Edexcel A-Level - Economics Sample
Edexcel A-Level - Economics Sample
Edexcel A-Level - Economics Sample
MICS
ONO
EC lude
1
s AS level
Inc
PETER SMITH
ALSO AVAILABLE
Edexcel A level Economics
Dynamic Learning
Dynamic Learning is an online subscription solution
that supports teachers and students with high-
quality content and unique tools. Dynamic Learning
incorporates Teaching and Learning resources,
Whiteboard and Student eTextbook elements that
all work together to give you the ultimate classroom
and homework resource.
Prices from: £150. Publication date: April 2015
Feel confident about the new specifications with the Sign up for a free 30 day trial – visit
leading A level economics publisher. We will www.hoddereducation.co.uk/dynamiclearning
support you and your students with comprehensive Student Guides
and up-to-date teaching and learning resources, Reinforce students’ understanding throughout
from popular and trusted textbooks and revision their course; clear topic summaries with sample
guides, to topical student magazines and specialist- questions and answers will improve exam technique.
led CPD. Price: £9.99 per copy.
This sample chapter is taken from Edexcel A level
Student Workbooks
Economics Book 1
Create confident, literate and well-prepared
To pre-order, or request an inspection copy, students with skills-focused, topic-specific
please visit www.hoddereducation.co.uk/ workbooks.
ALevelEconomics/Edexcel
Price: £5.99 per copy.
Develop your knowledge of economic themes My Revision Notes
1 and 2 of the Edexcel specification and put Unlock your students’ full potential with this
theory into context, with focused case studies and revision guide which provides both the key content
practice activities. they need to know and guidance on
Titles in this series: how to apply it for better grades
▶▶ Edexcel A level Economics Book 1 by Peter Smith From £10.99 per copy.
(9781471830006, March 2015, £24.99)
▶▶ Edexcel A level Economics Book 2 by Peter Smith To sign up for inspection copies visit
(9781471830051, June 2015, £24.99) www.hoddereducation.co.uk/ALevelEconomics/
Edexcel
We are working with Edexcel to get these titles
endorsed. Economic Review magazine
Philip Allan magazines are the ideal resource to
Our Edexcel A level Economics textbooks will
deepen subject knowledge and better prepare
also be available as Student eTextbooks –
students for their exams.
downloadable versions of the printed textbook
that teachers can assign to students so they can: Visit www.hoddereducation.co.uk/
▶▶ download and view on any device or browser economicreview to find out more and to trial the
▶▶ add, edit and synchronise notes across archive free for 30 days.
two devices Philip Allan Events
▶▶ access their personal copy on the move Ensure that you are fully prepared for the upcoming
To trial the student eTextbooks for free, visit changes to the A level specifications by attending
www.hoddereducation.co.uk/dynamiclearning one of our ‘Implementing the New Specification’
courses.
For more information on our resources available to
support the new Edexcel specification, please visit For more information and to book your place visit
www.hoddereducation.co.uk/ALevelEconomics/ www.philipallanupdates.co.uk
Edexcel
Contents
Book 1
Introduction
1
Book 2
Introduction
Earlier chapters have shown that prices can act as signals that help to guide the
allocation of resources. However, there are situations in which markets fail to
produce the ideal outcome for society. This chapter and the next discuss some key
ways in which market failure can occur. The main focus of this chapter is to explore
what happens if market prices are not able to reflect the full costs and benefits
associated with market transactions. There are many situations in which there are
costs or benefits that are external to the workings of the market mechanism.
Learning objectives
After studying this chapter, you should:
➜ recognise situations in which the free market mechanism may fail to take account of costs
or benefits that are associated with market transactions
➜ be familiar with situations in which there may be a divergence between private and social
costs or benefits, such that price is not set equal to marginal cost
➜ be able to use diagrams to analyse positive and negative externalities in either production
or consumption
➜ be familiar with a wide range of examples of externalities
Public goods
There is a category of goods known as public goods, which because of their
characteristics cannot be provided by a purely free market. Street lighting is one
example: there is no obvious way in which a private firm could charge all the users
of street lighting for the benefits that they receive from it. Such goods are also
discussed in Chapter 7.
Summary
Study tip l Free markets do not always lead to the best possible allocation of resources: there may be
Market failure is often market failure.
l When there are costs or benefits that are external to the price mechanism, the economy will
used as a justification for
government intervention in not reach allocative efficiency.
l Markets can operate effectively only when participants in the market have full information
markets, so it is important
to be aware of its various about market conditions.
l Public goods have characteristics that prevent markets from supplying the appropriate
causes and to be able to
recognise situations in quantity.
l Merit (demerit) goods are those which government believes are under- (over-) consumed in
which market failure may
occur. a free market.
Externalities
Externality is one of those ugly words invented by economists, which says exactly
what it means. It simply describes a cost or a benefit that is external to the market
mechanism.
An externality will lead to a form of market failure because, if the cost or benefit
Producers face marginal private costs given by the line MPC, but in
fact impose higher costs than this on society. Thus MSC represents D (MSB)
the total costs imposed on society in the production of this good.
