A Level Economics AQA Practice Exam

Which situation exemplifies complete market failure?

1. A single company dominating the market

2. A lack of public goods available

3. An oversupply of a product

4. A market with externalities

The correct answer is: A lack of public goods available

The situation that exemplifies complete market failure is characterized by the absence of adequate provision of public goods. Public goods are those that are non-excludable and non-rivalrous, meaning that they are available to all individuals, and one person's use of the good does not diminish another's ability to use it. In the case of public goods, if the market fails to supply them, it leads to a scenario where there is not enough investment in essential services like national defense, street lighting, or public parks, which ultimately results in significant societal issues. When public goods are not provided, it indicates a total breakdown in the functioning of a market that is supposed to allocate resources efficiently for the benefit of society. This situation stands in stark contrast to the other choices, which do not represent complete market failure. For example, a single company dominating the market often leads to monopoly power but does not imply that the market has completely failed to provide goods or services. An oversupply of a product might indicate inefficiencies in production or marketing but does not indicate that the market has failed to function altogether. Similarly, externalities—though they represent a market imperfection where costs or benefits are not reflected in market prices—do not equate to a complete lack of market