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15 marksMarket Failure

CAPE Economics Unit 1 · 2008 · Paper 2 · Question 4(a)(iii)

Using suitable examples, explain how EACH of the following causes the market allocation of resources to be inefficient:

Asymmetric information (moral hazard and adverse selection)

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Other parts of this question

  1. 4(a)(i)Public good[12 marks]
  2. 4(a)(ii)Externalities[12 marks]
  3. 4(b)(i)Explain what is meant by a 'natural monopoly'.[5 marks]
  4. 4(b)(ii)State why a natural monopoly uses resources inefficiently if unregulated.[3 marks]
  5. 4(c)Identify ONE pricing rule that a regulator may apply, and state how it may be used to achieve efficiency.[3 marks]

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