Theme 1: Government Intervention

Question 1

What are the 4 causes of government failure?

Answer 1

1) the distortion of the price mechanism
2) the law of unintended consequences
3) administration costs
4) information gaps

Question 2

What is the distortion of price mechanism?

Answer 2

When government intervention can distort the price mechanism

Question 3

What is government failure?

Answer 3

When the government intervenes to correct market failure but makes the allocation of resources even worse than before

Question 4

What is the law of unintended consequences?

Answer 4

When government intervention can have negative unintended consequences

Question 5

What are information gaps?

Answer 5

When the government lacks the information needed to intervene most efficiently.

Question 6

What does administration costs describe?

Answer 6

When admin costs exceed public goods

Question 7

What are administration costs?

Answer 7

The miscellaneous costs of government intervention

Question 8

What is an example of the law of unintended consequences?

Answer 8

E.g. a tax on cigarettes can create a black market where cigarettes are sold without tax.

Question 9

What are the 4 Examples of administration costs?

Answer 9

E.g. paperwork, legal fees, secretaries, managers.

Question 10

Example of information gaps?

Answer 10

E.g. the government doesn’t know what size to set for its carbon tax.

Question 11

2 examples of the distortion of the price mechanism?

Answer 11

1) a minimum price will create excess supply between Qd and Qs
2) a maximum price will create excess demand between Qs and Qd