Edexcel IGCSEEconomicsGeneral Applications10 Marks

Governments often intervene in markets to correct market failures.

(a)Explain what is meant by market failure.[2]
(b)With the aid of an example, explain how the existence of negative externalities can lead to market failure.[4]
(c)Discuss two ways a government could intervene to reduce the market failure caused by negative externalities.[4]

Mark scheme

Marking points from the official mark scheme. The mark or mark type is shown in brackets.

(a) B1 for inefficient allocation of resources / resources not allocated optimally
(a) B1 for leading to a loss of economic welfare / social costs not equal to social benefits
(b) B1 for definition of negative externality (cost imposed on third party)
(b) B1 for example (e.g., pollution from a factory)
(b) B1 for explanation of how market fails (private costs are less than social costs / overproduction at too low a price)
(b) B1 for implication (e.g., welfare loss, misallocation of resources)
(c) B1 for identifying a policy (e.g., taxation, regulation, permits)
(c) B1 for explaining how it works (e.g., tax increases costs, reducing supply/output)
(c) B1 for identifying a second policy (e.g., subsidies for cleaner alternatives, education/awareness campaigns)
(c) B1 for explaining how it works (e.g., regulation limits output/emissions)

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