1.4.2- Government Failure

Question 1

What is government failure?

Answer 1

When government intervention in a market leads to a less efficient allocation of resources and therefore makes the situation worse

Question 2

What does government failure lead to?

Answer 2

A net welfare loss

Question 3

What are the causes of government failure?

Answer 3

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

Question 4

Why is distortion of price signals a cause of government failure?

Answer 4

Gov subsidies could distort price signals by distorting the free market mechanism, so resources may be inefficiently allocated

Question 5

Why is unintended consequences a cause of government failure?

Answer 5

Policies may be undermined, making them expensive to implement so shadow markets may develop

Question 6

What is an example of unintended consequences?

Answer 6

Minimum wage leads to reduction in staff non-wage benefits

Question 7

Why is information gaps a cause of government failure?

Answer 7

-Gov may make policies that don’t maximise welfare
-too expensive and time consuming to find full info

Question 8

Why is excessive administrative costs a cause of government failure?

Answer 8

The social benefits of a policy may not be worth the financial cost of administering the policy