4.2 Government Failure

Question 1

What is government failure?

Answer 1

When govt intervention in a market leads to a net social welfare loss

Question 2

Causes of failure?

Answer 2

U DIE
1) Information gaps
2) Unintended consequences
3) Distorted price signals
4) Excessive administrative costs

Question 3

Examples of unintended consequences?

Answer 3

• Bank bailouts (moral hazard)
• NMW leading to reduction in employment
• Smoking bans lead to outdoor heaters

Question 4

Main causes of regulatory capture?

Answer 4

• Asymmetric information
• Under-resourced
• Information gaps

Question 5

Examples of regulatory capture?

Answer 5

1) Ofwat accused of allowing water monopolies to raise prices too high
2) Financial Services Authority accused of allowing banks to be too risky up to GFC 2008