Market Failure (Cambridge (CIE) IGCSE Economics): Exam Questions

Tanzania is a low-income country with relatively high import tariffs. Between 2012 and 2015, Tanzania experienced a high economic growth rate. This allowed the government to provide more public goods. The government also increased its investment in the merit goods of education and healthcare. Tanzania’s central bank influenced household borrowing and spending with the aim of achieving price stability. As a result, the country’s inflation rate fell, with money losing less of its value.

Droughts in the Pacific Coast region of the US and regulations, in the form of limits on the amount of salmon that can be caught in the wild, have reduced the supply of wild salmon. These limits were imposed to avoid market failure in the salmon market. However, the effect of this on the revenue of salmon producers is uncertain. In addition, producers of farmed salmon in the US states of Washington and Alaska have received subsidies from the US government.

Mexico has recently experienced relatively low inflation and the Mexican government wants to maintain this price stability. Despite this its currency has fallen in value with each Mexican peso exchanging for less foreign currency. The government is also trying to reduce pollution in the country. One key cause of pollution in Mexico is car travel. Driving has both private and external costs.

The United Nations (UN) has set out development goals for countries to achieve by 2050. These goals include:

• conserve natural resources
• ensure education for all
• end poverty everywhere
• promote sustained economic growth

More governments are imposing taxes on unhealthy food and drinks. Such taxes are usually regressive. Some of these governments are also increasing their spending on healthcare. In other countries healthcare is provided by the private sector. The number of state-owned enterprises is declining in a number of countries due to privatisation.

The production process in the oil industry is capital-intensive. The pollution it generates means it is one cause of environmental market failure. A Nigerian oil monopoly is starting to produce more environmentally friendly liquefied petroleum gas (LPG), rather than kerosene, in an attempt to reduce pollution. The Nigerian government intends to split the monopoly firm into separate companies to improve efficiency.

Botswana has a number of conservation projects. These are thought to provide a social benefit to local communities. Botswana has a mixed economic system with tax revenue as a percentage of GDP at 27% in 2017. Some Botswana economists suggest that the country should move towards a market economic system, taking care to avoid market failure.

Swaziland is a small African country where six in ten people live in poverty and most firms are small and use little capital equipment. In October 2015 it opened a new airport. Some economists suggest that the building of the airport involved a high opportunity cost and caused a range of external costs. The building of the airport is part of the government’s plan to turn the country from a developing into a developed country.

Changes in the Ghanaian economy

Table 1.1 Ghana fact file 2024

Ghana, a lower-middle-income country in West Africa, has experienced steady economic growth over the past two decades. The structure of its economy has changed significantly. While the country continues to rely on exports of cocoa beans and gold, the tertiary sector – particularly banking, tourism, and telecommunications – now contributes more than half of GDP. Investment in mobile technology and digital services has allowed Ghana to expand financial inclusion, bringing more people into the formal banking system. Tourism has also grown as visitors are attracted to Ghana’s natural reserves and cultural heritage.

Despite this progress, Ghana faces serious macroeconomic challenges. The inflation rate rose to 11% in 2024, mainly because of rising food and fuel prices. Higher costs of living have forced many households to reduce saving and borrow more from banks. Lenders have expanded credit to consumers and firms, but some economists worry that this may increase financial risks if interest rates rise further. At the same time, the government faces high levels of public debt, and a large proportion of tax revenue is used to pay interest on loans.

The government has tried to address health concerns by introducing an indirect tax on sugary drinks. Supporters of this policy argue that it will reduce sugar consumption, improve public health, and lower long-term healthcare costs. However, producers warn that the tax will raise production costs, reduce output, and harm employment in the soft drinks industry.

Living standards in Ghana have improved: life expectancy has risen and poverty rates have fallen. Yet the Human Development Index (HDI) remains lower than in some other middle-income countries. Critics argue that while GDP per head is increasing, improvements in education and healthcare are not keeping pace.

Table 1.2 GDP per head and HDI in selected countries, 2024

Australia’s economic growth rate has fallen in recent years. Its Human Development Index (HDI), however, is high and in 2016, Australia had the second highest HDI in the world. The Australian government hopes that the country’s birth rate will rise from a low of 12.1 in 2016. An increasing proportion of Australian children are going to private sector schools. Their parents have to pay a fee for them to attend these schools.

A number of book publishers operate in Pakistan. These include multinational companies (MNCs). They employ a range of specialist workers. A number of these specialists estimate the price elasticity of demand (PED) for their firms’ books. There is a debate about whether some books should be subsidised by the government.

The price of dental treatment is increasing in most countries. For example, the average price of filling a tooth is $180 in the US. The number of dentists is increasing in the US. The largest proportion of the US labour force is employed in the tertiary sector. Price changes have an impact on the supply of products in the tertiary sector as well as in the primary and secondary sectors.

In the UK, bus journeys outside London have fallen by nearly 40% since 1980. This fall in demand has been largely due to a rise in bus fares, a rise in income and changes in the price and quality of substitutes. On some routes there are monopolies operating and this lack of competition can push up the price.

India and Ecuador are two major producers of bananas. India is the world’s largest producer of bananas while Ecuador is the world’s largest exporter. Multinational companies (MNCs) produce some of the bananas in both countries. The World Health Organization (WHO) recommends that each person should eat 400 grams of fruit and vegetables a day. To encourage people to eat more fruit and vegetables governments may use policy measures such as maximum prices and subsidies.

The population of Hungary is the most obese in Europe. Hungarians eat fewer vegetables than most Europeans and more food types that may be considered to be demerit goods. In 2017, the Hungarian government introduced a tax on unhealthy food, known as the chips tax. The tax has had some success in moving demand to healthier foods. Some economists suggest that governments should use price controls as well as taxes to influence the food market.

Changes in tobacco production and consumption can have both microeconomic and macroeconomic effects. Tobacco plants are grown in at least 124 countries with different levels of development. A higher proportion of the poor than of the rich consume tobacco products. The market for cigarettes, produced using tobacco, is changing. Demand for cigarettes and some other demerit goods is declining in a number of countries.

South Africa continues to experience one of the world’s highest levels of income inequality. Large numbers of households live below the poverty line, while some earn very high incomes from mining and financial services. The government raises tax revenue through progressive taxation and funds welfare programmes. It has also considered increasing taxes on goods such as alcohol and cigarettes to discourage consumption and improve public health. Small firms often struggle to compete with large supermarkets, and the unemployment rate has remained above 30% for many years.