Th1.4: Gov Failure: Distortion of Price Signals

Question 1

What happens as a result of some types of government intervention changing prices signals in the market and distorting free market mechanisms?

Answer 1

they keep some companies in business when they are inefficient so the resources should be switched to somewhere else (subsidies) or make consumers pay too much for a good (taxes)

Question 2

What is the result of subsidies keeping farmers in employment when they cannot produce cheaply enough to compete?

Answer 2

the government keeps them in business when they should close them down and find an alternative use for their resources

Question 3

What do max and min prices lead to?

Answer 3

excess supply/demand and make it difficult to allocate resources

Question 4

How does the government intervening affect the price mechanism?

Answer 4

the price mechanism aims to allocate resources to their best use and where consumers want/value them most highly. intervention distorts the price mechanism and so resources may be allocated inefficiently