Which of the following examples best illustrates the concept of government failure?

• A. A monopoly sets a price above marginal cost, reducing consumer surplus.
• B. Consumers respond to a price increase by purchasing less of a good.
• C. A competitive market reaches equilibrium where supply equals demand.
• D. A government subsidy leads to overproduction and waste in the agricultural sector.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the concept of government failure. Government failure occurs when government intervention in the economy causes an inefficient allocation of resources, leading to outcomes worse than if the market had been left alone.
2. Step 2: Analyze each option to see if it represents government failure or a different economic concept. For example, a monopoly setting a price above marginal cost is a market failure, not government failure.
3. Step 3: Recognize that consumer response to price changes and competitive market equilibrium are examples of normal market behavior, not failures caused by government action.
4. Step 4: Identify that a government subsidy causing overproduction and waste is a classic example of government failure because the intervention distorts market signals and leads to inefficiency.
5. Step 5: Conclude that the example involving a government subsidy leading to overproduction and waste best illustrates government failure, as it shows how government policies can unintentionally harm economic efficiency.