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Theme 1: Introduction to markets and market failure
1.4 Government intervention
1.4.2 Government failure
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Government failure occurs when government intervention in the market results in a less efficient allocation of
resources
Poor
information
is a primary cause of
government failure
.
What is an example of government failure mentioned in the study material?
Rent controls
Factors contributing to government failure
1️⃣ Poor information
2️⃣ Unintended consequences
3️⃣ Bureaucratic inefficiencies
4️⃣ Political objectives
Unintended consequences of government policies may include unforeseen and negative
impacts
Rent controls can lead to a shortage of
affordable
housing due to unintended consequences.
What is an unintended consequence of minimum wage laws?
Increased unemployment
Agricultural subsidies can lead to distorted market
prices
Policies driven by political objectives often disregard economic
efficiency
What is an unintended consequence of rent controls?
Increased black market
Minimum wage laws can result in higher prices for
consumers
.
Match the policy with its negative consequences:
Rent Controls ↔️ Shortage of rentals, deteriorated housing quality
Agricultural Subsidies ↔️ Overproduction, distorted prices, environmental damage
What is a strategy to mitigate government failure?
Improved information
Policies should be adaptable to changing
circumstances
Strategies to mitigate government failure
1️⃣ Improved Information
2️⃣ Policy Flexibility
3️⃣ Cost-Benefit Analysis
4️⃣ Independent Evaluation
5️⃣ Citizen Engagement
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