1.4.2 Government failure

Question 1

Government failure

Answer 1

This incurs when government intervention in the economy cause a net welfare loss/decline in economic welfare.
-The total social costs arising from the intervention is greater than the social benefit.
-Government failure can happen if a policy decision fails to create enough of an incentive to change behaviour of agents to meet aims of policy.

Question 2

Causes of government failure: distortion of price signals

Answer 2

Some types of government intervention changes price signals in the market.
-Maximum and minimum prices lead to excess demand (shortage) and excess supply (surplus).
-

Question 3

Causes of government failure: unintended consequences

Answer 3

Some intervention cause effects which the government did not intend to happen.
- Targets to increase the treatment of patients under the NHS, has led to a reduction in the quality of care.

Question 4

Causes of government failure: Excessive administration costs

Answer 4

In many cases, a lot of money allocated by the government is used for basic administration costs. Social costs may be higher than social benefits once administration costs are taken into account.
-A large proportion of the money given to the NHS is actually spent on organisational administration rather than putting the money into medical care.

Question 5

Causes of government failure: Information gas

Answer 5

Any decisions made by the government is based on some form of data but this information is limited.
-The government cannot accurately predict the number of cancer patients there will be.