5

Market failure

Exam practice (pp. 5051)

1 An external cost of driving a car is the cost endured by third parties, e.g. air
pollution, noise pollution, congestion and visual pollution caused by a traffic jam.
2 Stakeholders of the congestion charge include: pedestrians, car drivers, local
residents, local businesses, bus drivers and people who work within the area.
Pedestrians and local residents
Advantages include:
l It is easier to cross the road and there should be less air pollution due to the
decreased amount of traffic.
l Public transport, e.g. buses, should be able to run efficiently without traffic
jams.
Disadvantages include:
l Local residents face higher costs of driving into central London.
l Knock-on effects on local residents if businesses see a decline in trade due to
the congestion charge.
l Social disadvantages as friends and family will find it more difficult to visit
those residents living in central London.
Car drivers
Advantages include:
l If they are prepared to pay the congestion charge then they should be able to
travel more quickly and easily in the central business district (CBD) as there will
hopefully be less congestion.
l Parking within the CBD should be easier due to the decreased number of cars.

Disadvantages include:
l If drivers need to access central London by car the private costs to the driver
will increase.
l The congestion charge is a regressive tax and will affect those on a low income
more than those on a high income.
l The areas outside central London may become more congested as drivers
choose not to enter the CBD, and park outside.
Local businesses
Advantages include:
l Less air pollution and noise pollution.
l The area may become more attractive to users of public transport and this may
increase their business.
Disadvantages include:
l Local businesses may have fewer customers as people avoid the area due to
increased costs of accessing the area.
l They may lose business to businesses located outside of central London.
l They may face higher transport costs for the goods and services they require
for their business.

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People who work within the area

Advantages include:
l Less congestion in central London.
l Less air pollution and less noise pollution.
l Public transport e.g. buses should be able to run efficiently without traffic
jams.
Disadvantages include:
l Workers may face higher costs of driving into central London.
l Their journey to work may become longer if they need to drive and then take
public transport.
Award a maximum of 3 marks if impact on only one stakeholder discussed.
Award a maximum of 4 marks if discussion is one-sided.
Award 56 marks if impact on two stakeholders is discussed in a balanced
manner, i.e. an advantage and disadvantage.
3 The congestion charge may be a short-term solution because:
l Higher costs have decreased the number of cars entering the CBD.
l The congestion charge raises revenue for the government.
l Fines imposed for non-payment of the charge may deter people from not
paying the charge.
The congestion charge is therefore successful in the short term.
The congestion charge may be a long-term solution because:
l The short-term success may lead to a long-term solution as people change
their driving habits and may choose not to drive into central London.
l The congestion charge may make people choose public transport over driving.
l There may be a cultural shift away from cars to public transport and cycling
which cause fewer external costs.
l Awareness is raised about the negative impact of driving cars into central
London and in the long term people choose greener methods of transport.
On the other hand the congestion charge may not be effective in changing
peoples driving habits and drivers may get used to paying the charge.
Drivers may visit shops and businesses outside of central London instead of within
the CBD. This may result in congestion in these areas and a decrease in sales
revenue for shops within the CBD.
Award 12 marks for a brief answer that shows limited understanding.
Award 35 marks for a balanced discussion about whether the congestion charge
is a short- or long-term solution. There may be a lack of detail and/or use of
relevant examples.
Award 67 marks for a detailed discussion about whether the congestion charge
is a short- or long-term solution. There is appropriate use of terminology and use
of examples. There must be a reasoned judgement made for full marks.
A maximum of 5 marks if only short-term or long-term impacts of a congestion
charge are considered.

Activity (p. 51)

Students own answers which may vary between countries. Examples may include:
l compulsory use of seat belts in cars
l compulsory schooling for a number of years

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 5 Market failure

l compulsory vaccinations
l restrictions on where people can smoke
l ban on talking on mobile phones or eating and drinking whilst driving
l restrictions on where alcohol can be purchased
l minimum age for alcohol, cigarettes and gambling
l minimum age for driving
l licence for ownership of guns.

Activity (p. 53)

The aim of the activity is to encourage students to think critically to assess the
effectiveness of the measures taken by the government in students home countries.
Examples of measures may include:
l laws to restrict legal age of purchasing cigarettes
l laws governing where people can smoke
l public health warning on cigarette packets
l shocking images on cigarette packets showing potential effects of smoking
l education programmes in schools informing young people about the negative
impact of smoking
l tax on cigarettes to increase the purchase price in an attempt to decrease sales.

