1.4.2 Government failure

Question 1

what is government failure as intervention that results in a net welfare loss

Answer 1

gov failure is when the gov intervention in the market leads to net welfare loss and a misallocation of resources. the social costs are higher than the social benefits

Question 2

Causes of government failure:
distortion of price signals

Answer 2

change price signals in the market and distort 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)

for example, subsidies keep farmers in employment when they cannot produce cheaply enough to be competitive, the result is the gov keeping them in business when they should close down and find an alternative use for their resources

maximum and minimum prices lead to excess supply and demand and make it difficult to allocate resources

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 price mechanism

Question 3

Causes of government failure:
unintended consequences

Question 4

Causes of government failure:
excessive administrative costs

Question 5

Causes of government failure:
information gaps

Question 6

Government failure in various markets