LS23 - Government Failure

Question 1

Government failure

Answer 1

When the cost of intervention outweighs the benefits of intervention.
The end result is a worsening of allocation of scarce resources harming social welfare ​

Question 2

Consequences of govt failure

Answer 2

Distortion of price signals, unintended consequences, excessive administrative costs and information gaps​

Question 3

Distortion of price signals

Answer 3

• Govt subsidies can disrupt the free market mechanism - distorting price signals
• Inefficient allocation of resources - market not allowed to operate freely
• Ex: the government might end up subsidising an industry which is failing or has few prospects, wasting money​

Question 4

Unintended consequences

Answer 4

• This is when the actions of producers and consumers have unexpected effects of their transaction
• With government policies, consumers react in unexpected ways. A policy could be undermined or taken advantage of, which makes it harder for the government to reach their original goal

Question 5

Excessive administrative costs

Answer 5

• This is where the benefits of a policy may not be worth the financial costs of administering the policy
• It may cost more than the government expected

Question 6

Information gaps

Answer 6

• Policies may be implemented without perfect information. This may require full cost benefit analysis, which can be time consuming and expensive
• However, it is not practical for governments to gain every bit of information they need, so assumptions are made instead
• Governments, without the right information can make mistakes such as setting the min/max price too low or too high, resulting in unintended consequences