government failure definitions

Question 1

Government failure:

Answer 1

Government failure: when government intervention in a market reduces overall economic welfare.

• misallocation of resources

Question 2

Deregulation:

Answer 2

Deregulation: the removal of rules and regulations in order to increase the efficiency of markets.

The removal of so-called ‘red tape’ or excessive bureaucracy is one benefit of deregulation, which may be argued to reduce firms’ costs of production, meaning consumers may benefit from lower prices. The promotion of competition may also lead to a more contestable market by removing artificial barriers to entry. Deregulation is also felt to help avoid the problem of regulatory capture.

Question 3

Regulation:

Answer 3

Regulation: the imposition of rules and laws which restrict market freedom.

leads to regulatory capture

Question 4

Regulatory capture:

Answer 4

Regulatory capture: when the regulatory bodies (such as OFGEM in the case of gas and electricity suppliers) set up to oversee the behaviour of privatised monopolies come to be unduly influenced by the firms they have been set up to monitor.

Question 5

Privatisation:

Answer 5

Privatisation: the sale of state-owned enterprises to the private sector.

Question 6

Public ownership:

Answer 6

Public ownership: government ownership of firms, industries or other assets.

Question 7

Nationalisation:

Answer 7

Nationalisation: the transfer of assets from the private sector to public ownership.