A Level Economics AQA Practice Exam

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What is the central premise of the concept of market failure?

The market always efficiently allocates resources
Government intervention is unnecessary for public goods
Markets fail to provide optimal outcomes for society
Econimics only applies in competitive markets

The correct answer is: Markets fail to provide optimal outcomes for society

The central premise of market failure is that markets, under certain conditions, do not lead to optimal outcomes for society. This can occur due to various reasons such as externalities, public goods, market power, and information asymmetries. When these market failures are present, the allocation of resources is inefficient, meaning that some individuals may benefit significantly while others may be worse off, leading to a suboptimal overall outcome for society. In situations like these, private market solutions may not suffice to address the issues—thus justifying the need for government intervention or alternative mechanisms to help correct these failures and improve societal welfare. Understanding market failure is crucial for economists when analyzing how well the economy functions and what roles government might play in certain situations to enhance outcomes.