Topic / economics

Market Failure

Externalities, information problems and other cases where markets misallocate resources.

Core exam brief

Know the idea before you use the evidence.

Definition

Market failure occurs when the free market produces an inefficient allocation of resources and social welfare is not maximised.

Chain of analysis

With a negative externality, marginal social cost exceeds marginal private cost, causing overproduction relative to the socially efficient quantity.

Evaluation trigger

Government intervention can also fail; assess information limits, administrative costs, unintended effects, elasticity and the size of the externality.

Analysis and example bank

13 July 2026 · United Kingdom

12-marker15-marker

UK Soft Drinks Industry Levy threshold will fall to 4.5g of added sugar per 100ml

HMRC confirmed that from 1 January 2028 the Soft Drinks Industry Levy threshold will fall from 5g to 4.5g of added sugar per 100ml, while exemptions for milk-based and milk-substitute drinks will be removed. It is a strong market-failure case because the government expects firms to respond by reformulating products, so the intervention changes incentives before many consumers ever pay a higher price.

Read →