1.4.2 Government failure Quiz: Pearson Edexcel Economics A, Unit 1

The 20 questions

1. What is government failure?

   • A situation where government is unable to collect enough tax revenue to fund its planned spending in the economy.
   • Intervention by government that results in a net welfare loss, so society is worse off than before it intervened.
   • A situation where government raises the price of a good, so consumers buy less of it than they did before.
   • A situation where the market fails to provide any goods at all, so the government must step in to supply them.

2. Which of these is a cause of government failure?

   • External benefits from consumption, where third parties enjoy benefits from a good they did not pay for.
   • Excess demand for a good, where consumers want more of a product than producers are willing to supply.
   • Information asymmetry in a private transaction, where one party knows more than the other.
   • Distortion of price signals, where intervention sends false information to buyers and sellers in the market.

3. Which of these describes an unintended consequence of government intervention?

   • A rent ceiling reduces the supply of rental housing over time, leaving tenants with fewer homes to rent.
   • A subsidy increases the supply of a good as intended, so that the market moves towards the socially optimal quantity.
   • A minimum price raises incomes for workers as planned, without any side effects on employment in the market.
   • A tax on a harmful good reduces its consumption as intended, and the government raises revenue as planned.

4. Which of these is an example of government failure caused by excessive administrative costs?

   • A tax is collected at a low cost, so the government's revenue is higher than it would be under a costly system.
   • A private firm spends heavily on advertising, so consumers choose the firm's product over the cheaper alternatives.
   • A state programme spends more on administration and paperwork than it delivers in benefits to the intended recipients.
   • A state programme spends very little on administration, so the benefits to recipients are maximised at lowest cost.

5. Which of these is an example of government failure caused by information gaps?

   • A regulator is provided with perfect information about every firm, so its decisions always match what is needed.
   • A regulator sets a price based on complete and accurate data, so the market clears at the efficient quantity.
   • A regulator never sets any price at all, so information gaps cannot arise in the market for the good.
   • A regulator sets a price based on incomplete data about costs, leading to shortages or surpluses in the market.

6. Why might a government subsidy for a product create government failure?

   • It always corrects an externality exactly, so it cannot lead to any unintended consequences in the market.
   • It always reduces the cost of living for consumers without any side effects on production or taxpayers.
   • It removes the need for any price signals, so producers allocate resources efficiently without market information.
   • It can encourage over-production, raise taxpayer costs, and distort the signals that producers use to decide what to make.

7. Which of these is a case of government failure in agricultural markets?

   • A price support scheme leads to large surpluses of food that must be stored or disposed of at public expense.
   • A price support scheme eliminates all excess supply, so that no food is wasted and no costs fall on taxpayers.
   • A price support scheme leads to a fall in surpluses, so that farm incomes rise and food is always in shortage.
   • A price support scheme has no effect on farm production, since farmers respond only to the market price.

8. A government sets a rent ceiling in a city to protect tenants. Which outcome best illustrates government failure?

   • Fewer homes are offered for rent, quality falls over time, and tenants face queues or search costs, so welfare may fall.
   • The rent ceiling removes all excess demand, so every tenant obtains a home at the capped rent without difficulty.
   • More homes are offered for rent, quality rises over time, and tenants face no search costs, so welfare clearly improves.
   • The rent ceiling has no effect on the market, since rents are set by the price mechanism alone in all cities.

9. Which of these best illustrates a distortion of price signals caused by government intervention?

   • A price control makes prices reflect scarcity more accurately, so producers respond by increasing output.
   • A price control stops prices rising during a shortage, so the signal that would encourage extra supply is blocked.
   • A price control allows prices to rise freely during a shortage, which encourages extra supply in the market.
   • A price control has no effect on the market signals sent to buyers and sellers in the economy.

10. Why might a government tax on a harmful good sometimes fail to reduce consumption as intended?

    • Taxes always increase consumption, since consumers try to avoid the tax by buying larger quantities of the good.
    • Taxes never affect consumption, since consumers do not respond to changes in price in any market.
    • Consumers may switch to substitutes that are also harmful, or the tax may be set at the wrong level for the external cost involved.
    • Consumers always stop buying the good immediately after any tax, so the tax always achieves its intended aim perfectly.

