Syllabus: Cambridge - IGCSE Economics
Module: 2.10 Market Failure
Lesson: 2.10.2 Causes of Market Failure
Jump to Section:
Introduction
This article supports the delivery of Cambridge IGCSE Economics 0455, specifically Topic 2.10.2: Causes of Market Failure. As students explore how and why markets can fail to allocate resources efficiently, the lesson builds both core economic understanding and wider commercial awareness — equipping learners with insights essential for real-world and workplace readiness.
Aligned to the IGCSE curriculum, this topic prepares students for both assessment and application by linking theory to public goods, externalities, monopolies, and asymmetric information. It also creates meaningful opportunities to meet Gatsby Benchmark 4, linking curriculum to careers.
Key Concepts
The Cambridge IGCSE Economics syllabus outlines the following causes of market failure:
Externalities: Costs or benefits that affect third parties not directly involved in a transaction.
Negative externalities: pollution, traffic congestion.
Positive externalities: education, vaccinations.
Lack of Public Goods: Goods that are non-excludable and non-rivalrous, such as street lighting or national defence, are underprovided in free markets due to the free rider problem.
Underprovision of Merit Goods: These are goods like healthcare or education that are under-consumed if left purely to market forces, despite offering wider societal benefits.
Overprovision of Demerit Goods: Goods like alcohol or tobacco may be over-consumed, leading to negative societal outcomes.
Abuse of Monopoly Power: A lack of competition can lead to restricted supply, higher prices, and reduced consumer welfare.
Imperfect Information: When consumers or producers do not have full information to make rational choices, markets can misallocate resources.
This topic invites learners to analyse real issues and make judgements about how governments might intervene to correct these failures.
Real-World Relevance
Understanding market failure equips students with the ability to interpret everyday economic issues and policy decisions:
Climate Change and Pollution: Negative externalities from industrial activity have led to policy interventions like carbon taxes and emissions trading schemes.
COVID-19 and Vaccination Programmes: Public health strategies showcased positive externalities where governments provided free vaccinations to maximise uptake.
Sugar Tax in the UK: A response to overconsumption of demerit goods, encouraging healthier choices through fiscal policy.
Housing Crisis: Underprovision of merit goods like affordable housing remains a central political and economic issue in the UK.
Each of these examples links directly to the IGCSE content while providing a platform for developing wider commercial awareness and decision-making skills.
How It’s Assessed
Students may be assessed through a combination of:
Short-answer questions testing definitions (e.g. “Define externalities”)
Data response questions analysing diagrams or real-world scenarios (e.g. “Use a diagram to show the effects of a negative externality”)
Structured questions requiring evaluation of policy solutions (e.g. “Evaluate whether a tax is the best solution to market failure caused by pollution”)
Command words such as ‘explain’, ‘analyse’, ‘evaluate’, and ‘discuss’ feature heavily. Teachers should encourage extended responses that reference context, draw on diagrams, and provide reasoned conclusions. Real-world application is critical for accessing higher marks.
Enterprise Skills Integration
This topic is ideal for developing applied skills beyond the textbook:
Decision-Making & Problem-Solving: Students weigh up different policy responses (e.g. subsidies vs regulation) and must assess trade-offs.
Critical Thinking: Learners evaluate imperfect information and its implications for consumer choice.
Commercial Awareness: By linking to firms’ behaviour (monopoly pricing, corporate pollution), students understand how economic decisions shape society and markets.
These competencies align directly with the Enterprise Skills thematic framework and are core to Skills Hub Futures, which uses real-world scenarios to embed these skills in curriculum and careers sessions.
Careers Links
Studying market failure supports multiple Gatsby Benchmarks:
Benchmark 4: Curriculum learning is clearly linked to policy-making, environmental economics, and ethical business decisions.
Benchmark 5: Use of employer case studies and real business behaviour shows how firms interact with regulations and externalities.
Benchmark 6: Business simulations provide students with the chance to act as decision-makers within firms, choosing how to respond to regulatory or ethical challenges.
Relevant career pathways include:
Public Policy Analyst: Evaluating government responses to market failures.
Environmental Economist: Advising on taxation or regulation to reduce pollution.
Healthcare Planner: Ensuring provision of merit goods across regions.
Regulatory Affairs Officer: Managing compliance for organisations.
Teaching Notes
Practical Activities: Use roleplay or simulation — e.g. “You are the government: how will you fix this market failure?” Tools in the Skills Hub enable this with zero prep time.
Diagram Practice: Teach students how to draw and label diagrams for externalities. Use formative assessment to correct common misconceptions, such as misplacing welfare loss triangles.
Case Study Integration: Incorporate current events (e.g. carbon pricing or monopolistic tech firms) to contextualise learning.
Differentiation: Use scaffolded templates for analysing causes of failure, especially for lower ability learners.
Extension Opportunities: Invite discussion on behavioural economics and how real consumers deviate from rationality, connecting to topics like asymmetric information.
This lesson is an excellent opportunity to bring economics to life and foster the broader commercial literacy demanded by today’s employers.
