4.1.8.10 Government failure Quiz: AQA Economics, Unit 1

The 20 questions

1. Government failure occurs when:

   • The government intervenes in a market and the outcome is exactly the same as the market outcome that would have occurred anyway.
   • The government sets a budget deficit in a year when the economy is growing at its trend rate with low unemployment.
   • Government intervention in the economy leads to a misallocation of resources, so the outcome is worse than the market outcome it replaced.
   • The government collects tax revenue from every household but spends none of it on public goods or services in the year.

2. Which is a source of government failure linked to a lack of information?

   • Policymakers have information only about the past, so they never need to consider the future effects of any policy at all.
   • Policymakers never need information, because the market always provides every fact that a government could require for policy.
   • Policymakers have complete information on every market, so they always know the exact level of each external cost in the economy.
   • Policymakers may not know the true size of an external cost or the preferences of consumers, so the policy may be poorly targeted.

3. Which is an example of conflicting objectives contributing to government failure?

   • A government wants to reduce pollution but also wants to protect jobs in polluting industries, so it sets weak and inconsistent policies.
   • A government wants to increase output and reduce inflation at the same time, and so it always achieves both in a single policy.
   • A government wants to lower taxes for everyone, and so it always achieves higher tax revenue in the same period of time.
   • A government wants to keep the same policy for every market, so it never faces any conflict between its objectives at any time.

4. What is an administrative cost of government intervention?

   • The cost of running the agency that enforces a regulation, such as staff, monitoring and legal enforcement.
   • The cost of consumers' purchases, which is paid entirely by firms and so never falls on the public purse at all.
   • The cost of borrowing from the private sector, which is always lower than the cost of any administrative activity.
   • The cost of the goods that the government buys from private firms, which is always covered by the price paid for them.

5. Which statement describes a case where government intervention may create rather than remove distortions?

   • A grant to research that produces new knowledge, which spills over to other firms and so raises their productivity without any cost.
   • A tax that corrects a negative externality exactly, so that the market outcome moves to the socially efficient level in every case.
   • A subsidy to one industry that encourages resources to flow into it, distorting the allocation of resources across the economy.
   • A regulation that sets clear minimum safety standards for all firms, so that no firm has any incentive to cut corners in production.

6. Why can government intervention lead to unintended consequences?

   • Policies never affect incentives, because households and firms do not change their behaviour in response to taxes or benefits.
   • Policies may produce effects that were not anticipated, such as a black market created by a price ceiling or a poverty trap from benefits.
   • Policies always produce exactly the outcome that was planned, because governments have full control over all economic behaviour.
   • Policies affect only the government's own accounts, so no effects reach households, firms or other markets in the economy.

7. Which is an example of an unintended consequence of a price ceiling?

   • The shortage disappears, because the controlled price guarantees that every buyer can find the good at the price set by the state.
   • The price rises above equilibrium, because the ceiling forces suppliers to raise the price on every unit they sell in the market.
   • A black market emerges, because the controlled price is below equilibrium and buyers and sellers trade outside legal channels.
   • The quantity supplied rises above equilibrium, because firms are attracted by the lower price set by the government for the good.

8. A government gives subsidies to a firm that is already profitable. Which form of government failure is most likely?

   • Misallocation of resources, because subsidies to a profitable firm may encourage inefficient use of public money and distort the market.
   • A rise in market efficiency, because subsidies to profitable firms always lower prices and raise output in every market.
   • No failure at all, because subsidies never affect the allocation of resources or the behaviour of firms in any market.
   • An automatic removal of market failure, because the subsidy gives the firm the incentive to supply every good at marginal cost.

9. Which factor is an example of government failure caused by administrative costs?

   • A private firm that funds its own research, so the government spends nothing on innovation and avoids every administrative cost.
   • A policy that is paid for through a single tax, so the government never needs to employ any staff to run the scheme at all.
   • A small government department that approves new policies within a week, so the policy takes effect immediately in the market.
   • A large bureaucracy that takes years to approve a new policy, so the policy is out of date by the time it takes effect.

10. Which is the best evaluation of the claim that government intervention always improves market outcomes?

    • The claim is unlikely to hold generally, as intervention can create distortions and its effects depend on the quality of policy design.
    • The claim is always true, because governments have complete information about every market and can always predict the result.
    • The claim cannot be tested, because economic outcomes are never observable and so cannot be compared with each other.
    • The claim is always false, because governments can never improve any market outcome in any circumstance whatsoever in the case described.

