1.4.2 - Government faliure

Question 1

Government failure

Answer 1

When the government intervenes to correct market failure and this results in a net welfare loss

the finial allocation of resources after intervention is less efficent then before intivention

Question 2

Free market economists (like adam smith) believe…

Answer 2

that interfering with the free market allocation will result in inefficent allocation and so welfare loss

Question 3

A tax distorst price signal by

Answer 3

increasing the price to consumers and hence reducing quantity consumed resulting in low consumer surpluss

Question 4

subsidies distorts price singals by

Answer 4

• Higher prices encouraging producers to produce more
• Resources are allocated to subsidies industries and hence away from others

Question 5

A min price distorts price signal by

Answer 5

• less people want to supply at lower price
• more consumers want (excess demand)

Question 6

Information gaps can cause government faliure

Answer 6

interventions, to address market failure, may be poorly designed as policy makers do not have access to all information necessary

Question 7

causes of government failure

Answer 7

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