A Level Economics AQA Practice Exam

Why can government failure be considered detrimental to an economy?

1. It leads to an efficient allocation of resources

2. It can cause market distortions and inefficiencies

3. It ensures that all citizens receive equal benefits

4. It minimizes the need for government intervention

The correct answer is: It can cause market distortions and inefficiencies

Government failure is detrimental to an economy primarily because it can cause market distortions and inefficiencies. When the government intervenes in the economy, it is often with the aim of correcting market failures, such as monopolies or externalities. However, if these interventions are poorly designed or implemented, they can lead to unintended consequences that disrupt the natural functioning of the market. For example, excessive regulation can stifle competition, leading to a lack of innovation and higher prices for consumers. Additionally, inefficient allocation of resources can occur when government projects and spending do not align with the actual needs and preferences of consumers, leading to wasted resources and poorer overall economic performance. Moreover, government failures can contribute to a misalignment between incentives and outcomes, resulting in corruption, bureaucracy, and a lack of responsiveness to the market. As resources are allocated based on political motives rather than economic efficiency, it exacerbates the problems that the initial government intervention sought to address. In contrast, the other choices suggest outcomes that are inconsistent with the concept of government failure. Efficient allocation of resources and equal benefits for all citizens are ideal scenarios that could arise from successful government intervention, not government failure. Minimizing government intervention can be beneficial in some contexts, but it does not address the inherent issues