5.9 Government failure

Question 1

When does government failure occur?

Answer 1

Government failure occurs when government intervention in the economy leads to a misallocation of resources or a NET welfare loss in comparison to the free market operating alone

Question 2

What factors could cause government failure? (5)

Answer 2

• Inadequate information
• Unintended consequences
• Market distortions
• Administrative costs
• Regulatory capture

Question 3

Why does government failure cause a misallocation of resources?

Answer 3

Government failure causes a misallocation of resources because the intervention creates a worsening of market failure causing allocative inefficiency

Question 4

What is public choice theory?

Answer 4

Public choice theory suggests that those agents that represent the public e.g. politicians maximise their own self-interest rather than the interests of the public

Question 5

What are administrative costs?

Answer 5

Administrative costs are the expenditures that the government spends on intervening in markets

Question 6

What are unintended consequences?

Answer 6

Side-effects of government intervention

Question 7

What are market distortions?

Answer 7

Problems within the market that the government are trying to solve