government failure Flashcards
1
Q
what is government failure ?
A
when the governement intervenes to correct a market failure, but the intervention results in a more inefficient allocation of resources leading to a net welfare loss to society.
2
Q
what are the 4 main factors that cause government failure?
A
- distorting price signals (minimum and maximum prices. leads to excess demand and excess supply)
- unintended consequences e.g. gov began subsidising bio-fuel so farmers began growing more crops to produce ethenol than crops for food
- excessive administrative costs (costs for the collection of taxes , which may end up outweighing the benefits)
- information gaps = inefficient allocation of recourses. e.g. gov doesnt know what tax rate is most efficient for maximising tax revenue
