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Therefore the market is said to be inefficient when the socially optimal amount of educationQ * is not achieved due to an under-consumption of education from society’s point of view,and this results in market failure.Costs/Benefits MPC = MSC MEB A B C MSB MPB Q p Q * Qty (Education) In the air travel market, consumers only take into account of their own private benefits offlying. These private benefits can be in terms of the satisfaction from flying, and the feelgood factor from going on a holiday, or even to businessmen where the benefits of flying isimmense, it can make a difference between closing a multi-billion dollar deal overseas.Again we assume that there are no externalities in the production of air travel.However these consumers fail to take into account the external costs of flying, such as thepollution and noise generated to the local and global community. In other words, theyoverestimate the benefits of flying. In this case we see that MSB = MPB – MEC. Again thereis a divergence between the MSB and MPB. Looking at Figure 2, individuals only equateMPB and MPC, and consume up to a level of Q p, where obviously the socially optimal level islesser at Q * if the external costs are taken into account. The over-consumption of flyingresults in a deadweight loss (ABC) to society. The market is inefficient as the overconsumption of flying results in wastage of resources, and this results in market failure.
Costs/Benefits C MPC = MSC A B MEC MPB MSB Q * Q p Qty (Air travel) CONCLUSIONTherefore we see that the presence of externalities (in this case positive and negativeexternalities in consumption) can result in misallocation of resources if left to the freemarket. The government needs to step in to correct these market failures so thatsociety’s welfare is maximised.LevelsL3(7m – 10m)L2(5m – 6m)L1(1m - 4m)Descriptors- Clear explanation of and identification of the externality problemin both the education and air travel market- Clear graphical analysis.- Sufficient depth/ scope in explaining how market failure occurs.- Insufficient depth/scope in addressing the basic questionsexternalities- Some attempt in identifying at least one correct externality in thecontext of the question for education and air travel- Some errors in explanation and diagram showing the externalityproblem- Poor and erroneous explanation with little understanding of howexternalities causes market failure\
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ST ANDREW’S JUNIOR COLLEGEH1 ECON
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demand for hotel accommodation. The
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Cost/Benefits/$ Welfare loss MSC =
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more than proportionate fall in qua
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Price S P 1 P 2 D 1 D 2 Market for
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ERP• Works by charging drivers an
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2010 YJC Prelims H1 Paper CSQ1: Hou
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quantity transacted increases and h
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Hence as long as the West is willin
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Marks Scheme:L3( 7 - 8m)L2(4 - 6m)L
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• Germany’s revival has been bu
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