Markets and Market Failure: Advantages
and Disadvantages
Advantages of a command economy - correct answer-Cooperation between firms leads to
high levels of output - out maximisation becomes key aim of firms, reduction in inequality,
government limits external costs, government funds provision of public goods, smaller
swings in business cycle as government has more control so there is less unemployment
and inflation.
Advantages of a free market economy - correct answer-Competition leads to economic
efficiency, lower prices, cheaper high quality products, greater choice and financial
incentives to take risk in order to earn profit.
Advantages of indirect taxes to correct market failure - correct answer-Helps to internalise
external costs as it's based on the principle that polluters pay,, work with market forces so
that choice still exists in terms of consumption and production, level of pollution should fall as
output of the good or service is reduced, MSB=MSC can be achieved, tax funds raised for
government, difficult to evade, convenient.
Advantages of maximum prices - correct answer-Reduce exploitation of consumers, reduce
inequality, helps people on low incomes to afford key products.
Advantages of minimum prices - correct answer-Reduces consumption of demerit goods,
encourages producers to switch to making merit goods, reduces fluctuations in food prices
so consumers can more easily budget their incomes, surplus stockpiles saved for shortages,
stabilises producer income leading to greater investment and employment, reduces
exploitation of labour such as national minimum wage
Advantages of regulations - correct answer-Simple to understand e.g. age limits for buying
tobacco/alcohol, can be imposed on operations of firms to protect consumers, possible to
fine/close down companies abusing regulations, acts as deterrent to not break the law, may
help reduce problem of asymmetric information e.g. tobacco restrictions make it harder for
young people to begin smoking irrespective of whether they know how serious the
consequences of smoking are.
Advantages of subsidies - correct answer-Works with market forces to help internalise
external benefits so that social optimum level of output can be reached, increases rate of
consumption of merit goods and reduces consumption of other demerit goods e.g. a higher
consumption of renewable energy means a lower consumption of fossil fuels
Advantages of the division of labour - correct answer-Workers become highly skilled, less
time required for training, no time wasted in moving from one job to another, capital
equipment continuously used in production, more choice for workers to specialise.
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