Paper 1 8. The market mechanism, market failure and government intervention in markets

Question 1

What is gov failure?

Answer 1

Governments can fail when they intervene in markets. They could worsen the market failure already present or a new failure might occur.

Question 2

Causes of government failure: Distortion of price signals

Answer 2

Government subsidies could distort price signals by distorting the free market mechanism. There could be an inefficient allocation of resources because the market mechanism is not able to act freely.
For example, the government might end up subsidising an industry which is failing or has few prospects.

Question 3

Causes of government failure: Unintended consequences

Answer 3

With government policies, consumers react in unexpected ways. A policy could be undermined, which could make government policies expensive to implement, since it is harder to achieve their original goals.

Question 4

Causes of government failure: Excessive administrative costs

Answer 4

The social benefits of a policy might not be worth the financial cost of administering the policy. It might cost more than the government anticipated. The government has to consider whether the policy is good value for money.

Question 5

Causes of government failure: Information gaps

Answer 5

Some policies might be decided without perfect information. This might require a full cost-benefit analysis, and it could be time-consuming and expensive. For example, government housing policies are long term, and have failed several times in the past.

Question 6

Causes of government failure?

Answer 6

Information gaps, Excessive administrative costs, Unintended consequences, Distortion of price signals