A monopoly is considered to be market failure, as the important benefits of economies of scale will not be achieved. A more difficult area to apply this topic to is the social distribution of resources. Candidates also need to appreciate that if externalities arise in a process of production then even Perfect Competition would result in an allocative inefficiency and this means a market failure has arisen. Let's look at some possible examination questions and see how they attempt to test one of the fundamentals of modern economics.
Question Using examples explain what economists mean by the term 'market failure'.
A reasonable explanation of the term market failure. If the question was carrying 12 marks or above then this would be worth up to 3 marks 2. An inclusion with examples of any of the following. The Board would normally expect two or three well-developed points. The remainder of the marks available would be scored by the quality of response involving the above.