An independent transport authority is established to regulate rail fares and ensure high safety standards. Over time, senior directors of the major private rail operators are appointed to the authority's advisory board. Consequently, the authority repeatedly approves fare increases above inflation while lowering safety inspection frequencies.
This scenario is a classic demonstration of government failure resulting from:
unintended consequences, because restricting fare increases has led to underinvestment in the rail network.
excessive administrative costs, because the cost of operating the transport authority exceeds the economic welfare generated by the rail network.
regulatory capture, because the regulatory body has become aligned with the interests of the firms it is supposed to oversee rather than the public interest.
information failure, because the government does not possess sufficient market data to set a socially optimal price for rail travel.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.