1.8.6 Market Imperfections — Practice Questions

Six original multiple-choice questions on market imperfections, written to the style and difficulty of AQA Paper 3 Section A.

6 questions AQA A-Level Multiple choice Model answers included

Not read the notes yet? Start with the 1.8.6 Market Imperfections revision notes.

1. 1. Asymmetric information exists in a market when

   Definition in context

   Select one answer

   A Both parties to a transaction lack the same information.

   B Neither party can obtain any information about the product.

   C One party has more or better information than the other.

   D The government publishes information about market prices.
   Show model answer

   Answer: C (One party has more or better information than the other.). Asymmetric information means the two sides of a transaction are unequally informed. A used car seller knows the vehicle's history and the buyer does not; an insurance applicant knows their own health better than the insurer. The imbalance lets the better-informed party gain at the other's expense, and decisions are made on faulty grounds, so resources are misallocated.

   Why the other options are wrong

   • A — Both parties lacking the same information is a shared information gap — genuine uncertainty, but symmetrical, so neither side has an advantage.
   • B — Complete absence of information is an extreme information gap rather than an asymmetry.
   • D — Published information reduces asymmetry, which is why transparency requirements are a common remedy.

2. 2. Which one of the following is a market imperfection that can cause market failure?

   Applied reasoning

   Select one answer

   A Firms competing to attract customers by improving quality.

   B Prices adjusting quickly to changes in demand and supply.

   C Consumers switching between suppliers when prices change.

   D The immobility of factors of production between industries.
   Show model answer

   Answer: D (The immobility of factors of production between industries.). Immobility of factors means labour and capital cannot move freely to where they are most valued. Redundant workers whose skills are not transferable, or who cannot afford to relocate, stay unemployed while vacancies elsewhere go unfilled. Resources are therefore not allocated to their most productive use, which is a market failure. The other imperfections in this topic are asymmetric information and monopoly power.

   Why the other options are wrong

   • A — Competition on quality is the market working well, and it is one of the recognised benefits of competition.
   • B — Rapid price adjustment is the price mechanism doing its job of signalling and rationing efficiently.
   • C — Consumers switching in response to price is exactly the behaviour that disciplines firms and keeps markets competitive.

3. 3. A consumer skips a routine health check because they do not realise how valuable early detection can be. The resulting market failure is best described as

   Applied reasoning

   Select one answer

   A An information gap causing under-consumption.

   B A negative externality in production.

   C A public good problem caused by non-excludability.

   D Monopoly power exercised by healthcare providers.
   Show model answer

   Answer: A (An information gap causing under-consumption.). The consumer is not weighing the benefit correctly because they do not know what it is. That information gap leads to under-consumption of a service society would like more of — a misallocation of resources, since the check is worth more than the consumer believes. It is one of the two reasons merit goods are under-consumed, alongside positive externalities.

   Why the other options are wrong

   • B — No third party is being harmed by a production process here. The problem is the consumer's own faulty judgement.
   • C — A health check is entirely excludable — you must book and attend — so it is not a public good.
   • D — Nothing suggests a dominant provider restricting output or raising price. The barrier is knowledge, not market power.

4. 4. Monopoly power is treated as a market imperfection mainly because a monopolist

   Applied reasoning

   Select one answer

   A Always produces at the minimum of its average cost curve.

   B Cannot earn supernormal profit in the long run.

   C Restricts output and charges a price above marginal cost.

   D Sells a homogeneous product to many small buyers.
   Show model answer

   Answer: C (Restricts output and charges a price above marginal cost.). A profit-maximising monopolist produces where MC = MR and then charges the price its demand curve allows, which lies above marginal cost. Since price measures what consumers think an extra unit is worth and marginal cost measures what it costs society to make, P > MC means too little is produced. That is allocative inefficiency, and it is compounded by X-inefficiency where competitive pressure is absent.

   Why the other options are wrong

   • A — A monopolist usually does not produce at minimum average cost, and would not be criticised if it did.
   • B — Sustaining supernormal profit in the long run is exactly what barriers to entry allow, and it is part of the concern.
   • D — Homogeneous products and many small buyers describe perfect competition, the opposite market structure.

5. 5. Skilled workers made redundant in one region cannot move to vacancies in another because of high housing costs. This market imperfection is best described as

   Applied reasoning

   Select one answer

   A Asymmetric information between workers and employers.

   B Geographical immobility of labour.

   C Monopsony power held by regional employers.

   D Occupational immobility of labour.
   Show model answer

   Answer: B (Geographical immobility of labour.). Geographical immobility is the inability to move between places, and housing cost is the most common cause of it in the UK. The consequence is a market failure: labour is not allocated where it is most productive, so unemployment in one region persists alongside unfilled vacancies in another.

   Why the other options are wrong

   • A — The workers know perfectly well that the vacancies exist. Their obstacle is the cost of moving, not a lack of information.
   • C — Monopsony concerns an employer's power to set wages. Nothing here suggests one dominant buyer of labour.
   • D — Occupational immobility is the inability to move between types of work. These workers already have the relevant skills.

6. 6. A government requires energy suppliers to publish standardised tariff comparisons. The economic case for this policy is that it

   Applied reasoning

   Select one answer

   A Guarantees that every household will pay the same price for energy.

   B Increases the monopoly power held by the largest suppliers.

   C Reduces asymmetric information, aiding consumer choice.

   D Removes the need for any competition between energy suppliers.
   Show model answer

   Answer: C (Reduces asymmetric information, aiding consumer choice.). Where tariffs are complex and hard to compare, suppliers know far more about the true cost of their deals than customers do — a clear asymmetry. Consumers stay on poor-value tariffs, and the market rewards obscurity rather than efficiency. Standardised comparisons close the gap, so consumers can switch to genuinely better deals and firms have to compete on price rather than on confusion.
   The evaluation is that information alone may not be enough: many households still do not switch, which is where behavioural economics — inertia, choice overload, default effects — becomes relevant.

   Why the other options are wrong

   • A — Prices can and should still differ between suppliers and tariffs. The aim is that differences become visible, not that they disappear.
   • B — Better-informed consumers switch more readily, which weakens the position of large incumbents rather than strengthening it.
   • D — The policy is designed to make competition work more effectively, not to replace it.