AS econ session 2

A Level Economics – Year 1 (AS) Revision Workshop
Session 2
Market Failure and
Government Intervention
12
In this session we will consider under what circumstances free-market
conditions do not always lead to the optimum social outcome. We will
also look at how the Government intervenes to combat such market
failure and how this intervention is not always successful.

Market Failure
Complete Market Failure occurs when the market simply
does not supply products at all - we see "missing
markets“.
Partial Market Failure occurs when the market does
actually function but it produces either the wrong
quantity of a product or at the wrong price.
12
Remember – most market failures we discuss at A Level
Economics are ‘partial’.

Types of Market Failure:
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1 2 3 4 5
Example Example Example Example Example
Externalities
Fracking
(?)
Monopoly
power
Microsoft
Missing
Markets
Flood
defences
Information
failure
Estate
agents
Inequality
Wage
discrimination
for women

Externalities – AQA and OCR
13
Production - Positives Consumption - Negatives
Example (Positive) Example (Negative)
Where the marginal social cost of
production is lower than the
marginal private cost.
Lower transport costs for local
firms following construction of
new roads or airports
Where the marginal social
benefit of consumption is lower
than the marginal private
benefit.
Smokers ignoring the
harmful effects on others of
passive smoking

Externalities – All boards
13
Production – Negatives Consumption - Positives
Example (Negative) Example (Positive)
Where the marginal social cost of
production is greater than the
marginal private cost.
Air, land, river and noise
pollution which results from
factory emissions
Where the marginal social
benefit of consumption is greater
than the marginal private
benefit.
Benefits for society of free
public access to museums

Note:
AQA do not require diagrams for their AS
assessment on externalities. Edexcel and OCR do
require such diagrams. Activity 1 on page 20 tests
knowledge of these diagrams.
13

Succinct definitions!
A good that, if left to market forces, would be under-
consumed but generate positive externalities.
Merit Good
Remember, examiners will be expecting definitions of key
terms but keep them short whilst fully explanatory
13

Application – Museums charge for temporary
exhibitions
Since 2001, most
museums in the
UK do not charge
for entry
UK Govt felt that
museum
attendance
benefitted society
Attendance at
museums since
2011 has
increased by 50%
However, some
museums charge
admission fee for
temporary
exhibitions
Example: ‘Sunken
cities: Egypt's lost
worlds” at the British
Museum in 2016 will
cost £16.50 to enter
Museums argue
that this helps
cover the cost of
these exhibitions
13

Assess the arguments for and against museums
charging for entry to temporary exhibitions.
Argument for Argument against
Point
Explanation
Evidence
14
Throughout today’s sessions we are going to use the PEEEL acronym
to analyse and evaluate the case studies and questions presented.
PEEEL stands for:
POINT
EXPLANATION
EVIDENCE/EXAMPLE
EVALUATION
LINK BACK TO QUESTION

Assess the arguments for and against museums
charging for entry to temporary exhibitions.
Point
Explanation
Evidence
Improves the number or
quality of exhibitions
Charging brings in funds in
addition to Govt payments
Exhibitions (such as
Egyptian one) might not
happen otherwise
Reduces access to some
people
Cost of exhibition makes it
prohibitive to some
£16.50 cost
14

Firms will profit maximise. With little competition firms
are able to set higher prices. This leads to allocative
inefficiency.
Firm is not making the optimal use of scarce resources.
How does the level of competition within a market lead to
market failure and welfare loss?
14

CMA investigates merger between Celesio and Sainsbury’s Pharmacy
CMA to investigate the proposed
merger between Celesio AG
(owners of Lloyds Pharmacies)
and Sainsbury’s Pharmacies.
Celesio owns and runs 1542
outlets, whilst Sainsbury’s
has 277 pharmacies.
CMA has identified where 78 local
areas may be affected by the
merger, with some of the
pharmacies likely to close.
Pharmacies compete on the
quality and range of products,
with a primary factor including
their opening times.
14

