1.4.2 Government Failure

Question 1

What leads to Government failure

Answer 1

When Government intervention in a market leads to a less efficient allocation of resources - ultimately making the situation worse

When the costs of Governemnt failure to correct market failure, exceeds benefits

Question 2

The intervention by the Government in market failure, can lead to what, if not sucessful

Answer 2

A greater net social welfare loss

Question 3

What are the 4 main causes of market failure

Answer 3

Distortion of price signals

Unintended consequences

Excessive admin costs

Information Gaps

Question 4

In the case of subsidies:

How could a distortion of price signals cause Government failure

Answer 4

• Can causes an inefficient allocation of resoruces, by not allowing the price mechanism to function properly
• Dependancies of subsides, may mean the survival of businesses who, without aid wouldn’t survive
• There will be less incentive to increase productivity or efficiency, to meet competitors

Question 5

In the cases of taxations:

Why would this cause Government failure

Answer 5

• If there are high levels of protectionism on trade, the Government may enforce tariffs on imported goods, to try and increase demand for domestic markets
• Could create a welfare loss to consumers, where costs will rise for imported goods, while domestic markets can become less efficient because they have less compeption from imports

Question 6

In the case of minimum price (min wages):

How could this cause Government failure through distortion in price signals

Answer 6

• Minimum prices are set above free-market equilibrium, to decrease demand
• The higher price of wages, will cause businesses to possible employ fewer individuals, possibly increasing unemployment

Question 7

What are unintended conseqences when it comes to market failure

Answer 7

is that the actions of consumer/producers and Government, always have an effect that are unanticipated/unintended

Although the original aim was to remove and externalitiy

Question 8

Give examples of intended consequences with

taxes/subsidies/min and max price

Answer 8

• Setting taxes/fines too high which could effect businesses survival, discourage other countries from wanting to set up business
• Subsides can causes businesses to become ineffiecent
• Minimum price casues an excess of unwanted goods
• Maximum price could cause the development of illegal markets

Question 9

How does excessive administrative costs cause Governemnt failure

Answer 9

The estimated social benefits of a particular policy might be largely swamped by admin costs of policing it

Question 10

Give an example of excessive admin costs when relating to pollution permits

Answer 10

• Costs of policing policing pollution of businesses can be high
• Benefits of reduced pollution need tp be greater than costs of enforcing it
• Government doesn’t make much revenue from fines from permits unlike taxations
• Leading to Governemnt failure

Question 11

How does information failure, lead to Government failure

Answer 11

• It is likley that Governements will always have information failure
• Meaning that when trying to meet the socially optimum point (tax/subsidy) will carry a value judgement
• Therefore could be ineffive in reducing externsility