11. A government sets a price below equilibrium for a good. Which of the following is an example of government failure?

    • A rise in the quantity supplied of the good, because the lower price encourages firms to produce a larger quantity for consumers.
    • Persistent shortages of the good that lead to queues, rationing by non-price methods and a reduction in the quality of the product.
    • A rise in the market equilibrium price, because the government's price control forces firms to charge higher prices elsewhere.
    • A fall in the quantity demanded of the good to zero, because consumers decide that the good is no longer worth buying at any price.

12. Which is a source of government failure related to the political process?

    • Policies are always designed to maximise social welfare, because politicians have no interest in winning elections at all.
    • Policies may be shaped by the need to win votes or by lobbying from interest groups, rather than by what best serves the public interest.
    • Policies never involve decisions about which groups benefit, because all policies apply equally to every household in the economy.
    • Policies are always set by independent experts, so political considerations never influence any decision in the economy.

13. Which of the following best describes the concept of crowding out as a form of government failure?

    • Government intervention replaces every private firm with state firms, so that the private sector is entirely removed from the economy.
    • Government spending on schools reduces the number of pupils who attend private schools, which crowds out private firms.
    • Higher government spending lowers interest rates for private firms, which increases private investment in every case in the economy.
    • Higher government borrowing raises interest rates, which reduces private investment that would otherwise have taken place.

14. Which statement about government failure is most accurate?

    • Government failure and market failure are identical concepts, because both occur only when prices are set by the state.
    • Government failure never occurs in a market economy, because the government always acts in the interests of all citizens equally.
    • Government failure and market failure can both lead to misallocation, so the choice of policy requires comparing the likely outcomes.
    • Government failure is always worse than market failure, so governments should never intervene in any market in the economy.

15. A regulator sets a price cap that is too low, so a firm reduces investment in new capacity. What type of failure is this?

    • Market failure from public goods, because the firm is providing a good that every household can enjoy without paying.
    • No failure, because price caps always raise investment by reducing the costs of firms in every market in the economy.
    • Government failure, because the intervention has discouraged investment and led to a misallocation of resources in the industry.
    • Market failure from monopoly, because the firm is using its market power to restrict the output it supplies to consumers.

16. Which evaluation best explains why government failure can be more difficult to correct than market failure?

    • Government failure cannot be corrected, because the state always remains the only supplier in every market it enters.
    • Government failure is easier to correct than market failure, because the government has unlimited information about every market.
    • Government decisions are shaped by political processes, so the feedback that corrects errors in markets may be weaker or slower.
    • Government failure is always corrected immediately, because voters can instantly change policy in every case at no cost.

17. Which of these is a likely consequence of a poorly designed benefit system?

    • A fall in the number of households in poverty, because benefit systems always remove the need for any further redistribution.
    • A rise in the incentive to work, because benefits are always withdrawn at a lower rate as incomes rise in every system.
    • A rise in the marginal propensity to save, because benefit recipients always save any extra income they receive from the state.
    • A poverty trap, in which withdrawal of benefits as income rises makes extra work yield very little additional disposable income.

18. A government intervenes to correct a market failure but the intervention creates a new distortion elsewhere. What is this called?

    • Market failure, because the market has become perfectly competitive and so produces the socially optimal outcome always.
    • Equilibrium, because the new distortion is always offset by an equal and opposite effect in the other part of the economy.
    • Government failure, because the intervention has created a misallocation of resources in another part of the economy.
    • Market success, because each intervention automatically removes the need for any further policy in the rest of the economy.

19. A minimum wage is set above the market-clearing wage. Which outcome could be a government failure?

    • Unemployment among low-skilled workers, because employers demand fewer workers when the wage floor is raised above the market rate.
    • Full employment in every sector, because a higher wage always increases the demand for labour by firms across the economy.
    • A fall in the wage rate for all workers, because a minimum wage always lowers the equilibrium wage in every market in the case described.
    • No change in employment, because a minimum wage has no effect on the number of workers that firms choose to employ.

20. Which statement describes the time lag problem in government policy?

    • Policies are never affected by delays, because the economy always responds to a policy as soon as it is introduced by government.
    • Time lags apply only to private firms, so governments can always respond to economic change immediately without any delay at all.
    • Policies take effect instantly, so the government never faces any delay between announcing a policy and seeing its results in the economy.
    • Policies take time to design, implement and take effect, so they may be poorly timed relative to the economic conditions they address.

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