1.4.2 Government failure

Question 1

Explain what government failure is

Answer 1

• When government intervention in a market leads to a less efficient allocation of resources and
  therefore makes a situation worse
• When government intervention to correct market failure leads to a net social welfare loss
• When the costs of government intervention to correct market failure exceed the benefits
• Government failure can happen if a policy decision fails to create enough of an incentive to change
  people’s actual behaviour

Question 2

What are examples of government failure?

Answer 2

Question 3

Briefly explain the problems of each cause of govt failure, with examples

Answer 3

Question 4

What is the law of unintended consquences?

Answer 4

Actions of consumers, producers and government always have at least one and often many effects
that are unanticipated or “unintended.”

Question 5

What are examples of unintended consequences?

Answer 5

o Bank bail-outs – raises the problem of moral hazard
o Bio-fuel subsidy –may divert production away from food, cause food price inflation and this
hits the poorest in society
o Import tariffs on steel – hits domestic car and construction firms
o Targets for treating patients – contributed to a reduction in the quality of care e.g. the Mid-
Staffordshire General scandal

Question 6

What is regulatory failure?

Answer 6

The actions of regulators may also bring about government failure

Question 7

Give examples of regulatory failure.

Answer 7