Government Failure

Question 1

What is government failure

Answer 1

When government intervention in markets leads to an inefficient allocation of resources causing a net welfare loss to society

Question 2

What are the 4 types of government failure

Answer 2

-distortion of price signals
-unintended consequences
-information gaps
-administration costs

Question 3

How does the distortion of price signals lead to government failure

Answer 3

-Government intervention can disrupt the rationing, signalling and incentive functions of the price mechanism
-max and min prices can distort price signals
-subsidies and min prices can distort the signalling function

Question 4

How are unintended consequences a type of government failure

Answer 4

Some methods of intervention can lead to firms/consumers getting around it
E.g shadow markets, tax evasion

Question 5

How are information gaps a type of government failure

Answer 5

External costs and benefits are difficult to quantify

Question 6

How are administrative costs a type of government failure

Answer 6

The cost of implementing and overseeing a policy to correct market failure may outweigh the benefits of the policy