Syllabus: Pearson - AS Level Economics
Module: 1.3 Market Failure
Lesson: 1.3.1 Types of Market Failure

Introduction

This lesson supports the Pearson Edexcel AS Level Economics A syllabus, specifically Theme 1: Introduction to markets and market failure. Section 1.3.1 introduces learners to the key types of market failure and sets the stage for deeper analysis in later units around government intervention. It’s core microeconomics, foundational for students’ understanding of real-world economic challenges and a key component of Paper 1 assessment.

The concept of market failure helps learners grasp why unregulated markets don’t always lead to efficient or equitable outcomes. It bridges textbook theory and lived experience, offering fertile ground for critical thinking and real-world application.

Key Concepts

According to the Pearson AS Economics A specification, students must understand:

• What is market failure?
  When the free market fails to allocate resources efficiently, leading to a loss of economic welfare.

• Three key types of market failure:

  • Externalities: Spillover effects of production or consumption on third parties. These can be:

    • Negative externalities (e.g. pollution from factories)

    • Positive externalities (e.g. herd immunity from vaccinations)

  • Under-provision of public goods: Goods that are non-rival and non-excludable, like national defence or street lighting. These tend to be under-provided by the market due to the free rider problem.

  • Information gaps: Situations where buyers or sellers lack the information needed to make informed decisions, leading to poor outcomes (e.g. second-hand car market or smoking).

• Diagrams and models:
  Students are expected to draw and interpret diagrams showing:

  • Divergence between private and social costs/benefits.

  • Welfare loss or gain from market failure.

  • The concept of marginal analysis in evaluating externalities.

Real-World Relevance

Market failure is not abstract theory—it’s visible everywhere. A few contemporary examples:

• Plastic waste and pollution:
  The overuse of single-use plastics represents a negative externality. Producers and consumers often don’t bear the environmental cost, leading to overproduction.

• Covid-19 vaccination programmes:
  These illustrate a positive externality. Individuals who get vaccinated help protect those around them, yet not everyone chooses to vaccinate voluntarily, justifying state intervention.

• Access to healthcare and education:
  These are often underprovided by markets due to their public and merit good characteristics. Left solely to private markets, certain groups may be excluded.

• Social media and data privacy:
  Information gaps and externalities are prevalent, as users may not understand how their data is used, while society bears the costs of misinformation and addiction.

Encouraging students to explore local issues—such as air quality in their area or access to mental health services—can ground these concepts in their lived experience.

How It’s Assessed

In Pearson Edexcel AS Economics A, market failure appears across multiple question formats on Paper 1:

• Multiple-choice and short-answer questions:
  Often test definitions, examples, or diagram interpretation.

• Data response questions:
  Expect students to apply market failure theory to a real-world context using provided data. These often involve a short article or dataset followed by structured questions.

• Extended open-response questions (8–12 marks):
  Require evaluation of market failure scenarios and the role of government intervention. Key command words include:

  • Explain: Define a concept or describe a cause/effect.

  • Analyse: Show logical chains of reasoning.

  • Evaluate: Consider multiple sides and justify a conclusion.

Students must use relevant diagrams, apply theory to context, and show awareness of real-world implications.

Enterprise Skills Integration

This topic lends itself well to active, student-led exploration and enterprise thinking:

• Problem-solving:
  Students analyse failures in the market and propose solutions, weighing up costs and benefits—just like a policymaker or entrepreneur would.

• Decision-making:
  Investigating whether the government should intervene, and if so, how, builds critical judgement.

• Communication and justification:
  Learners must present economic arguments clearly using diagrams and data. This develops reasoning and persuasive communication skills.

• Simulation or role-play activities:
  Run a classroom debate on government intervention in sugary drinks or fossil fuels. Students take on roles (e.g. firm, government, consumer group) to argue their case.

Careers Links

Understanding market failure links well to multiple careers and supports Gatsby Benchmarks 4 and 5:

• Policy and public service:
  Roles in local government, environmental agencies or think tanks often focus on correcting market failures.

• Business and sustainability:
  Analysts and managers increasingly need to assess the social and environmental impacts of their firms.

• Law and regulation:
  Legal professionals working on environmental law, data protection, or consumer rights tackle the consequences of externalities and information gaps.

• Health and education sectors:
  These fields frequently face under-provision challenges and benefit from professionals who understand economic reasoning.

Help careers leads tie this into workplace skills by focusing on analysis, ethical judgement, and real-world application.

Teaching Notes

Classroom tips:

• Start with relatable examples—littering, traffic congestion, or overfishing.

• Use simple, real-life analogies to explain public goods (e.g. fireworks display or local park).

• Bring in news articles or case studies—students should link theory to headlines.

Common pitfalls:

• Confusing private and social costs/benefits.

• Over-relying on generic examples without context.

• Not fully labelling or explaining diagrams.

Extension activities:

• Get students to evaluate a specific government policy (e.g. plastic bag charge) using economic criteria.

• Create a group project where students identify a local issue and design a policy response based on market failure theory.

Recommended tools:

• Past papers from Edexcel with real data-response questions.

• Interactive simulations (e.g. BBC Bitesize, Tutor2U) to show effects of externalities.

• Visual tools like whiteboards or digital polling to map cost/benefit scenarios.