A Level Economics AQA Practice Exam

What characterizes partial market failure?

1. The market does not function at all

2. The wrong quantity of a good or service is produced

3. There is no demand for the good

4. All resources are allocated efficiently

The correct answer is: The wrong quantity of a good or service is produced

Partial market failure occurs when the market is able to function, but not efficiently, leading to the production of either too much or too little of a good or service. In this case, the correct characterization is that the wrong quantity of a good or service is produced. This implies that the market is not allocating resources in a way that maximizes overall welfare, which can result in inefficiencies. In this context, when the market produces the incorrect quantity of a good, it typically reflects a divergence between social benefits and private benefits, or between social costs and private costs. This misallocation can occur due to factors such as externalities, imperfect competition, or information asymmetries. Therefore, the market is partially failing because it is not achieving optimal outcomes despite still functioning to some degree. The other choices present scenarios that do not accurately describe partial market failure. When the market does not function at all, it indicates a complete market failure, while a lack of demand for a good suggests that it is not desired in the market, which is unrelated to the concept of partial market failure. Furthermore, efficient allocation of all resources would mean there is no market failure, either partial or complete.