LS23- Government Failure

Question 1

Government failure

Answer 1

When government intervention designed to correct a market failure results in a less efficient allocation of resources.

Question 2

Consequences of government failure

Answer 2

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

Question 3

Distortion of price signals

Answer 3

• Government subsidies can disrupt the free market mechanism- distorting price signals
• Inefficient allocation of resources- market not allowed to operate freely
• E.g. government might end up subsiding an industry which is failing or has few prospects, wasting money

Question 4

Unintended consequences

Answer 4

• 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 administration costs

Answer 5

• Where the benefits of a policy may not be worth the financial cost of administering the policy
• It may cost the government more than expected

Question 6

Information gaps

Answer 6

• Policies may be implemented without perfect information- this may require a full cosy 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 high or low, resulting in unintended consequences.