A Level Economics AQA Practice Exam

What typically leads to market failure?

1. Efficient allocation of resources

2. Regulation and government intervention

3. Under-allocation of resources for public goods

4. Increased market competition

The correct answer is: Under-allocation of resources for public goods

The statement regarding the under-allocation of resources for public goods accurately reflects a common cause of market failure. Public goods are characterized by being non-excludable and non-rivalrous, which means that individuals cannot be effectively excluded from use, and one person's use of the good does not diminish its availability to others. As a result, private markets often struggle to produce these goods efficiently because there is little incentive for firms to provide them, leading to an overall shortage in society. This under-allocation manifests because, without government intervention, essential services like defense, public parks, or street lighting may not be provided in sufficient quantities, if at all. The result can be significant societal costs and unmet needs, illustrating how the market fails to deliver optimal outcomes when it comes to public goods. The other choices relate to situations that may not directly indicate market failure in the same way. Efficient allocation of resources typically suggests that the market is functioning well, while increased competition usually enhances efficiency and benefits consumers. Regulation and government intervention can sometimes correct market failures, rather than lead to them.