1.4.2 Government failure

Question 1

What is government failure?

Answer 1

When the government intervene to try and correct market failure however are inefficient in doing so making market failure more severe resulting in a net welfare loss.

Question 2

Explain one cause of government failure

Answer 2

When government intervene in the market it may distort the price signals and the market forces of demand and supply which operate freely causing for the rpice mechanism to inefficiently allocate resources again causing further market failure.

Question 3

How can government intervention be evaluated

Answer 3

Will the welfare gain as a result of succesful government intervention exceed the welfare loss as a result of the existing market failure. Or will the unsuccesful governemnt intervention further worsen the welfare loss causing government failure.