Government failure

Question 1

Do all markets fail?

Answer 1

Yes, all real markets fail e.g. product, labour and financial markets.

Question 2

When is there a case for government intervention?

Answer 2

When markets fail - they’re not self-correcting and efficient in allocating scarce resources.

Question 3

What is government failure?

Answer 3

When intervention to correct a market fails leading to greater net social welfare loss.

Question 4

Give examples how government intervention can fail?

Answer 4

• Policy leads to greater inequality
• Regulatory capture
• Failure to rigorously test a policy
• High enforcement costs
• Unintended consequences
• Conflicts with other policy aims

Question 5

What does the UK put on majority of imports of steel?

Answer 5

25% TARIFF ON IMPORTS

Question 6

Give examples of possible government failure from imposing quotas and tariffs on imported steel in the UK.

Answer 6

• Increased tarrifs and quotas leads to Higher costs for downstream users of steel - higher construction costs, making houses less affordable
• Risk of a tit-for-tat trade war - with other counties imposing retaliatory trade barriers.

Question 7

Give an examples of rent control in the UK.

Answer 7

Scottish gov introduced a rent increase cap in rented housing and a pause on some evictions in 2022

cap set at 0% effectively freezing rents

Question 8

Give 2 examples of possible government failure from banning high-caffeine drinks to people under the age of 16.

Answer 8

• Black market and illegal sales
• Enforcement costs

Question 9

Give a possible cause of government failure from imposing a minimum retail price for high-caffeine drinks.

Answer 9

• Low PED and low effectiveness
• Substitution effects