A Level Economics AQA Practice Exam

Which scenario exemplifies market failure?

1. Efficient resource allocation by the government

2. Failure to produce enough public goods

3. Overproduction of private goods

4. Stable pricing in a competitive market

The correct answer is: Failure to produce enough public goods

The scenario that best exemplifies market failure is the failure to produce enough public goods. Public goods have characteristics such as non-excludability and non-rivalry, meaning that individuals cannot be effectively excluded from their use, and one person's consumption does not reduce the amount available for others. When the market fails to provide adequate public goods, such as national defense, public parks, or street lighting, it results in underproduction since private firms are unwilling to produce these goods at optimal levels due to the difficulty in charging consumers. This underproduction leads to inefficiencies and unmet societal needs, illustrating a clear instance of market failure. In contrast, efficient resource allocation by the government represents a situation where market failure is being corrected rather than exemplified. Overproduction of private goods could indicate inefficiencies, but does not specifically highlight how the market fails to provide essential services or goods. Stable pricing in a competitive market indicates a well-functioning market where supply and demand are balanced, thus not illustrating market failure.