Theme 1.4.2 Government failure (unit 21)

Question 1

What is government failure?

Answer 1

It is where a government intervenes in the market but the intervention leads to a net loss of welfare rather than a gain.

Question 2

Why does the government distort prices?

Answer 2

They may do it to support crucial areas of industry that are inherently unprofitable such as farming. However this can lead to government failure if they say distort the price of labour to much resulting in companies laying lot so off workers.

Question 3

What are some of the pitfalls of government intervention?

Answer 3

• Unintended consequences.
• Excessive administrative costs.
• They have information gaps themselves.
• They may have conflicting objectives.
• Politicians may try to maximise there own welfare.

Question 4

Market vs government failure

Answer 4

While it can be risky for a government to intervene it is often the only solution.

Question 5

What is the public choice theory?

Answer 5

Theories about how and why public spending and taxation decisions are made.

Question 6

What is rent-seeking?

Answer 6

It is the use of political power by an economic agent to manipulate the distribution of resources for there own benefit at the expense of others without creating any extra wealth for society as a whole.