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

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Introduction

This lesson covers the first part of Section 1.3 in the Pearson Edexcel A Level Economics A Specification: Types of Market Failure. It’s a pivotal part of Theme 1 (Introduction to Markets and Market Failure), laying the groundwork for understanding when markets don’t allocate resources efficiently on their own.

From a classroom perspective, this is where economic theory begins to intersect with ethical decision-making, environmental impact, and the limitations of the private sector. Students begin to see the ‘why’ behind government intervention.

Key Concepts

Aligned with section 1.3.1 of the specification, students should understand:

  • What market failure means: A situation where free markets fail to allocate resources efficiently or equitably.

  • The three core types of market failure:

    • Externalities (both positive and negative): Third-party effects not reflected in market prices.

    • Public Goods: Goods that are non-rivalrous and non-excludable, leading to under-provision in free markets.

    • Information Gaps: When consumers or producers lack full information, leading to poor decisions and resource misallocation.

These concepts underpin much of government policy analysis students will encounter later in the course.

Real-World Relevance

Market failure isn’t just theory—it’s happening around us:

  • Climate change is a classic case of negative externalities. Pollution from factories and transport isn’t priced into the goods we buy, leading to overconsumption.

  • Vaccination programmes provide positive externalities—when more people are vaccinated, everyone benefits, even those who aren’t.

  • Flood defences and street lighting are public goods. They’re hard to charge for individually, so governments provide them.

  • Used car markets or dietary supplement industries are examples where information asymmetry can mislead buyers.

Bringing these examples into lessons makes the topic more tangible and relevant for students.

How It’s Assessed

Pearson Edexcel assessments are designed to test application as much as knowledge:

  • Paper 1 includes market failure as a core theme. Expect data response, short answers, and extended writing.

  • Common command words:

    • Explain (e.g. explain why pollution is a negative externality)

    • Analyse (e.g. analyse the effects of under-provision of public goods)

    • Evaluate (e.g. evaluate government intervention to correct information failure)

  • Students must be able to interpret diagrams such as marginal social cost/benefit curves and apply these to policy choices or current issues.

Encourage students to practise justifying the social optimum point in different market scenarios.

Enterprise Skills Integration

This lesson links closely with:

  • Problem-solving: Identifying why markets fail and considering appropriate responses.

  • Decision-making: Evaluating trade-offs in government interventions.

  • Critical thinking: Assessing whether government action improves or worsens welfare.

You can embed activities where students propose and defend policy solutions—like whether sugary drinks should be taxed, or how to price a new public service.

Careers Links

This topic supports Gatsby Benchmarks 4, 5 and 6:

  • Economists, policy advisers, environmental consultants, and urban planners all deal with market failure in practice.

  • Information gaps and externalities are also central to careers in public health, transport logistics, and energy policy.

  • Invite guest speakers or explore case studies from roles in local councils or sustainability teams to show real-world application.

Linking this to employment gives the topic weight and purpose beyond exams.

Teaching Notes

Top tips for delivery:

  • Use real case studies to ground abstract theory—plastic pollution, NHS funding, or congestion charging all work well.

  • Reinforce diagram literacy early—especially for externalities and welfare loss/gain areas.

  • Encourage debate: Is it the state’s job to fix markets? Should all information be regulated?

Common pitfalls:

  • Students often confuse public goods with merit goods.

  • They may struggle to apply diagrams accurately or forget labels.

  • Watch for surface-level evaluation—push for supported judgments.

Extension ideas:

  • Run a policy pitch challenge: “You’re the Chancellor. Fix a market failure in five slides.”

  • Assign research tasks using current articles on government responses to market failure.

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