Government Failure

Question 1

Gov. Failure Definition

Answer 1

When government intervention in a market results in a net loss of economic welfare

Question 2

3 Reasons for Government Failure

Answer 2

Distortion of Price Signals

Excessive administrative costs

Information gaps

Question 3

Price Signal Distortion

Answer 3

Taxes and Subsidies can cause inefficiency, particularly when the reason isn’t to correct market failure

e.g. subsidies to farmers who cannota afford to produce cheaply enough to be competitive mean keeping inefficient firms in business. In reality we should stop these subsidies, let the firms close down and spend elsewhere

Question 4

Excessive administration costs

Answer 4

Some regulation can be extremely expensive e.g. health & safety checks
Taxpayers are paying for the regulation for little benefit

Or a lot of the money given to the NHS is spent on organisational Administration rather than actual healthcare

Question 5

Information Gaps

Answer 5

Gov. spend a lot of money on risky projects e.g. Keilder Water Resevoir in the 60s. Was thought to be necessary to supply workers, but a huge decline in the steel and coal industry meant it was no longer needed