4.1.8.10 - Goverment Faliure

Question 1

What are the 6 reasons for government failure

Answer 1

• inadequate information
• unintended consequences
• market distortions
• administrative costs and opportunity costs
• regulatory capture
• political factors / the pursuit of conflicting objectives

Question 2

What is government failure

Answer 2

When government intervention to solve a market failure results in a misallocation of resources meaning the allocation is either inefficient or inequitable

Question 3

How does inadequate info lead to government failure

Answer 3

• governments do not know the exact nature or size of the problem they are dealing with as the problem are hard to measure
• therefore their solution may not be to the right extent , or correct overall to deal with the problem
• they may not know the full impacts of their solution which can lead to incorrect judgements of the intervention

Question 4

How do unintended consequences lead to government failure

Answer 4

• a policy to deal with one market failure may create unexpected problems, which could lead to a worse allocation than before

Question 5

How do market distortions lead to government failure

Answer 5

Attempts by the government to correct market failures may leas to inefficiencies or distortions

Question 6

How do administrative costs and opportunity costs lead to government failure

Answer 6

• if the government allocates its scarce resources into dealing with market failures, those factors of production cannot be used elsewhere - creating an opportunity cost
• the alternative uses of these factors of production could have delivered more economic welfare elsewhere instead of dealing with the market failure
• the cost of the resources can be greater that the benefits gained from the policy
• this is more likely if the market failure is less severe or the solution is very expensive

Question 7

How does regulatory capture lead to government failure

Answer 7

• bodies that enforce regulation can be subject to regulatory capture
• the regulators will not always do a god job as they could be influenced by the firms that they were set up to monitor
• often regulators have previously worked in the industry they are regulating as they would have had to gain their expertise, so they therefore may not be neutral in the dealings because they could be overseeing ex- colleagues

Question 8

How do political factors/ per suit of conflicting objectives lead to government failure

Answer 8

• because the government drive the policies and they can be driven by short- termism and their desire to win the next election rather than thinking about the long term economic benefits
• this can lead to more fashionable problems being tackled, while the less fashionable market failures are left to worsen