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The Market Mechanism, Market Failure and Government Intervention

Government failure

  • 2 things to know
  • Papers 1 and 3

Overview

Unintended consequences, administrative costs, information gaps and distorted incentives.

What you need to know

Answer each one before you reveal it.

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Evaluation

How can administrative costs and intervention itself cause government failure?

Evaluation

What is information asymmetry, and how does it damage efficiency?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What is government failure?

    Model answer

    Government failure is when the state's own intervention allocates resources badly.

  2. 2

    How can inadequate information lead to government failure?

    Model answer

    Governments may lack sufficient or accurate data about markets, consumer preferences, or costs, leading to poorly designed policies that misallocate resources.

  3. 3

    Why might conflicting objectives cause government failure?

    Model answer

    Governments often pursue multiple goals simultaneously (e.g. economic growth, environmental protection, reducing inequality), and policies designed to achieve one objective may undermine another, resulting in resource misallocation.

  4. 4

    Give an example of how conflicting government objectives might result in policy failure.

    Model answer

    A government aiming to reduce carbon emissions while also promoting economic growth may find that environmental regulations slow industrial output, creating a trade-off that leads to neither objective being fully achieved.

  5. 5

    Explain how administrative costs can be a source of government failure.

    Model answer

    The costs of implementing, monitoring and enforcing government policies may exceed the benefits of the intervention, leading to a net welfare loss and misallocation of resources.

  6. 6

    Instead of correcting market failures, what might government intervention sometimes do to markets?

    Model answer

    Government intervention may create market distortions rather than remove them, worsening the allocation of resources.

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