1.4.2 Government Failure

Question 1

What is Government failure?

Answer 1

Government failure occurs when the government intervenes in a market to correct market failure, but the intervention results in a more inefficient allocation of resources.

Question 2

What are the effects of Government failure?

Answer 2

Causes greater welfare loss, Poor value for money, May have long term consequences

Question 3

What are the causes of Government failure?

Answer 3

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

Question 4

What is distortion of price signals?

Answer 4

When the signalling function of the price mechanism is artificially altered e.g. minimum prices.

Question 5

What is an information gap?

Answer 5

An information gap exists when either the buyer or seller does not have access to the information needed for them to make a fully-informed decision.