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Government Intervention

Government failure

  • 3 things to know
  • Papers 1 and 3

Overview

Recall questions on government failure through distorted price signals, unintended consequences, administrative costs, information gaps, conflicting objectives, regulatory capture and political short-termism, examples from labour, farm, housing and energy markets, and how it compares with market failure.

What you need to know

Answer each one before you reveal it.

Your recallNot started
Evaluation

What are the main causes of government failure?

Evaluation

What is regulatory capture?

Key term

What are unintended consequences in the context of government policy?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What is government failure?

    Model answer

    Government failure occurs when government intervention in a market leads to a net welfare loss or a less efficient allocation of resources than would have occurred without intervention.

  2. 2

    How can subsidies, taxes or price controls lead to government failure?

    Model answer

    They can distort price signals by preventing prices from reflecting true costs and benefits, leading to inefficient resource allocation.

  3. 3

    Give an example of how a subsidy might distort price signals.

    Model answer

    A subsidy on a good lowers its price below the true cost of production, encouraging overconsumption and overproduction relative to the socially optimal level.

  4. 4

    What are unintended consequences in the context of government policy?

    Model answer

    Effects produced by government policies that were not anticipated or desired by policymakers.

  5. 5

    Why might a policy to reduce carbon emissions have unintended consequences?

    Model answer

    For example, a carbon tax on domestic industry might cause firms to relocate production abroad, potentially increasing global emissions rather than reducing them.

  6. 6

    Why can the cost of running a policy outweigh what it achieves?

    Model answer

    Monitoring, enforcement and compliance all absorb real resources. Where those costs exceed the welfare the policy creates, the intervention leaves society worse off than the market failure it was meant to correct.

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The Nature of Economics
How Markets Work
Market Failure
Government Intervention

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Higher costs shift supply .
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ANiche markets are too small to support a large producer.
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COwners may prefer control and independence to higher profit.

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Monopoly means a market dominated by one seller.
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