Syllabus: Cambridge - IGCSE Economics
Module: 2.10 Market Failure
Lesson: 2.10.1 Definition of Market Failure

Introduction

What happens when markets don’t deliver the outcomes society needs? In IGCSE Economics, the topic of market failure offers students a vital lens to analyse when and why free markets fall short. Part of the Cambridge IGCSE Economics syllabus (0455), this lesson directly supports understanding for Paper 1 and Paper 2 components, offering real-life economic application, and building critical analysis skills for further study and the world beyond school.

Key Concepts

According to the syllabus, students should be able to:

• Define market failure as a situation where the allocation of resources by a free market is not efficient.

• Understand that market failure occurs when the price mechanism fails to account for all the costs and benefits involved in production and consumption.

• Recognise the types of market failure covered later in the syllabus, such as externalities, public goods, and information gaps.

At this stage (2.10.1), learners focus on the general concept and definition. The lesson acts as a foundation for deeper topics like government intervention and specific causes of failure.

Real-World Relevance

The COVID-19 pandemic revealed global examples of market failure — from shortages of PPE to underinvestment in public health systems. Pollution from fossil fuels, underprovided street lighting, or overconsumption of sugary drinks are everyday examples students can relate to. Bringing in these relatable contexts helps them connect theory with visible, societal issues.

Mini case: In London, air pollution exceeds legal limits in several boroughs. This is a textbook example of negative externalities — costs not reflected in the market price of driving, disproportionately affecting low-income residents.

How It’s Assessed

Market failure concepts typically appear in both multiple-choice and structured response questions in Papers 1 and 2:

• Paper 1 (Multiple Choice) – May include a straightforward definition or an example-based question (e.g., identifying a scenario where market failure exists).

• Paper 2 (Structured) – Often includes short-answer questions such as: “Define market failure” or “Explain why pollution is an example of market failure.”

Command words like “define”, “explain” and “analyse” are common. Encourage learners to use economic vocabulary precisely and to give brief, real-world examples where applicable.

Enterprise Skills Integration

This topic offers a great chance to embed:

• Critical Thinking – Evaluating when markets succeed or fail and why.

• Decision Making – Analysing the trade-offs of intervention versus market freedom.

• Ethical Reasoning – Considering whose welfare is impacted when markets fail.

You could also introduce a classroom debate: “Should the government always intervene when a market fails?” — an excellent way to promote discussion and application.

Careers Links

Understanding market failure supports the Gatsby Benchmarks by linking classroom learning to careers in:

• Public Policy – especially roles involving economic regulation or sustainability.

• Environmental Science – where externalities are central to assessing ecological impact.

• Journalism – economic reporters must explain and analyse these failures for public understanding.

Teachers might also bring in a local councillor or sustainability officer to discuss real-life challenges in tackling market failure in the community.

Teaching Notes

• Start with relatable examples before introducing the formal definition — try using a current news clip or infographic showing a local issue.

• Use retrieval practice tools (e.g., mini whiteboards, low-stakes quizzes) to reinforce the term “market failure”.

• Common misunderstanding: Students may confuse market failure with business failure. Clarify early that it refers to resource misallocation, not a company going bust.

• Pair work: Get students to brainstorm possible failures in everyday markets (e.g., plastic packaging, mobile data plans).

• Stretch activity: Ask students to design a short campaign tackling one type of market failure (e.g., littering or energy waste).

Visual aids such as Venn diagrams or flow charts work well here to help break down abstract concepts into digestible chunks.