Assess the view that the proposed merger between
Celesio AG and Sainsbury’s Pharmacies will INEVITABLY
lead to welfare loss.
Point
Explanation
Evidence
Reduced competition allows
firms to set higher prices
Firms seek to profit maximise –
less competition allows for
higher prices
78 Local areas that will be
affected including the closing
of stores
Merger could lead to
economies of scale
Economies of scale may come
from streamlined
administration or training
Firms will attempt to streamline and
keep some costs low – this could
benefit consumers
15

Is the BBC iPlayer a Public Good?
15

Non-rival – consumption by one person does not prevent
others from using it.
Non-excludable – providing it for free to TV Licence
holders makes it almost impossible to stop others using it
(especially in the UK)
Factors that suggest that the iPlayer service is a Public
Good
15
You have 1 minute to come up
factors that suggest that the
BBC iPlayer IS or IS NOT a
public good

Can prevent free-riding by using software.
Alternative could be provided by a private firm which
could charge – e.g. other catch-up services such as ITV
Hub.
Factors that suggest that the iPlayer service is NOT a
Public Good
15

Evaluate the view that the BBC iPlayer service should be a subscription-only facility,
like the services already supplied by firms such as Netflix and Amazon Prime.
Point
Explanation
Evidence
Evaluation
Subscriptions could improve
the quality of output
Increase in revenues for BBC
could be used to fund
improved or increased output
Increase in range and quality of
Netflix and Amazon illustrates
value of investment
Publically funded iPlayer acts
as incentive to others to
improve their service
Firms such as Netflix need to
invest and provide good quality
service to compete with iPlayer
Netflix now funds its own shows and
does not solely rely on providing
streaming of other networks’ output
16
However, if BBC programmes are
funded through public monies why
should repeats not be made available
for free?
It depends on view of improved
‘quality’. Are most new programmes
made in the USA?

Government Intervention to combat market
failure
16
S2
P2
Q2
S2
P2
Q2
P max
Q2 Q3
You have 1 minute complete
the 3 diagrams on page 16 to
illustrate the impact of the
stated Government
Intervention

Other possible government interventions:
Regulation Buffer Stocks
Supply-side to
impact on factor
immobility
16
E.g. Ofgem E.g. in agriculture
E.g. change A
level structure to
improve learning

Political
self-
interest
Policy
myopia
Regulatory
capture
Imperfect
information
Cost of
administration
and
enforcement
You have 1 minute to list 5
possible causes of Government
Failure
17
e.g. subsidies for
Electricity plants
using coal
e.g. Did govt do
enough to stop
banking crisis?

Application – UK Haulage Industry
Road Haulage
Association (RHA)
suggests that
there is a
shortage of
drivers
Shortage is
between 45 and
50 thousand
drivers Caused by
expensive test
for new drivers
(£3000)Test also has a
pass rate of
only 51%
RHA argues for
an injection of
Govt cash into
the industry
17

Assess the view that a £150 million subsidy to the haulage industry will
certainly lead to a welfare gain for the UK economy.
Argument for
Point
Explanation
Evidence
Evaluation
Link back
An effective haulage industry is key to efficiencies throughout the
economy.
Many sectors (e.g. retail, heavy plant) use the haulage industry
extensively. A more effective haulage industry reduces general
business costs.
Haulage industry is used to transport finished and part finished goods.
18
It depends on where the money is placed. Could government money
be better placed in improving infrastructure rather than skills of
drivers?
A large subsidy to the haulage industry would support numerous
sectors within the economy, reducing costs and leading to a welfare
gain for the UK economy.

Assess the view that a £150 million subsidy to the haulage industry will
certainly lead to a welfare gain for the UK economy.
Argument against
Point
Explanation
Evidence
Evaluation
Link back
The haulage industry does not need a subsidy but needs to be more
efficient in operations.
The change in the testing system is attempting to improve the quality
of drivers and should lead to long term efficiency gains.
Cost and rigour of test will ensure that only able drivers are used
within the industry.
18
However, there may be a short term period where there is a lack of
adequate drivers; some intermediate action may be required.
A subsidy does not bring a long term gain in welfare for the UK and
would only support an inefficient industry.

COP21 – Climate Change Summit
Suggested answers for ‘Question
Framing’ exercise on page 29 will
be available in the download of
this presentation.
18

Extension
activities
20

AS econ session 2

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