A Level Economics AQA Practice Exam

What is government failure in economics?

1. An increase in economic efficiency due to regulation

2. An optimal allocation of resources by the government

3. An inefficient allocation of resources due to government intervention

4. Successful management of public goods without intervention

The correct answer is: An inefficient allocation of resources due to government intervention

Government failure refers to the situation wherein government intervention in the economy leads to an inefficient allocation of resources, contrary to the intended outcomes of such interventions. This often occurs when the objectives of government policies do not align with economic efficiency or when the government lacks the necessary information or incentives to make effective decisions. In many cases, government interventions can lead to unintended consequences, such as misallocation of resources, where goods and services are not produced in quantities or forms that society values most. For example, when the government sets price controls or provides subsidies, it can create distortions in the market that deter optimal production and consumption levels. This misalignment not only affects efficiency but can also lead to increased bureaucracy and a lack of responsiveness to consumer needs. The other options reflect concepts that are contrary to the definition of government failure. For example, increases in economic efficiency through regulation suggest successful government intervention. Similarly, an optimal allocation of resources by the government implies effective management, which is not a characteristic of government failure. Lastly, the idea of managing public goods successfully without intervention does not relate to government failure either, as it overlooks the necessity for government in the provision of certain goods that the private market may underprovide.