1.4.2 Government Failure

Question 1

Wha is government failure?

Answer 1

It’s when the government intervenes to correct a market failure, but the intervention leads to further welfare loss and a misallocation of resources

Question 2

Name the 3 causes of government failure?

Answer 2

Information gap/failure

Excessive administration costs

Unintended Consequences

Question 3

How is information gap/failure a cause of govt failure?

Answer 3

Gov does not have all the information it needs when making policies

When valuing externalities the right level of policy is needed

Question 4

How is excessive administration costs a cause of government failure?

Answer 4

Social costs may be higher than social benefits if admin costs taken to account

Regulation has huge costs and enforcement costs
Subsidies have huge costs
State provision has huge costs
Price controls has huge costs in enforcement, and sorting out problems with price controls

It’s where the costs outweigh the benefits

Question 5

What is unintended consequences?
How is unintended consequences a cause of government failure?

Answer 5

It’s when some interventions by the government cause effects that the government did not intend to happen

Leads to policy not having the effect that it should
Black markets may occur
Impact on firms if regulation is strict and tax is high
Employment
Impact on people especially those on lower income

Question 6

For max and min price what might gov intervention cause

Answer 6

Excess supply and demand making it harder to allocate resources

Question 7

How much government intervention distort Price signals

Answer 7

For example, the price mechanism aims to allocate resources to their best use and where consumers want and value them most highly

By intervening the government to sort the mechanism and resources may be allocated in efficiently