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Market Failure

The effects of government intervention: Government intervention can create distortions in markets

  • 3 things to know
  • AS Units 1 and 2

Overview

Recall questions on Government intervention can create distortions in markets.

What you need to know

Answer each one before you reveal it.

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Key term

What does it mean when government intervention creates 'distortions' in a market?

Key term

Give three examples of government interventions that can create distortions in agricultural markets.

Key term

Name three types of government intervention that can distort housing markets.

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    What does it mean when government intervention creates 'distortions' in a market?

    Model answer

    Prices and quantities deviate from what would occur in a free market, potentially leading to inefficient resource allocation.

  2. 2

    Give three examples of government interventions that can create distortions in agricultural markets.

    Model answer

    Price support schemes, subsidies to farmers, and import tariffs.

  3. 3

    How might price support schemes in agriculture lead to market distortions?

    Model answer

    They artificially raise prices above equilibrium, affecting supply and demand decisions and potentially causing overproduction or surpluses.

  4. 4

    Why might a subsidy to farmers lead to inefficient resource allocation?

    Model answer

    It encourages production beyond the socially optimal level, directing resources to agriculture that could be more productively used elsewhere.

  5. 5

    Name three types of government intervention that can distort housing markets.

    Model answer

    Rent controls, planning restrictions, and housing subsidies.

  6. 6

    What effect might rent controls have on housing supply and demand?

    Model answer

    They may reduce supply as landlords exit the market, while increasing demand due to lower prices, potentially creating housing shortages.

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