1.4.2 Government Failure

Question 1

What is government failure

Answer 1

Occurs when government intervention imposes a cost greater than the benefit brought about through the government action. Therefore the government intervention itself causes a misallocation of resources and a net welfare loss

Question 2

What are the types of government failure

Answer 2

• excessive admin costs
• unintended consequences
• distortion of price signals
• information gaps
• regulatory capture

Question 3

Explain excessive admin costs

Answer 3

Where the costs that arise in the formation, monitoring and enforcing of government measures are too high and above the benefits of the measure

Question 4

Explain unintended consequences

Answer 4

A policy results in an unexpected outcome that more than negates the benefits of the policy

Question 5

Explain distortion of price signals

Answer 5

Government intervention that manipulates prices often undermines the key functions of the price mechanism (signalling, rationing, incentives) e.g minimum prices leads to excess supply

Question 6

Explain information gaps

Answer 6

Governments are also unlikely to have all the correct information to hand and their actions could lead to the market moving even farther away from the socially optimal equilibrium

Question 7

What can information gaps lead to

Answer 7

• a lack of trust in the government and its policies
• it can lead to the inefficient allocation of resources

Question 8

Explain regulatory capture

Answer 8

It is an economics theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating

Question 9

What is the result of regulatory capture

Answer 9

The agency which is charged with acting in the public interest instead acts in ways that benefit the industry it is supposed to be regulating

Question 10

Define unintended consequence

Answer 10

Distortion of consumer or producer behaviour due to the impact of an economic decision