11. Which of these is most likely to be a cost of government failure for taxpayers?

    • Public money is spent on a scheme that delivers little benefit, so taxpayers pay for an intervention that does not improve welfare.
    • Taxpayers pay less for public goods because the government has intervened in the market for those goods.
    • Taxpayers gain a benefit from every intervention, since the government never spends money on a failed scheme.
    • Taxpayers receive a refund because a policy has exceeded its aims, so public money is saved in every case.

12. Which of these is a reason why government failure can persist even when the government wants to correct a market failure?

    • Governments do not intervene in markets, so government failure cannot occur because there is no intervention to fail.
    • Governments face information gaps and political pressures, so their decisions may be based on incomplete data or be captured by interests.
    • Governments can only ever make correct decisions, so any failure must be due to market forces alone.
    • Governments always have perfect information and no political pressures, so failure cannot arise in any policy.

13. Evaluate: does government failure mean that markets should always be left to function alone?

    • Yes, since government failure always exceeds market failure, so intervention should never be used in any market.
    • Yes, since markets never fail, so government intervention is always unnecessary in any economy in the world.
    • No, since government failure never occurs in practice, so intervention is always the best option for every market.
    • No, since market failure can still be significant, so the choice depends on comparing each failure's size using evidence.

14. A government regulates the maximum emissions of a factory, but it lacks the data to set the right limit. What is the likely outcome?

    • The limit may be set too strict or too loose, so either excessive costs for firms or insufficient reduction in pollution may result.
    • The limit removes all external costs of pollution, so society gains fully from the regulation in every case.
    • The limit is always set at the socially optimal level, since regulation removes all information problems automatically.
    • The limit has no effect on pollution, since firms ignore all regulations once a limit is set by the government.

15. Which statement best describes why government failure is about net welfare, not simply about whether a policy achieves its aim?

    • Net welfare is unrelated to policy outcomes, since welfare is determined only by the size of the government budget.
    • A policy can achieve its stated aim but still reduce overall welfare if its costs and side effects outweigh the benefits.
    • A policy that achieves its aim always increases welfare, so net welfare and policy aim are always the same thing.
    • A policy that fails to achieve its aim always increases welfare, since government intervention has no real costs at all.

16. Which of these is an example of government failure in the market for healthcare?

    • A state scheme that has no effect on the health of patients, since healthcare is always a private good in every market.
    • A state scheme with long waiting lists that leaves some patients untreated in time, because it does not respond to where needs are.
    • A state scheme that is funded by private insurance and so never involves any government intervention in the market.
    • A state scheme that delivers treatment on time to all patients at no cost, with no waiting lists in any region.

17. Which of these is an example of an unintended consequence of government intervention?

    • A crop subsidy reduces planting on all land, so soil quality improves across the whole region over time.
    • A crop subsidy encourages farmers to grow the crop on unsuitable land, damaging soil and wasting resources.
    • A crop subsidy reduces the cost of land, so farmers invest more in soil quality over the long term.
    • A crop subsidy has no effect on land use, since farmers always grow the crop that the market demands.

18. Which of these is a risk of government failure when a regulator is captured by the industry it regulates?

    • Rules are always designed to protect consumers, since regulators have no contact with the firms they oversee.
    • Rules are never enforced, so the regulator's influence has no effect on competition or welfare in the market.
    • Rules may be designed to protect incumbent firms rather than consumers, so competition and welfare are reduced.
    • Rules always increase competition, since regulators prefer to see new firms enter every market they oversee.

19. A government spends heavily on a project whose costs rise far above its planned budget. Which cause of government failure is most relevant?

    • A surplus of funds, since projects with higher costs always generate more welfare for society than planned.
    • Negative externalities, since the project creates pollution that is removed by rising costs over time.
    • Excessive administrative costs and poor cost control, which raise the net cost and reduce the net benefit of the project.
    • Perfect information about costs, which ensures that the budget is never exceeded in the public sector.

20. A government intervention improves outcomes for one group of consumers but imposes a larger loss on others. What is the appropriate assessment?

    • The intervention is always neutral, since gains and losses to different groups always cancel out in the economy.
    • Net welfare must be judged across all groups, so the intervention may still be a net welfare loss if the losses exceed the gains.
    • The intervention must be a success, since any gain to some consumers makes the policy desirable on its own.
    • The intervention cannot be assessed, since welfare cannot be compared across different groups in any way.

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