1.4.2

Question 1

What is government failure seen as

Answer 1

intervention that results in a net welfare loss

Question 2

Define government failure

Answer 2

when government intervention designed to correct a market failure results in a less efficient allocation of resources

Question 3

State 4 potential causes of government failure

Answer 3

o distortion of price signals
o unintended consequences (Aka cobra effect)
o excessive administrative costs
o information gaps

Question 4

What are unintended consequences and give an exmaple where they would occur

Answer 4

A cause of government failure whereby the government’s actions result in unexpected effects.
example: prohibition, high taxes on cigarettes

Question 5

Define net welfare loss

Answer 5

An overall loss of economic welfare when compared to the starting position

Question 6

Define regulatory capture

Answer 6

A form of government failure, happens when a government agency operates in favour of producers rather than consumers.

Question 7

Explain how distortion of rpice signals occur

Answer 7

• some types of government intervention change price signals in the market and distort the free market mechanism.
• As a result, they keep some companies in business
  when they are inefficient so the resources should be switched to somewhere else (subsidies) or make consumers pay too much for a good (taxes)

Question 8

How does distortion of price signals lead to gov failure

Answer 8

• The price mechanism aims to allocate resources to their best use and where consumers want and value them most highly.
• By intervening, the government distorts
  the mechanism and so resources may be allocated inefficiently

Question 9

Examples of distortion of price signals

Answer 9

• subsidies (CAP) keep farmers in employment when they cannot produce cheaply enough to be competitive.
  + The result is that the government keeps them in
  business when they should close down and find an alternative use for their resources.
  + ALSO, greate consumption fo goods wiht externla costs like sugar
• Maximum and minimum prices lead to excess demand/supply and make it difficult to
  allocate resources

Question 10

Describe excessive administrative costs

Answer 10

-a lot of money that is allocated by the government is actually used up on basic administration costs.
- The social costs may be higher than social benefits,
once administration costs are taken into account.
- adminstartive costs of gov iny > benefits that it produces

Question 11

Describe information gaps

Answer 11

• A lack of sufficient information can lead to government intervention being set in an ineffective manner.
• impossible for the governemnt to obtain full information needed to get accurate balance of costs and benefits
  Examples: the promotion of diesel cars by European governments.