1.4.2 Government failure

Question 1

What is government failure?

Answer 1

Government failure occurs when the government intervenes in a market to correct market failure, but the intervention results in a more inefficient allocation of resources from society’s point of view.

Question 2

What are the causes of government failure?

Answer 2

/Distortion of price signals
/Unintended consequences
/Excessive administrative cost
/Information gaps

Question 3

Explain distortion of price signals?

Answer 3

The signalling function of the price mechanism is artificially altered. For example, a minimum price sends a signal to producers to supply more

Question 4

Explain unintended consequences?

Answer 4

Producers and consumers aim to maximise their self interest. This often leads them to look for legal or illegal loop holes to bypass government intervention

Question 5

Explain excessive administrative cost?

Answer 5

Regulation or administration costs can be expensive. The costs can sometimes be greater than the savings in social welfare

Question 6

Explain information gaps?

Answer 6

Government decision making is subject to the same information gaps and cognitive biases.

Question 7

An example of government failure?

Answer 7

Illegal Markets, the introduction of minimum prices on alcohol in Scotland has increased the amount of cross-border driving to Carlisle to purchase alcohol. In 2017, a report found that the illegal trade in drugs was worth £10bn.