Microeconomic Objectives and Policies
H2 Economics - syllabus 9570, 2026
Explain why markets fail through externalities, public goods and information failure, and judge the policies governments use to correct them.
- Efficiency and equity
Markets fail when they do not allocate resources efficiently; equity is a separate question about fairness.
- Negative externalities
When an activity harms third parties, the free market produces too much of it.
- Positive externalities
When an activity benefits third parties, the free market produces too little of it.
- Deadweight loss
Deadweight loss is the net benefit society loses when output is not at the efficient level.
- Public goods
Public goods are non-excludable and non-rival, so the free market provides too little or none at all.
- Information failure
When people misjudge the benefits or costs of a good, they buy the wrong amount.
- Taxes and subsidies to correct externalities
A tax equal to the external cost, or a subsidy equal to the external benefit, moves the market to the efficient output.
- Quotas and tradeable permits
Tradeable permits cap total pollution and let firms that can cut it cheaply do more of the cutting.
- Direct and joint provision
The government can provide goods itself, or share provision with the private sector.
- Rules, regulation and education
Rules set limits on harmful behaviour; education and labels fix information failure.
- Evaluating market failure policies
Judge a policy by whether it fixes the cause, what it costs and who is affected, compared with the alternatives.
- Asymmetric information
When one side of a deal knows more than the other, adverse selection and moral hazard can lead to inefficient outcomes.
- Factor immobility
When workers or capital cannot move to new uses, resources stay idle while jobs go unfilled.
- Market dominance
A dominant firm restricts output to raise its price, so less is produced than society wants.
- Nudges
A nudge changes how choices are presented, to steer people towards better decisions without removing options.
- Government failure
Government failure happens when intervention makes resource allocation worse, not better.
- Model essay (a): why too few people get vaccinated
A top 10-mark answer, written in about 20 minutes, explains two sources of market failure, each with a full chain, and shows the welfare loss on a diagram.
- Model essay (b): are subsidies the best policy?
A top 15-mark answer, written in about 30 minutes, shows how a subsidy corrects the externality, tests it against the real barriers, and judges with criteria.
- Case study practice: plastic bags and waste
A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.
What you will be able to do
I can state a government's two microeconomic objectives: efficiency and equity.
Syllabus 9570, 2.3.1(a). Governments' Microeconomic Objectives: Governments' microeconomic objectives are efficiency and equity
Taught in Efficiency and equity
I can explain that a market is efficient at the social optimum, where marginal social benefit equals marginal social cost.
Syllabus 9570, 2.3.1(b). Governments' Microeconomic Objectives: Efficiency in markets occurs when the social optimum is achieved, where Marginal Social Benefit (MSB) = Marginal Social Cost (MSC), maximising society's welfare
Taught in Efficiency and equity, Negative externalities
I can explain deadweight loss as society's lost net benefit when output is not at the social optimum.
Syllabus 9570, 2.3.1(c). Governments' Microeconomic Objectives: Deadweight loss results when the social optimum is not achieved; Deadweight loss can be explained as the reduction in net benefit to society when output level is not at the social optimum
Taught in Deadweight loss, Model essay (a): why too few people get vaccinated
I can explain why an efficient outcome can still be unfair.
Syllabus 9570, 2.3.1(d). Governments' Microeconomic Objectives: Efficient resource allocation may not result in equitable outcomes
Taught in Efficiency and equity
I can explain equity as a fair share of essential goods and services.
Syllabus 9570, 2.3.1(e). Governments' Microeconomic Objectives: Equity occurs when there is fairness in the distribution of essential goods and services
Taught in Efficiency and equity, Evaluating market failure policies
I can define market failure as the free market failing to allocate resources efficiently.
Syllabus 9570, 2.3.2(a). Market Failure and its Causes: Market failure occurs when the free market is unable to allocate resources efficiently
Taught in Efficiency and equity
I can explain the causes of market failure: public goods, externalities, information failure, immobile factors and market dominance.
Syllabus 9570, 2.3.2(b). Market Failure and its Causes: Markets may fail in terms of; non-provision of public goods due to non-rivalry and non- excludability; non-socially optimal levels of goods and services due to the presence of externalities, information failure (including asymmetric information), immobility of factors of production, and market dominance
Taught in Negative externalities, Positive externalities, Public goods, Information failure, Asymmetric information, Factor immobility, Market dominance, Model essay (a): why too few people get vaccinated, Case study practice: plastic bags and waste
I can explain why a government steps in to improve efficiency and equity.
Syllabus 9570, 2.3.3(a). Microeconomic Policies: Microeconomic policy decisions undertaken by governments to achieve microeconomic objectives in relation to efficiency and equity
Taught in Evaluating market failure policies, Model essay (b): are subsidies the best policy?
I can explain how taxes, subsidies, quotas, tradeable permits, provision, rules and public education correct market failure.
Syllabus 9570, 2.3.3(b). Microeconomic Policies: Policy measures including taxes and subsidies, quotas and tradeable permits, joint and direct provision, rules and regulations, public education in achieving efficiency and equity
Taught in Taxes and subsidies to correct externalities, Quotas and tradeable permits, Direct and joint provision, Rules, regulation and education, Nudges, Model essay (b): are subsidies the best policy?, Case study practice: plastic bags and waste
I can judge how well each policy works and explain government failure.
Syllabus 9570, 2.3.3(c). Microeconomic Policies: Effectiveness of policy measures and government failure
Taught in Evaluating market failure policies, Government failure, Model essay (b): are subsidies the best policy?, Case study practice: plastic bags and waste
Original teaching notes