ZIMSEC A Level · Economics · Form 5
Types of market failure
- Externalities: costs or benefits to third parties. Negative (pollution from mining, congestion) leads to overproduction; positive (education, vaccination) leads to underconsumption.
- Public goods: non-excludable and non-rival (street lighting, national defence); the free-rider problem means markets underprovide them.
- Merit goods (education, healthcare) are underconsumed; demerit goods (tobacco, alcohol) are overconsumed, often due to information failure.
- Monopoly power, inequality, and factor immobility.
Government intervention
- Indirect taxes on demerit goods and negative externalities; subsidies for merit goods.
- Maximum prices (price ceilings) can cause shortages and black markets; minimum prices (price floors) can cause surpluses.
- Regulation, legislation and fines (EMA environmental regulations).
- State provision of public and merit goods.
- Tradable pollution permits.
Government failure
Intervention can make outcomes worse: poor information, unintended consequences (price controls causing empty shelves), high administrative costs, and corruption.
Worked example: The equilibrium price of maize meal is US$8 and the government sets a maximum price of US$6. Explain the likely outcome.
At US$6, quantity demanded exceeds quantity supplied → shortages, queues and parallel (black) markets; producers may cut supply.
Exam tip: Use diagrams for taxes, subsidies and price controls, showing the welfare loss triangle.
Check yourself
- Give two characteristics of public goods.
- How does an indirect tax correct a negative externality?
- Name one cause of government failure.
Show answers
- Non-excludable and non-rival.
- It raises the price, reducing output towards the socially optimal level and internalising the external cost.
- Any one: imperfect information, unintended consequences, administrative costs, political motives, corruption.
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