IB Economics: Market Failure — Tutor Lesson Plan (negative externality, deadweight loss, evaluation)

2026-10-28

Half the marks in an IB market-failure answer sit in the diagram and half in the evaluation of the policy cost. This lesson turns deadweight loss into an area and then weighs the tax against what it costs.

Objectives — the student can separate private from social cost, compute deadweight loss as an area, and evaluate a tax by naming who gains and who loses.

01 Prerequisites (3-minute check)

If any of these fails, fix it before the lesson starts.

Skill	Quick check	Pass mark
Reading a diagram	Where is the market equilibrium?	Where demand meets supply, (20, 100)
Triangle area	Base 20, height 4	40
Multiplication	A tax of 4 per unit on 80 units	320

02 Lesson flow (60 minutes)

Time	Stage	Tutor does	Student does
0-10 min	Two kinds of cost	Private cost against social cost	Point to the gap
10-22 min	Equilibrium and optimum	Market output 100, social optimum 80	Explain the gap of 20
22-36 min	Deadweight loss	Half times external cost times excess output	Get 40
36-48 min	Policy tools	Pigouvian tax, subsidy, regulation	Revenue 4 times 80 is 320
48-56 min	Evaluation	Winners, losers, trade-off	Write two contrasting sentences
56-60 min	Exit check	Three questions marked	Finish alone

03 Teaching script (read it out)

Scene 1: The externality is the gap between two lines

Firms see only private cost, while society pays an extra 4 per unit, so social cost equals private cost plus 4.
The market settles at price 20 and output 100, the social optimum is 80, and each of the extra 20 units costs society more than it is worth.

Student explains why the producer does not count the external cost: the producer does not pay it.

Scene 2: Deadweight loss is one triangle

Deadweight loss is half times the external cost per unit times the excess output, that is half times 4 times 20, so 40.
IB wants that area marked on the diagram and described as the part where social marginal cost exceeds social marginal benefit.

Student calculates the loss if the external cost doubles (80).

Scene 3: Evaluation: a tax is not free

A Pigouvian tax of 4 per unit cuts output from 100 to 80 and raises 4 times 80, so 320, while the deadweight loss disappears.
Evaluation must name both sides: the externality is internalised, but producer profit and employment fall, and if demand is inelastic output barely moves.

Note: the evaluation paragraph needs at least one conditional sentence.

04 Question types and worked steps

Type	Example	Steps	Answer
Define and illustrate	negative externality	A cost borne by a third party, uncompensated	Pollution, noise
Compute deadweight loss	external cost 4, excess 20	Half times 4 times 20	40
Policy effect	tax of 4 per unit	Output 80, revenue 320	Loss removed
Evaluation	tax against regulation	Elasticity, enforcement cost, equity	End with a condition

Sanity check (teach this): Tax revenue cannot exceed the value of the market, since 320 is far below 20 times 100; and deadweight loss must be half the rectangle of the same base and height, 40 against 80.

05 Independent practice (3 questions)

Question	Answer	What to watch
Socially optimal output	80	Where social cost meets demand
Deadweight loss	40	All three factors of the formula
Revenue from a tax of 4	320	Use the new output 80

06 Common mistakes and what to say

Mistake	Student writes	Say this
Using the old output	revenue written 400	A tax is collected on what is actually sold, which is 80.
Treating the loss as a rectangle	writing 80	Deadweight loss is a triangle, so halve it.
Only listing benefits	a one-line evaluation	IB wants the losing side too, or half the marks go.
Confusing loss with revenue	calling 40 the tax revenue	40 is the efficiency loss, revenue is the rate times output.

07 Homework (paper, section and question numbers)

IB economics chapter index — Check the three questions in the index

08 Exit check (last 5 minutes)

Question	Answer	Decision
Market and optimal output	100 and 80	All three right: move to macro policy
Deadweight loss	40	One wrong: re-teach the triangle
Revenue and one cost	320, and lower producer profit	Two wrong: repeat scene 3

09 Tutor FAQ

Must the diagram be drawn?

Part (a) of a Paper 1 question almost always asks for a diagram with labelled axes, equilibrium and the loss area.

Where does elasticity come in?

The less elastic demand, the smaller the fall in output for a given tax, so the loss shrinks more slowly.

Market failure against government failure?

Market failure is a price that ignores a cost; government failure is a new cost created by the policy, and the two are evaluated separately.

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A TutorZone lesson-prep guide. Written by the TutorZone team; questions and lesson flow are original and are not taken from any school or publisher material.