What you'll learn
Why markets sometimes allocate resources inefficiently.
Key ideas
- Externalities: costs/benefits to third parties (e.g. pollution).
- Public goods, merit goods and demerit goods.
- Government responses: taxes, subsidies and regulation.
Exam tips
- Give a clear externality example.
- Match a government policy to the failure.
Common mistakes
- Confusing merit and demerit goods.
- Ignoring third-party effects.