Gov Failure Flashcards
1
Q
What is government failure?
A
a situation where government intervention in the economy to correct a market failure creates inefficiency and leads to a misallocation of scarce resources
2
Q
Moral hazard
A
Arises as a result of subsidies.
3
Q
Why could subsidies be a form of gov failure?
A
They protect inefficient firms from competition
Create barriers to entry for new firms because prices are kept ‘artificially’ low.
4
Q
Taxes
A
can raise prices artificially and distort the efficient operation of the market.
Income tax can create a disincentive effect and discourage individuals from working hard.
