1.4.2 Government failure

Question 1

What is gov failure

Answer 1

When an intervention leads to inefficient allocation of resources and a net welfare loss

Question 2

Where does gov failure come from

Answer 2

-inadequate gov responses
-short term policies with long term consequences
-damaging policies

Question 3

What does gov failure cause

Answer 3

-distortion of price signals
-unintended consequences
-excessive administration costs
-information gaps

Question 4

What does a distortion of price signals mean

Answer 4

price doesn’t reflect true supply or demand, leads to under or over production
-e.g rent controls causes shortages as landlords don’t have incentive to supply

Question 5

What do unintended consequences mean

Answer 5

there is imperfect understanding of complex markets and behavioural responses creating new problems
-e.g cash transfers to reduce poverty discourage labour and reduce the workforce

Question 6

What do excessive administrative costs mean

Answer 6

costs of implementation, monitoring and enforcement can reduce net benefits of a policy
-e.g costs in healthcare limit resources for patients

Question 7

What do information gaps mean

Answer 7

interventions based on incomplete or inaccurate info don’t achieve intended goals
-e.g lack of data on pollution sources leads to failure of environmental policies

Question 8

What do agricultural price supports mean

Answer 8

overproduction and waste, so high gov expenditure and inefficient allocation
-e.g Common agricultural policy faced criticism for waste

Question 9

What may subsidies in renewable energy cause

Answer 9

over-subsidisation creates market distortions and wastes taxpayer funds
e.g subsidy in solar panels causes boom in solar instalments and financial losses for investors

Question 10

What may rent controls cause

Answer 10

housing shortages, deteriorating building conditions, reduced investment
e.g San Francisco has soaring housing prices and shortages