2.9

Market failure

Cambridge IGCSE Economics (0455)  · Unit 2: The allocation of resources  · 9 flashcards

Market failure is topic 2.9 in the Cambridge IGCSE Economics (0455) syllabus , positioned in Unit 2 — The allocation of resources , alongside Microeconomics and macroeconomics, The role of markets and Demand.  In one line: Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a loss of economic welfare. An example is pollution from a factory, where the cost to society isn't reflected in the factory's production costs.

This topic is examined in Paper 1 (multiple-choice) and Paper 2 (structured questions, including data-response items).

The deck below contains 9 flashcards — 5 definitions, 2 key concepts and 2 application cards — covering the precise wording mark schemes reward.  Use the 5 definition cards to lock down command-word answers (define, state), then move on to the concept and application cards to handle explain, describe and compare questions.

Key definition

'market failure' and provide an example

Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a loss of economic welfare. An example is pollution from a factory, where the cost to society isn't reflected in the factory's production costs.

Questions this Market failure deck will help you answer

Definition Flip

Define 'market failure' and provide an example.

Answer Flip

Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a loss of economic welfare. An example is pollution from a factory, where the cost to society isn't reflected in the factory's production costs.

Key Concept Flip

Explain the difference between an 'external cost' and an 'external benefit'.

Answer Flip

An external cost is a negative impact on third parties from production or consumption (

Example: air pollution). An external benefit is a positive impact on third parties (. education leading to a more skilled workforce).
Definition Flip

What is a 'public good' and why does the free market often fail to provide it adequately?

Answer Flip

A public good is non-excludable (everyone benefits, even if they don't pay) and non-rivalrous (one person's consumption doesn't diminish availability to others). The free market under-provides public goods due to the free-rider problem.

Definition Flip

Give two characteristics of a 'merit good'.

Answer Flip

Merit goods are goods or services that are considered to be beneficial for individuals and society but are under-consumed due to information failure or individuals undervaluing the benefit. Examples include education and healthcare.

Definition Flip

Explain the concept of a 'demerit good' and give an example.

Answer Flip

A demerit good is a good or service that is considered to be harmful to individuals and society but is over-consumed due to information failure or individuals undervaluing the harm. An example is cigarettes.

Definition Flip

Describe 'information failure' and how it can lead to market failure.

Answer Flip

Information failure occurs when consumers or producers lack complete information to make informed decisions. This can lead to over- or under-consumption of goods and services, causing a misallocation of resources.

Key Concept Flip

What is 'monopoly power' and how does it relate to market failure?

Answer Flip

Monopoly power is the ability of a firm to control prices and output in a market. It can lead to market failure because monopolies often restrict output and charge higher prices than in a competitive market, reducing consumer surplus and overall welfare.

Key Concept Flip

Explain how a government subsidy can be used to correct market failure related to a merit good.

Answer Flip

A subsidy lowers the cost of production, leading to lower prices for consumers. This encourages increased consumption of the merit good, bringing the level of consumption closer to the socially optimal level.

Key Concept Flip

How can the government use indirect taxes to correct market failure associated with demerit goods?

Answer Flip

Indirect taxes, such as excise duties, increase the price of demerit goods. This discourages consumption, reducing the negative externalities associated with these goods, and shifting consumption towards the socially optimal level.

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2.8 Market economic system 2.10 Mixed economic system

Key Questions: Market failure

Define 'market failure' and provide an example.

Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to a loss of economic welfare. An example is pollution from a factory, where the cost to society isn't reflected in the factory's production costs.

What is a 'public good' and why does the free market often fail to provide it adequately?

A public good is non-excludable (everyone benefits, even if they don't pay) and non-rivalrous (one person's consumption doesn't diminish availability to others). The free market under-provides public goods due to the free-rider problem.

Give two characteristics of a 'merit good'.

Merit goods are goods or services that are considered to be beneficial for individuals and society but are under-consumed due to information failure or individuals undervaluing the benefit. Examples include education and healthcare.

Explain the concept of a 'demerit good' and give an example.

A demerit good is a good or service that is considered to be harmful to individuals and society but is over-consumed due to information failure or individuals undervaluing the harm. An example is cigarettes.

Describe 'information failure' and how it can lead to market failure.

Information failure occurs when consumers or producers lack complete information to make informed decisions. This can lead to over- or under-consumption of goods and services, causing a misallocation of resources.

More topics in Unit 2 — The allocation of resources

Market failure sits alongside these Economics decks in the same syllabus unit. Each uses the same spaced-repetition system, so progress in one informs the next.

2.1 Microeconomics and macroeconomics

9 flashcards
2.2 The role of markets

8 flashcards
2.3 Demand

9 flashcards
2.4 Supply

9 flashcards
2.5 Price determination

9 flashcards
2.6 Price elasticity of demand

10 flashcards
2.7 Price elasticity of supply

9 flashcards
2.8 Market economic system

9 flashcards
2.10 Mixed economic system

10 flashcards

Cambridge syllabus keywords to use in your answers

These are the official Cambridge 0455 terms tagged to this section. Mark schemes credit responses that use the exact term — weave them into your answers verbatim rather than paraphrasing.

market failure externality external cost external benefit public good merit good demerit good information failure monopoly power

Key terms covered in this Market failure deck

Every term below is defined in the flashcards above. Use the list as a quick recall test before your exam — if you can't define one of these in your own words, flip back to that card.

'market failure' and provide an example
'public good' and why does the free market often fail to provide it adequately
Give two characteristics of a 'merit good'
Explain the concept of a 'demerit good' and give an example
Describe 'information failure' and how it can lead to market failure

How to study this Market failure deck

Start in Study Mode, attempt each card before flipping, then rate Hard, Okay or Easy. Cards you rate Hard come back within a day; cards you rate Easy push out to weeks. Your progress is saved in your browser, so come back daily for 5–10 minute reviews until every card reads Mastered.