Activity (p. 54)

Examples of market failure
Negative externalities:
Oil spill caused 11 deaths to workers and environmental damage to the ocean which
caused: loss of marine creatures, damage to natural habitats and damage to fish.
Endangered species of turtles and sea horses live in the area and therefore measures
had to be taken to ensure their survival.
Local businesses suffered loss of business, e.g. fishermen could no longer catch fish,
tourism in the area decreased and therefore hotels, restaurants and local attractions
experienced a loss of business and therefore employees lost their jobs. The increase
in unemployment may cause a decrease in spending on goods and services in shops
and businesses in the area.
Economic concepts include: scarcity of resources, limited resources, social costs
of extracting oil are greater than the social costs because of damage to the
environment. There are spillover effects to third parties of extracting oil and therefore
there is market failure.
Demand for goods and services causes a demand for workers (demand for labour is
a derived demand).

Exam practice (p. 54)

1 Social costs of economic growth in Sri Lanka include:
l External costs to society are caused by the increased construction of roads,
hotels and guest houses.
l Construction causes the destruction of the natural habitats of wildlife and loss
of green spaces.
l The increased use of fertilisers and pesticides may further impact on the
natural environment in a negative way.
l Private costs of building and construction of roads, hotels, fertilizers and pesticides.

Social benefits of economic growth in Sri Lanka include:

l There are external benefits of increased employment and therefore income.
l As incomes rise more can be spent in local shops and businesses, which may
lead to increased standards of living.

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 5 Market failure

l The increase in tourism increases the exports of Sri Lanka and the income of
local shops and businesses, which will increase economic growth.
l Private benefits of income obtained from tourism.
l Private benefits of increased trade due to better access to roads and improved
transport links.
l Private benefits to individuals of income from employment.

Award 1 mark for each social cost and benefit identified to a maximum of 4.
2 The long-term benefits of economic growth include:
l There is increased income for individuals and businesses.
l The increase in income can be spent on goods and services or saved and an
increase in savings can lead to an increase in investment.
l This may lead to increased standards of living for a wide range of people.

The long-term costs of economic growth include:

l There is a negative impact on the environment in terms of loss of natural
vegetation and wildlife habitats.
l The development of hotels and guest houses may bring too many people into
the area, which requires sewerage and disposal of the excess waste produced.
l An increase in tourism may damage the local culture as businesses try to cater
for foreign tastes.
Overall the increase in living standards may outweigh the damage to
environment because many people may be able to improve their quality of life.
Development may be managed in a sustainable way.
Award 12 marks for a brief answer that shows limited understanding.
Award 35 marks for a balanced discussion about whether the benefits of
economic growth outweigh the costs. There may be a lack of detail and/or use
of relevant examples.
Award 67 marks for a detailed discussion about whether the benefits of
economic growth outweigh the costs. There is appropriate use of terminology and
use of examples. There must be a reasoned judgement made for full marks.

Activity (p. 55)

Discussions are likely to be around the following:
l Dental health check-ups = positive externalities
l Art museums = positive externalities
l Consumption of soda/fizzy drinks = negative externalities
l Overuse of antibiotics = negative externalities
l A person driving whilst smoking or eating = negative externalities
l Family planning clinics = positive externalities

Exam practice (p. 57)

1 Social benefits are the sum of private benefits and external benefits of an
economic activity. This means that social benefits are the total benefits arising
from an economic activity. This includes private benefits and benefits which
arise to society at large or third parties who benefit indirectly from the economic
activity.
2 The short-term private costs include:
l cost of funding hospitals and clinics
l cost of training health care workers
l cost of medicines and medical equipment
l opportunity cost of spending on health care as the money spent on health care
could be spent on e.g. education or public transport.

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The long-term social benefits include:

l improved health of population (private benefits) which should decrease costs
of health care in the future
l increased life expectancy and decreased child mortality
l improved productivity of workers (due to less absenteeism) and therefore the
overall output of the workforce
l the resulting increase in the amount of goods and services produced and
therefore increased economic growth.
Conclusion
The social benefits outweigh the short-term private costs as although there
are opportunity costs in the short term of increased health spending, the long-
term benefits to society and the economy of increased productivity leading to
economic growth outweigh the short-term costs.
Award 12 marks for a brief answer that shows limited understanding.
Award 35 marks for a balanced discussion about the short-term private costs
and the long-term social benefits of investing in health care. There may be a lack
of detail and/or use of relevant examples.
Award 67 marks for a detailed discussion about the short-term private costs and
the long-term social benefits of investing in health care. There is appropriate use
of terminology and use of examples. There must be a reasoned judgement made
for full marks.

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