Types of Government failure

Question 1

Law of unintended consequences

Answer 1

Government intervention can have negative unintended consequences.

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

Question 2

Administration costs

Answer 2

The miscellaneous costs of government intervention.

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

Question 3

Information gaps

Answer 3

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

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

Question 4

Distortion of the price mechanism

Answer 4

Government intervention can distort the price mechanism.

E.g. a minimum price will create excess supply between Qd and Qs

E.g. a maximum price will create excess demand between Qs and Qd: