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Leaving Cert Economics: Market failure & externalities

How often Market failure & externalities comes up on the Economics papers, every year it was asked, and questions to try.

HL Asked on 5 of the last 5 Higher Level papers, most recently in 2025. banker

OL Asked on 4 of the last 5 Ordinary Level papers, most recently in 2025. most years

Market failure & externalities, Higher Level(7 marks)

Quick ones on Market failure & externalities.

(a)Market failure occurs when…
  1. A single firm makes a loss
  2. The free market misallocates resources
  3. Prices rise because of inflation
(b)A public good is…
  1. Always provided by private firms
  2. Rival and excludable
  3. Non-rival and non-excludable
(c)The free-rider problem explains why…
  1. Private firms under-provide public goods
  2. Monopolies charge high prices to consumers
  3. Merit goods are over-consumed by the public
Show the answers

(a) The free market misallocates resources

(b) Non-rival and non-excludable

(c) Private firms under-provide public goods

Your turn: Higher Level questions on Market failure & externalities.

Higher Level

Asked on 5 of the last 5 Higher Level papers, most recently in 2025. banker

Every paper, year by year

YearWhere it came up
2025Q7, Q8
2024Q7, Q9, Q12
2023Q16
2022Q3, Q9
2021Q4, Q13

Links open the State Examinations Commission’s paper for that year.

More Market failure & externalities questions

Market failure & externalities, 3 marks

On a diagram, a negative production externality means the social cost curve lies…

  1. Below the private supply curve
  2. Exactly on the demand curve
  3. Above the private supply (cost) curve
Show the answer

Above the private supply (cost) curve

Social cost = private cost + external cost, so the social cost curve sits above supply by the external cost per unit. The efficient output is where it meets demand.

Market failure & externalities, 3 marks

Demerit goods such as tobacco tend to be over-consumed because…

  1. Their prices are too high for users to afford
  2. Users underestimate the harm to themselves
  3. They are public goods that no one pays for
Show the answer

Users underestimate the harm to themselves

Imperfect information or short-sightedness leads people to consume more than is good for them. Taxes, age limits and health warnings aim to cut consumption.

Market failure & externalities, 2 marks

Which is a public good?

  1. National defence
  2. A cinema ticket
  3. A private gym membership
Show the answer

National defence

Defence protects everyone in the country at once (non-rival) and no one can be excluded, so it must be tax-funded. Cinema and gym places are rival and excludable.

Ordinary Level

Asked on 4 of the last 5 Ordinary Level papers, most recently in 2025. most years

Every paper, year by year

YearWhere it came up
2025Q6
2024Not asked
2023Q10, Q15
2022Q8, Q16
2021Q16

Links open the State Examinations Commission’s paper for that year.

More Market failure & externalities questions

Market failure & externalities, 2 marks

Market failure occurs when?

  1. A single firm in the market makes a loss
  2. Prices rise gradually over time
  3. The free market does not allocate resources well
Show the answer

The free market does not allocate resources well

Markets fail when, left alone, they make too much of some things (like pollution), too little of others (like education), or do not provide some goods at all.

Market failure & externalities, 2 marks

Smoke from a factory harming nearby residents is?

  1. A private cost
  2. A negative externality
  3. A positive externality
Show the answer

A negative externality

The residents are third parties who suffer a cost they did not choose, and the factory does not pay for it. So the market produces too much of the good.

Market failure & externalities, 2 marks

A neighbour's well-kept garden that passers-by enjoy is?

  1. A positive externality
  2. A negative externality
  3. A private cost
Show the answer

A positive externality

Other people gain a benefit they did not pay for. Because the producer does not get paid for these benefits, the market provides too little of such goods.

Other Economics topics

All of Leaving Cert Economics