Q* Q1 Quantity of
If the market is unregulated by the government, firms will choose chemicals
per period
how much to supply on the basis of the marginal (private) cost they
face, shown by MPC in Figure 6.1. The market equilibrium will Figure 6.1 A negative productive externality
Christmas lights
Example (2) in Exercise 6.1 is an example of a positive consumption externality.
Residents of this street decorate their homes in order to share the Christmas spirit
with passers-by. The benefit they gain from the decorations spills over and adds
to the enjoyment of others. In other words, the social benefits from the residents’
decision to provide Christmas decorations go beyond the private enjoyment that
they receive.
Costs, MSC Figure 6.2 illustrates this situation. MPB represents the marginal
benefits
private benefits gained by residents from the Christmas lights; but MSB
represents the full marginal social benefit that the community gains,
which is higher than the MPB. Residents will provide decorations up
to the point Q 2, where their marginal private benefit is just balanced
by the marginal cost of the lights. However, if the full social benefits
received are taken into account, Q* would be the optimum point: the
MSB
residents do not provide enough décor for the community to reach the
MPB
optimum. The shaded triangle in Figure 6.2 shows the welfare loss:
Q2 Q* Quantity of
Christmas that is, the amount of social benefit forgone if the outcome is at Q 2
decorations instead of Q*.
Figure 6.2 A positive
consumption externality
Positive and normative revisited
Example (2) is a reminder of the distinction between positive and normative analysis,
which was introduced in Chapter 1. Economists would agree that Figure 6.2 shows
the effects of a beneficial consumption externality. However, probably not everyone
would agree that the lavish Christmas decorations are providing such benefits. This
is where a normative judgement comes into play. It could equally be argued that the
lavish Christmas decorations are unsightly and inappropriate, or that they constitute
a distraction for drivers and are therefore likely to cause accidents. After all, not
everyone enjoys these lavish (and sometimes garish) displays.
Global warming
Some of the issues are international in nature, such as global warming. At the
heart of this concern is the way in which emissions of greenhouse gases are said
Acid rain
Global warming is not the only example of international externality effects.
Scandinavian countries have suffered from acid rain caused by pollution in other
European countries, including the UK. Forest fires left to burn in Indonesia have
caused air pollution in the neighbouring countries of Singapore and Malaysia.
River water
Another environmental issue concerns rivers. Some of the big rivers of the world,
such as the Nile in Africa, pass through several countries on their way to the
sea. The Nile runs through Egypt at the end of its journey, and is crucial for the
economy. If countries further upstream were to increase their usage of the river,
perhaps through new irrigation projects, this could have disastrous effects on Egypt.
Again, the actions of one set of economic agents would be having damaging effects
on others, and these effects would not be reflected in market prices, in the sense that
the upstream countries would not have to face the full cost of their actions.
Part of the problem here can be traced back to the difficulty of enforcing property
rights. If the countries imposing the costs could be forced to make appropriate
payment for their actions, this would help to bring the costs back within the market
mechanism. Such a process is known in economics as ‘internalising the externality’,
and will be examined later in this chapter.
Biodiversity
Concern has also been expressed about the loss of biodiversity, a word that is shorthand
for ‘biological diversity’. The issue here is that when a section of rainforest is cleared
to plant soya beans, or for timber, it is possible that species of plants, insects or
However, in adding to the congestion the motorist not only suffers the costs of
congestion, but also imposes some marginal increase in costs on all other users
of the road. Thus, the marginal social costs (MSC) of undertaking journeys are
higher than the cost faced by any individual motorist. MSC is therefore higher than
Summary
l Externalities arise in many aspects of economic life.
l Environmental issues are especially prone to externality effects, as market prices do not
always incorporate impacts on the environment, especially where property rights are not
assigned.
l Congestion on the roads can also be seen as a form of externality.
l Externalities also arise in the areas of healthcare provision and education, where individuals
do not always perceive the full social benefits that arise.
Follow-up questions
1 Explain what is meant by market failure.
2 Draw a diagram to help to explain the possible market failure outlined in relation to a vaccination programme.
A
C
E
MPB = MSB
O Y X Quantity
Figure 6.5
2 A new vaccine is developed to prevent the spread of coughs and colds,
which are the main cause of around 130 million working days lost through
absenteeism in the UK. The government decides to make this vaccine freely
available to anyone who wants it, much to the delight of the pharmaceutical
company that developed it.
a What are the private benefits of the production and consumption
of this new vaccine?
b Explain the opportunity cost of providing the vaccine free to
individuals.
c Assess the external benefits of the new vaccine, illustrating
your answer with an externalities diagram.
MIC S
NO First teaching
ECOO
K1
from September
BO 2015
ALSO AVAILABLE
Dynamic Learning
Edexcel A level Economics Dynamic Learning
Dynamic Learning is an online subscription solution that supports
teachers and students with high-quality content and unique tools.
Dynamic Learning incorporates Teaching and Learning resources,
Whiteboard and Student eTextbook elements that all work together to
give you the ultimate classroom and homework resource.
To request inspection copies and to sign up for a free 30 day trial of Dynamic Learning,
please visit: www.hoddereducation.co.uk/ALevelEconomics/Edexcel