IB Economics SL/HL-Year 1

Unit 2 Market Failures

Mister P

Worksheet - Markets and Market Failure

1) Explain with a diagram why a free market economy should in theory be the most desirable
market structure.
(5 marks)
2) In reality there are many other factors that make a pure free market economy less desirable.
Explain what is meant, and the problems created, by:

(a)
(b)
(c)
(d)

Public goods
Monopolies
Inequalities
Merit and demerit goods
(8 marks)

3) Explain what can be done by the government in a mixed economy to deal with each of these
issues.
(8 marks)

4) What problems might such intervention create in each case

(8 marks)

5) Read the article below, and answer the questions incorporated.

Hidden cost of the freight trade: pollution in the air, congestion in cities and danger on the
roads.
By Michael McCarthy, Environment Correspondent, the Independent 11 November 2000
Lorries are filthy; they're deafening, they kill people directly out of all proportion to their
numbers, they wreck the roads, they intimidate other drivers, they clog up cities, they terrorise
small towns and divide them right down the middle and they pump out more of the most harmful
pollution than any other form of transport. (see table)

The Pollution Factor

% of tonnes of particulates in the atmosphere per annum, by area, caused by:
London
W. Yorkshire Glasgow
Public power
3.5
0
0
Commercial and residential combustion
2.4
1.5
4.5
Industrial combustion
1.8
6.9
3.5
Industrial processes
4.1
19.9
8.2
Extraction and distribution of fossil fuels
0
0
0
Solvent use
0.5
1.7
0.1
Cars and taxis
15.7
11.6
9.8
Vans
5.9
4.8
4.6

IB Economics SL/HL-Year 1
Unit 2 Market Failures
Mister P
Heavy goods vehicles
Buses
Motorcycles
Other vehicles
Waste treatments and disposal
(i)
(ii)

50.3
5.7
0.2
5.4
5.0

41.9
5.2
0.2
6.1
0.3

Describe the differences in pollution patterns by area shown in the table

Analyse the possible reasons for these differences between areas

48.3
10.3
0.2
7.4
3.2
(3 marks)
(5 marks)

The fuel protesters riding in their convoy down the motorway system for their demo in London
next week may see themselves as knights in shining armour for an overtaxed public. But a close
look at the impact their vehicles have on the environment, and on society, makes a nonsense of
their assumed role of social saviours.
In a whole range of sectors, Mr Trucker and his big lorry cause disproportionate damage
wherever they go and this year the Government attempted to quantify the cost of it. The 220page study commissioned by the Department of the Environment: that the external cost of a
single heavy goods vehicle in terms of public health, noise, and wear and tear on the roads, can
reach 28,000 a year. For an older large articulated lorry in a city centre, the study found, the
cost could be as much as 50p per kilometre.
(iii)

What is meant by 'external cost'?

(2 marks)

But even these costs hide the true damage toll, because the study reportedly after pressure from
the road haulage industry included nothing about lorries' contribution to congestion or
accidents. According to the environmental technology journal ENDS, the way the study was
handled was "a further indication of the acute political sensitivity now surrounding road freight".
Lorries kill lots of people. They do so directly at a large, grim and disproportionate rate. In 1998,
576 people died in accidents with heavy goods vehicles, which represents 17 per cent of the road
casualties that year, while lorries accounted for only 7 per cent of the vehicles on the roads.
When a 40-tonner hits your car never mind your bicycle, never mind you your chances are
not good. But lorries kill even more people indirectly, through pollution. Heavy goods vehicles
are overwhelmingly responsible for most harmful form of air pollution now affecting Britain
particulates. These microscopic specks of soot and other matter less than ten millionths of a
metre across and invisible to the naked eye are regarded as more life-threatening than any
other material, as they hasten the deaths of 8,000 elderly people a year by aggravating
respiratory infections.
The Government admitted this year, in launching its air quality strategy, that particulate levels
are steadily increasing and it does not know what to do about the problem. The strategy sets
objectives for cutting eight key air pollutants, from carbon monoxide to lead, but ministers have
had to abandon as unattainable the reduction target for particulates that was set by the previous
Tory administration in the strategy's first version, in1997. Nationally, nearly 50 per cent of
particulate pollution comes from the diesel engines of the 400,000-strong lorry fleet (see table
above).

IB Economics SL/HL-Year 1
Unit 2 Market Failures
Mister P
Many other figures indicate the effect that big lorries have on our way of life. The pressure
group Transport 2000 offers a bunch of them, minutely sourced. The European Union has
calculated that the external costs of transport accidents, pollution, climate change, congestion
and noise amount to nearly 10 per cent of gross domestic product, and over 90 per cent of
these costs are attributable to road transport.

In the past 10 years, heavy goods vehicle traffic has increased by 38 per cent and van
traffic by 40 per cent. Between 1988 and 1998 the average distance goods that are hauled by
road has grown by 24 per cent. If nothing changes, between 1996 and 2006 lorry traffic will
grow by 16 per cent, and van traffic by 44 per cent.
In 1998-99, local authorities in England spent nearly 1.5bn on maintaining and repairing their
road network. And according to the Design Manual for Roads and Bridges (Highways Agency,
1994), lorries are almost entirely responsible for this a 40-tonne, 5-axle lorry causes tens of
thousands of times more damage than the average car.
And there is more to come. From 1 January next year, the 44-tonners arrive. These six-axle
behemoths on wheels, bigger than anything seen in Britain before, are being allowed on to
British roads by the Government in clear contravention of an unambiguous election manifesto
pledge. Lord Macdonald of Tradeston slipped out the decision, which, after a 20-year fight,
represented a huge victory for the road haulage lobby.
He said the heavier lorries would, in fact, prove environmentally beneficial. They were no bigger
than existing lorries, he claimed, but were simply allowed to carry heavier loads, and they did
less damage to roads because they had better weight distribution.
(iv)
(v)

(vi)

With reference to the article, explain the economic arguments behind the concerns over
the transport of goods by Heavy Goods Vehicle (lorry).
(7 marks)
Explain possible reasons why governments have been reluctant to make trucking firms
pay the full cost of the externalities they create.
(5 marks)
With reference to the article, discuss whether the high duty on diesel (used by heavy
goods vehicles) in the UK as compared with the rest of the EU is likely to be the best
solution for the problem.
(9 marks)