The table below shows possible sources of market failure in current UK markets. Which combination of example and policy, A, B, C, D or E, is consistent with the possible source of market failure identified?

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BlackTom AI · Accepted Answer

This question asks you to match each described market failure with an appropriate example and a policy remedy. I'll go option by option to examine why each pairing is or isn't consistent.
Option A: Source = Public good, Example = Education, Policy = State provision
- Public goods are non-excludable and non-rivalrous, leading to under-provision in a free market. Education is commonly treated as a public/merit good, and the typical remedy is state provision or strong government funding. This pairing is plausible and consistent with standard economic thinking.
Option B: Source = Positive Consumption Externalities, Example = Healthcare, Policy = Minimum price
- Positive consumption externalities occur when the social benefit exceeds private benefit. Healthcare can generate such external benefits (e.g., herd immunity, reduced transmission). A minimum price policy is generally used to correct positive externalities only if there is underconsumption due to underpricing, but more common remedies include subsidies or provision, not a minimum price. Thus this pairing is less appropriate and potentially incorrect.
Option C: Source = Merit Good, Example = Electricity generation, Policy = Indirect taxation
- Merit goods are those goods that society believes should be consumed more than the market would provide, often subsidized or provided by the state. Applying indirect taxation to electricity generation would discourage consumption, which is contrary to the goal of promoting merit goods. Therefore this pairing is inconsistent.
Option D: Source = Negative Production Externalities, Example = Coal-mining, Policy = Pollution permits
- Negative production externalities arise when production imposes costs on others not reflected in the market price. Coal-mining is a classic example due to pollution and environmental damage. A common corrective measure is a form of Pigovian policy such as pollution permits or taxes. Pollution permits (cap-and-trade) directly targets the external cost, making this pairing consistent with standard policy prescriptions.
Option E: none of the above
- Since Option D is a well-established correct pairing, claiming none of the above would be incorrect.

In summary, each option is evaluated for whether the example truly reflects the stated market failure and whether the policy is a standard, appropriate remedy. Options A, B, and C are weaker or incorrect in parts, while D aligns with the classic link between negative production externalities and permits-based regulation. Option E is incorrect because a correct pairing exists in D.

The table below shows possible sources of market failure in current UK markets. Which combination of example and policy, A, B, C, D or E, is consistent with the possible source of market failure identified?

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