1.4.2 - Government failure

Question 1

What is Government failure?

Answer 1

When the government intervene in a mark it leads to a less efficient allocation of resources and therefore make the situation worse.
When Government intervention to correct market failure leads to a net welfare loss.
When the cost of intervention to correct market failure exceeds the benefit.
Government failure can happen if a policy fails to create enough incentive to changes peoples behaviour.

Question 2

How is distortion of price signals an example of Government failure?

Answer 2

Government intervention like price controls and subsidies can distort price signals in market. This may not reflect the true supply and demand conditions leading to overproduction and underproduction of goods and misallocation of resources.

Question 3

How can unintended consequences lead to Government failure?

Answer 3

Policies aimed at addressing one problem may inadvertently create new problems or unintended consequences. This may result from imperfect understanding of the complex markets and behavioural responses.

Question 4

How can excess admin costs lead to Government intervention?

Answer 4

Government interventions often involve administrative costs related to implementation, monitoring and enforcing.

Excess administrative costs can reduce the net benefits of a policy

Question 5

How can information gas lead to Government failure?

Answer 5

Government intervention may be based on incomplete or inaccurate information about market conditions or the behaviour of economic agents

This can lead to policies that do not effectively address market failures or achieve their intended goals

Question 6

What are the key points of government failure?

Answer 6

Limited information - no government has resources and information to make a fully informed objective judgement

Government failure is most likely to occur when decisions are made in vested interest of special interest groups.