Which of the following are two potential drawbacks of government intervention in free trade?

• A. It can lead to inefficiency and higher prices for consumers.
• B. It guarantees technological advancement and innovation.
• C. It always increases market competition and lowers costs.
• D. It eliminates the risk of retaliation from other countries.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the context of government intervention in free trade, which typically involves policies like tariffs, quotas, or subsidies aimed at protecting domestic industries.
2. Step 2: Recognize that government intervention can distort market outcomes by preventing the free flow of goods and services, which may lead to inefficiency in resource allocation.
3. Step 3: Analyze how these distortions can cause higher prices for consumers because protectionist measures often reduce competition and increase production costs.
4. Step 4: Evaluate the incorrect options by considering economic principles: government intervention does not guarantee technological advancement or innovation, nor does it always increase competition or lower costs.
5. Step 5: Also note that intervention can provoke retaliation from other countries, so it does not eliminate that risk.