Edexcel AS Economics

Edexcel AS Economics

5 Market failure

For the supported multiple-choice questions 1–3, there is 1 mark for the correct answer and a further 3 marks for the explanation. To support your answer, your explanation should include definitions, reasons, application to the context and annotated diagrams.

1Correct answer:Aare under-provided in a free market economy.

2Correct answer:CThere is asymmetric information.

3Correct answer:DAn example of government failure.

4(a)Definition of opportunity cost. Possible examples include new hospitals, new infrastructure, e.g. roads, rail links. [4]

(b)Definition of private costs. Examples include tuition fees, books, internet connection, living costs, transport costs. [6]

(c)Definitions of private and external benefits. Private benefits include higher potential earnings, more job satisfaction. External benefits include higher economic growth, higher levels of employment, higher profits for firms, increased tax revenue for the government. External benefits diagram including welfare triangle. [up to 8 marks]

Evaluation: uncertainty of value of private benefits, e.g. because high graduate unemployment, type of degree. Difficult to quantify external benefits in monetary terms, danger of brain drain, impact of improvements in university education in other countries. [up to 6 marks for evaluation]

(d)Case for increased tuition fees:

high private benefits
incentive for universities to be more responsive to the market, e.g. by providing more places on courses which are in high demand
the universities can use the revenue to improve facilities, employ better quality staff
government will have more resources to reduce the budget deficit or to spend in other areas in the economy
students can demand more contact time [up to 8 marks]

However:

increased tuition fees might deter people from applying to university
they might lead to significant decline in applications from low-income families
some universities might go bankrupt if they fail to attract enough students
the range of courses might be reduced if they are uneconomic
[up to 6 marks for evaluation]

(e)Definition of price elasticity of demand.

Calculation of PED = 10 ÷ 166.67 = 0.06.

This suggests that demand is price inelastic, i.e. the price change has caused a less than proportionate fall in quantity demanded.

However, elasticity of demand may vary between different income groups and from different countries. Further, the PED may change over time. [10]

5(a)If stocks are available, e.g. in the case of non-perishable food such as wheat, rice. [6]

(b)Diagram showing both rightward shift in demand curve (caused by rising population, rising real incomes, use of food crops for biofuels) and leftward shift of supply curve (caused by extreme weather events, global warming). [up to 8 marks]

Evaluation in terms of extent of shift in each curve; elasticities of supply and demand; whether or not these are short-term or long-term factors). [up to 6 marks for evaluation]

(c)Definition of cross elasticity of demand; use of extract to note that wheat and oil are complements so that cross elasticity of demand will be negative. The value of XED will depend on how close the products are as complements. Also, this may change over time, e.g. if farmers could become less dependent on oil. [6]

(d)Typically, the demand for food is price inelastic. Therefore, expenditure on food will increase as a proportion of household expenditure, leaving less available for other goods and services so demand for these may fall. This could be illustrated by a supply and demand diagram.

However, consumers might respond by buying cheaper food products or shopping in cut-price supermarkets or by drawing on savings to maintain their existing lifestyles. [8]

(e)Definition of a buffer stock scheme; diagram to illustrate a buffer stock scheme.

Analysis of how a buffer stock scheme could reduce price fluctuations. [up to 8 marks]

Evaluation: reasons why the buffer stock scheme might not work, e.g. if floor price is set too high, if not all producers are members of the scheme, if some members cheat, or if it becomes too expensive to operate. [up to 6 marks for evaluation]