [1]. Price is too low and output too high, so the good is over-produced [1]. [4] Examiner insight: A full chain, from ignored cost to output compared with the social best, usually reads better than a statement that “it is over-produced”.

6. (a) Percentage change in quantity = PED × percentage change in price [1] = -0.5 × 12 = -6% [1]. (b) Inelastic demand means consumers respond little to a price rise [1], so the quantity falls by a smaller percentage than the price rises, and consumption barely changes [1]. [4] Examiner insight: Giving the sign and the unit with your answer shows you have read the elasticity correctly.

7. (a) Social benefit = private benefit + 14, giving 74, 62, 50, 38, 26 [1]. (b) The market provides units while private benefit is at least 20 [1]. Unit 4 gives 24 and unit 5 gives 12, so output is 4 units [1]. (c) Society provides units while social benefit is at least 20 [1]. Unit 5 gives 26, so the best output is 5 units [1]. (d) Unit 5: social benefit 26 minus cost 20 = 6 [1]. (e) The subsidy cuts the cost to 6, so unit 5 (benefit 12) is bought. Output is 5 units, so the bill is 5 × 14 = 70 [1]. [7] Examiner insight: Part (e) depends on finding the new output first, so show that step before multiplying.

8. First cost: welfare is lost [1] because resources are used where they give less value than elsewhere, such as a good costing more to society than it is worth [1]. Second cost: third parties are harmed [1], for example by pollution, which they never agreed to [1]. [4] Examiner insight: Each cost needs a short explanation. Listing two words earns less than two developed points.

9. Tax: it raises the producer’s costs [1], so supply falls and output moves towards the social best [1]; a limit is that the right level is hard to find [1]. Regulation: the government sets a limit or bans an activity [1], which cuts output directly [1]; a limit is that enforcement costs money [1]. [6] Examiner insight: Linking each method to how it changes costs or behaviour is more convincing than naming it.

10. A tax raises the cost of production by the size of the external cost [1], so output falls towards the social best [1]. Strength: it also raises revenue that can fund clean-up or other services [1]. Strength: the firm can choose how to cut output, so the price mechanism still works [1]. Limit: the right tax is hard to set because external costs are hard to value [1]. Limit: with inelastic demand, consumption falls little [1]. Alternatives: regulation or education may be quicker, or may work together with a tax [1]. Judgement: a tax is often useful, but whether it is best depends on elasticity and how well the cost can be measured [1]. [8] Examiner insight: Evaluation answers tend to do better when the final judgement refers back to the conditions you have set out.

Where marks are usually lost

• Leaving out resources or efficiency from a definition of market failure.
• Adding the external cost to the wrong side of a table.
• Choosing the output at the first block where benefit exceeds cost rather than the last.
• Using the private column when the question asks about the social optimum.
• Treating a subsidy bill as if it were revenue.
• Forgetting the negative sign or the unit in an elasticity answer.
• Naming a policy without saying how it changes costs or behaviour.
• Giving one-sided answers to an evaluate question.

Next steps

• Review the revision notes and the study guide.
• Visit the course hub and the checklist.
• Try all the free 10-minute diagnostics at diagnostics.
• Book a free trial class at trial.

Official syllabus

OxfordAQA International GCSE Economics (9214), published by OxfordAQA, first teaching September 2023, first examined May/June 2025. Sections 3.1.6.1 and 3.1.6.2.