In January and February 2014 there were calls for the UK Government to build more flood defences. Homes, factories and other resources were damaged and some destroyed by floods. It was argued that government intervention was needed in this case as there was evidence of market failure.

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

1. [1] Where the market forces of demand and supply
2. [1] do not achieve efficiency
3. [1] When social costs are greater than social benefits
4. [1] example of external cost e.g. monopoly or external benefit e.g. merit or public goods
5. [1] Regulation involves rules and laws.
6. [1] Firms may be banned
7. [1] from producing products that create external costs
8. [1] example such as water pollution
9. [1] Firms may be fined
10. [1] if they create external costs
11. [1] example e.g. air pollution
12. [1] Consumers may be banned from consuming products that create external costs
13. [1] or where there are high private costs
14. [1] some of which people are unaware of
15. [1] example e.g. cigarettes
16. [1] Consumption of some products that have external benefits
17. [1] and/or high private benefits
18. [1] some of which people are unaware of
19. [1] may be made compulsory
20. [1] e.g. primary school education
21. [1] Fewer resources will make it more difficult to achieve economic growth
22. [1] there will be fewer factors of production to produce goods and services
23. [1] output may fall or rise more slowly
24. [1] Fewer resources may increase costs of production
25. [1] supply may fall by more than demand/there may be a shortage of e.g. raw materials
26. [1] cost-push inflation may occur
27. [1] Natural disasters
28. [1] can lead to cost push inflation
29. [1] loss of employment
30. [1] government expenditure exceeding government income
31. [1] The current account may move into a deficit/larger deficit
32. [1] as exports may decline
33. [1] while e.g. food may have to be imported
34. [1] Destruction of factories may reduce unemployment opportunities
35. [1] which may increase unemployment
36. [1] but more workers may be needed to e.g. rebuild factories
37. [1] Social benefits are private benefits plus external benefits.
38. [1] Explain private benefits
39. [1] e.g. greater employment, greater revenue for firms, protection of homes / reduction in high risk of flooding (up to 3)
40. [1] Explain external benefits
41. [1] e.g. increase in house prices in the area, greater tourism, reduced cost to emergency services and benefit payments (up to 3)
42. [1] Social costs are private costs and external costs.
43. [1] Explain private costs
44. [1] e.g. cost of land, raw material labour and buildings, may only be a low risk of flooding (up to 3)
45. [1] Explain external costs
46. [1] e.g. pollution, destruction of wildlife habitats, opportunity cost of resources (up to 3)