The existence of market failure provides an argument for government intervention in markets
When free markets produce bad outcomes — too much pollution, too little healthcare — governments use that failure as a reason to step in and change what gets produced or consumed.
Real World
The UK government subsidises GP appointments and hospital care because the free market would underprovide healthcare — people on low incomes could not afford the price the market would set, creating inequity and underproduction of a merit good.
Exam Focus
Always identify the specific type of market failure before justifying intervention — examiners expect the chain: market failure → welfare loss → intervention rationale.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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