Market Failure and Government Intervention

Question 1

When does market failure occur?

Answer 1

When markets operating without government intervention fail to deliver an efficient allocation or resources.

Question 2

What is government failure?

Answer 2

When the government intervenes to correct market failure but ends up making the situation worse. Welfare loss increases.

Question 3

What are some benefits of price caps in different markets?

Answer 3

Useful surrogate for competition.

Holds prices down, consumer wealth gains

Incentives for businesses to cut costs to maintain profits.

Question 4

What are some downsides of price caps in different markets?

Answer 4

Reduces profits, less money for capital investment.

May dissuade new entrants

Firms might raise prices in other ways

Question 5

What are some alternatives of price caps in different markets?

Answer 5

Measures to reduce entry barriers in an industry.

Higher taxes on monopoly profits e.g a windfall tax.