government failure

Question 1

subsides failure

Answer 1

this may protect inefficient firms from competition and create barriers to entry for new firms because prices are kept ‘artificially’ low. Subsidies, and other assistance, can lead to the problem of moral hazard.

Question 2

taxes failure

Answer 2

Taxes on goods and services can raise prices artificially and distort the efficient operation of the market. In addition, taxes on incomes can create a disincentive effect and discourage individuals from working hard.

Question 3

fixing prices failure 1

Answer 3

Shortages, which may arise when government fixes price below the market rate. Because public healthcare is provide free at the point of consumption there will be long waiting lists for treatment.

Question 4

fixing prices failure 2

Answer 4

Surpluses, which may arise when government fixes prices above the natural market rate, as supply will exceed demand. For example, guaranteeing farmers a high price encourages over-production and wasteful surpluses. Setting a ‘minimum wage’ is likely to create an excess of supply of labour in markets where the ‘market clearing equilibrium’ is less than the minimum.

Question 5

moral hazard

Answer 5

If individuals know that the state will provide unemployment benefit, or free treatment for their poor health, they are less likely to take steps to improve their employability, or to avoid activities which prevent poor health, such smoking, a poor diet, or lack of exercise.

Question 6

Excessive bureaucracy

Answer 6

This is caused by the public sector when it tries to solve the principal-agent problem. Government must appoint bureaucrats to ensure that its objectives are pursued by the managers of public sector organisations, such as the NHS.

Question 7

information failure

Answer 7

is an issue for governments, given that government does not necessarily ‘know’ enough to enable it to make effective decisions about the best way to allocate scarce resources. Many economists believe in the efficient market hypothesis, which assumes that the market will always contain more information than any individual or government.

Question 8

Unintended consequences

Answer 8

Policies have unintended side effects- smoking ban increase outdoor patio heaters being used