Answer to Question #167959 in Microeconomics for Nelson

Question

Activities of government in the market only ends up in inefficiency. Discuss

Answer 1

Inefficiency in the market occurs when governmental action creates an inefficient outcome, where efficiency would otherwise exist. A defining feature of inefficiency is where it would be possible for everyone to be better off under a different regulatory environment. Inefficiency may arise because of unanticipated consequences of a government intervention, or because an inefficient outcome is more politically feasible than a Pareto improvement to it. Inefficiency due to government intervention can be on both the demand side and the supply side. Demand-side failures include preference-revelation problems and the illogics of voting and collective behaviour. Supply-side failures largely result from principal–agent problem.

Intervention through taxation, through subsidisation, or via other interventions can result in a distortion of markets and a weakening of the operation of the price mechanism. Taxes and subsidies on goods and services can artificially raise or lower prices and distort how markets work to allocate scarce resources.