Market and mixed economies, market failure and intervention
G3 Economics - syllabus K343, 2027
How market and mixed economies work, why markets fail, and the tools governments use to correct them.
- The market economic system
In a market economy, private firms and consumers decide what, how and for whom through the price mechanism.
- Market failure: the key terms
Market failure happens when the price mechanism allocates resources inefficiently, producing too much or too little.
- Causes and consequences of market failure
Markets over-produce goods with external costs, under-produce goods with external benefits, and fail to provide public goods.
- The mixed economic system
A mixed economy combines markets with government action, aiming to keep the strengths of markets while fixing their failures.
- Maximum and minimum prices
A maximum price below equilibrium causes a shortage; a minimum price above equilibrium causes a surplus.
- Drawing a minimum price
A minimum price set above equilibrium makes quantity supplied exceed quantity demanded, so there is a surplus that someone must buy, store or waste.
- Indirect taxes
A tax on each unit sold raises firms' costs, so supply falls, price rises and quantity falls.
- Subsidies
A subsidy lowers firms' costs, so supply rises, price falls and more of the good is consumed.
- Regulation, ownership, direct provision and quotas
Governments can also make rules, change who owns firms, supply goods themselves, or limit quantities.
- Put it together: Raise flu vaccination rates
Flu vaccination has large external benefits, but many people do not get vaccinated. The government wants to raise the vaccination rate. Compare four ways to do it.
What you will be able to do
I can define the market economic system.
Syllabus K343, 2.8.1. Definition of the market economic system
Taught in The market economic system
I can weigh the advantages and disadvantages of the market economic system.
Syllabus K343, 2.8.2. Arguments for and against the market economic system: advantages of the market economic system; disadvantages of the market economic system
Taught in The market economic system
I can define market failure.
Syllabus K343, 2.9.1. Definition of market failure
Taught in Market failure: the key terms
I can define public, merit and demerit goods, private, external and social costs and benefits, and monopoly.
Syllabus K343, 2.9.2. Definitions of terms associated with market failure: public goods, merit goods, demerit goods, private benefits, external benefits, social benefits, private costs, external costs, social costs, monopoly
Taught in Market failure: the key terms
I can explain how public goods, merit and demerit goods, externalities and monopoly power cause market failure.
Syllabus K343, 2.9.3. Causes of market failure: causes relating to public goods, merit goods, demerit goods, external costs and external benefits, abuse of monopoly power
I can explain what market failure leads to: too much or too little consumed, goods not provided, and high monopoly prices.
Syllabus K343, 2.9.4. Consequences of market failure: implications of misallocation of resources in relation to: the over-consumption of demerit goods and goods with external costs, the under-consumption of merit goods and goods with external benefits, the non-provision of public goods, restricted supply causing higher prices under a monopoly
I can define the mixed economic system.
Syllabus K343, 2.10.1. Definition of the mixed economic system
Taught in The mixed economic system
I can weigh the advantages and disadvantages of the mixed economic system.
Syllabus K343, 2.10.2. Arguments for and against the mixed economic system: advantages of the mixed economic system; disadvantages of the mixed economic system
Taught in The mixed economic system
I can explain, draw and evaluate the ways a government corrects market failure, from price controls and taxes to regulation and direct provision.
Syllabus K343, 2.10.3. Government intervention to address market failure: definitions, drawing and interpretation of diagrams, advantages and disadvantages of: maximum and minimum prices in product markets, indirect taxation, subsidies; definitions, advantages and disadvantages of: regulation, privatisation, nationalisation, direct provision of goods and services, quotas, e.g. for the extraction of natural resources
Taught in Maximum and minimum prices, Drawing a minimum price, Indirect taxes, Subsidies, Regulation, ownership, direct provision and quotas
The K343 syllabus does not require demand and supply diagrams for market failure itself. Diagrams are required for maximum and minimum prices, indirect taxes and subsidies.