1.4.2 - Government Failure

Question 1

What Is Government Failure?
(2 Points)

Answer 1

~ When the costs of government intervention in a market, outweigh the benefits of the intervention.

~ The end result is a worsening of the allocation of scarce resources, harming social welfare.

Question 2

What Are The Causes Of Government Failure?
(5 Points)

Answer 2

~ Information failure.

~ Excessive administrative costs.

~ Unintended consequences.

~ Distortion of price signals.

~ Regulatory capture.

Question 3

Describe ‘Information Failure’ As A Cause Of Government Failure
(3 Points)

Answer 3

~ Governments do not have perfect information.

~ They are often subject to political pressure.

~ Leads to prices, where costs are higher than benefits to society.

Question 4

Describe ‘Excessive Administrative Cost’ As A Source Of Government Failure

Answer 4

Costs of policy / intervention may be high.

Question 5

Describe ‘Unintended Consequences’ As A Source Of Government Failure
(2 Points)

Answer 5

~ Some policies / intervention can cause effects the government didn’t intend to happen.

~ Creation of illegal markets, impacts on the poor, impacts on firms and employment issues.

Question 6

Describe ‘Regulatory Capture’ As A Source Of Government Failure
(2 Points)

Answer 6

~ Interests of society are overlooked, for the interest of CEOs, managers and firms.

~ Occurs when they influence the regulation E.g. Maybe they used to be friends.

Question 7

Describe ‘Distortion Of Price Signals’ As A Source Of Government Failure
(2 Points)

Answer 7

~ Changing price signals in the market and distorting the free market mechanism.

~ Results in an inefficient allocation of resources.