AS 91402 - 3.4
Demonstrate understanding of government interventions to
correct market failures
EXTERNALITIES – Present an economic analysis
to justify the use of a
government policy to
compensate for an externality
STUDENT INSTRUCTIONS

You can complete either of the TWO activities below for this part of your AS 3.4 Portfolio:
1. An essay of approximately 1000 words
2. A presentation eg. in the form of a powerpoint or any other method approved by
your teacher
 Possible topics:

-ve externalities of consumption
eg obesity caused by fast food consumption so govt intervention is
necessary in this market

+ve externalities of consumption
eg. the efficiency of secondary education in NZ is improved because
the government provides some of it.

-ve externalities of production
eg.firms who emit greenhouse gases are inefficient so the
government should intervene in the markets they operate.

+ve externalities of production
eg. spillover benefits of bees pollinating agricultural not earned by
apiarists (bee keepers)
 OR any other externality topic approved by your teacher
Task
1. Select a market failure related externalities for a New Zealand good or service.
2. Submit a proposal to your teacher identifying:
 the market failure
 the policies you intend to analyse
 the economic models you will use for your analysis.
3. Once your teacher has approved your proposal, write a report, following the steps below:
1st
Fully explain the key problem(s) causing the market to fail. Support your explanations
by using an economic model to illustrate the market failure.
2nd Explain two policy options that the government could use to address the market
failure, using an economic model(s).
3rd
th
4
For each policy fully explain:

the efficiency of the policy

the equity of the policy.
Determine which of the two policy options is the most equitable and/or efficient and
write a proposal to the government integrating economic models into the justified
recommendation.
Assessment schedule: Economics 91402
Evidence/Judgements for
Achievement
Evidence/Judgements for
Achievement with Merit
Evidence/Judgements for
Achievement with Excellence
The student reported on a market
failure and completed a peer
assessment form on a different
market failure. They have
demonstrated their understanding
by:
The student reported on a market
failure and completed a peer
assessment form on a different
market failure. They have
demonstrated their in-depth
understanding by:
The student reported on a market
failure and completed a peer
assessment form on a different
market failure. They have
demonstrated their
comprehensive understanding by:

explaining why the market
failed for their good/service



including an economic model
that shows why the market
failed
identifying the key problem in
the market for their
good/service and explaining in
detail how this caused that
market to fail
identifying the key problem in
the market for their
good/service and explaining in
detail how this caused that
market to fail

identifying policies that could be
used by the government to
correct problems caused by the
market failure



illustrating the effects chosen
policies will have on the market
failure on an economic
model(s)
referring to specific
data/information included on
the economic model they have
drawn to support their detailed
explanation about why the
market failed
referring to specific
data/information included on
the economic model they have
drawn to support their detailed
explanation about why the
market failed

explaining in detail how
equitable a policy is or how
efficiently it will correct the
market failure

explaining in detail how
equitable a policy is or how
efficiently it will correct the
market failure

using specific data/information,
including the economic
model(s) they have drawn, to
support their discussion about
the equity of government
policies or their impact on
efficiency

using the capabilities of the
economic model, if appropriate,
to support detailed explanations
about the equity of government
policies or their impact on
efficiency


explaining in detail another
market failure.
making a justified
recommendation as to which
policy intervention to use to
correct the market failure by
comprehensively explaining
why it is more efficient or more
equitable than another
government intervention

integrating economic models
into their detailed explanation of
which policy will be the most
effective and/or equitable

comprehensively explaining
another market failure.


explaining how equitable and/or
efficient the chosen policies are
in correcting the market failure
explaining another market
failure.
Example of possible student
response:
Example of possible student
response:
The market for alcohol has
negative externalities of
consumption and has examples of
spill-over effects like drunk drivers
crashing into other motorists
meaning society pays more in
healthcare.
The market for alcohol has
negative externalities of
consumption because consumers
fail to pay for the spill-over cost of
their excessive drinking. Because
some of this cost is borne by third
parties, a deadweight loss occurs
at the market equilibrium.
The student draws a social
marginal benefit (SMB) or a social
marginal cost (SMC) graph with
SMB left of PMB and the social
and private equilibrium p’s + q’s
correctly identified.
Increasing the sales tax on
alcohol, raising the drinking age,
and imposing blood level limits for
drivers are all policies that the
government could use to address
the market failure.
The student labels and refers to
areas of spill-over costs, total
surpluses, and DWL when
explaining market failure.
Since a sales tax raises the price
of alcohol it will be regressive
because, on average, poor people
spend a greater percentage of
their income on alcohol than
wealthy consumers.
The student shows the effect a
sales tax will have on the market
failure by drawing a new PMC and
tax line to the left and identifies
the dual price equilibrium (that is,
consumer price PTAX and producer
price PPR and quantity at QTAX).
The student identifies that sales
taxes are unfair as they are
regressive.
Responding to another student’s
report on a different market failure;
see Teacher resources for sample
extract of Achieved peer
assessment.
When explaining why sales tax
improves efficiency, the student
refers to the higher price paid by
consumers (PTAX) causing a
decrease in Qd and a lower price
received by the producer (PPR)
causing a decrease in Qs and so
QTAX = (moves closer to) QSOC.
Responding to another student’s
report on a different market failure;
see Teacher resources for sample
extract of Merit peer assessment.
They comment accurately on the
link between the policy’s effect on
the model and the efficiency or
equity of the policy.
The examples above relate to only
part of what is required, and are
just indicative.
The examples above relate to only
part of what is required, and are
just indicative.
Example of possible student
response:
The student indicates the area of
spill-over costs that is covered by
market surpluses (PS + CS),
showing on the graph a triangle at
QFM that is the DWL to highlight
why the market has failed.
The student shows the area of
DWL as arrows, showing Qd and
Qs appears on SMC and PMB
lines after the new prices caused
by the sales tax are entered on
their model to indicate that it is
allocatively efficient.
The student justifies their policy
proposal of using a sales tax by
noting that it will have double
dividend impact on the alcohol
market. The dual price decreases
Qd + decreases Qs and the tax
revenue earned from the tax can
be used to fund anti-drink driving
campaigns (shifting MB) left as
spill-over costs are decreased.
These combined impacts make it
more likely to be effective than
subsidising substitutes (which
aims to increase their
consumption by lowering their
price), which has only an indirect
impact on the alcohol market.
The student shows the SR effect
of dual price effect of sales tax
removing the DWL and then the
LR effect of PMB shifting left,
dissolving spill-overs and reducing
the need for government
intervention in the future.
Responding to another student’s
report on a different market
failure; see Teacher resources for
sample extract of Excellence peer
assessment and the Merit extract
for the discussion of the other
market failure.
The examples above relate to only
part of what is required, and are
just indicative.
Final grades will be decided using professional judgement based on a holistic examination of the
evidence provided against the criteria in the Achievement Standard.