A Level Economics AQA Practice Exam

Which of the following is a cause of government failure?

1. Perfect market competition

2. High levels of consumer awareness

3. Information gaps leading to distortion

4. Increased supply and demand balance

The correct answer is: Information gaps leading to distortion

Government failure occurs when the intervention of the government in the economy leads to inefficient outcomes, exacerbating problems rather than solving them. A significant cause of government failure is the presence of information gaps, which leads to distortions in decision-making and policy implementation. When consumers or policymakers lack complete information, they cannot make fully informed choices that benefit the overall market or public welfare. For example, if a government assumes that a particular subsidy will help farmers without understanding the demand nuances or full implications of their actions, it may create an oversupply of certain crops while neglecting others. This misallocation of resources results from the distortion caused by the lack of clear and comprehensive information, ultimately leading to inefficiencies in the market and failure to achieve the intended policy goals. In contrast, perfect market competition and high levels of consumer awareness generally contribute to more efficient outcomes, as they encourage informed decision-making and resource allocation. Increased supply and demand balance reflects a stable market condition rather than a misallocation of resources, indicating the effective functioning of market forces rather than government intervention issues.