Answer to Question 1
In the absence of price controls the shortage usually goes away quickly because prices are bid up to eliminate the excess demand. But with price controls in effect the shortage usually persists. This helps explain why we usually only see long lines in effect when the government imposes a price ceiling like it did during the 1970s so-called gas crisis.
Answer to Question 2
Government failure refers to the distortions caused by political economy conflicts and politicians and bureaucrats acting in their own interests rather than as representatives of the electorate and society. However, the presence of government failure does not necessarily mean that governments should not intervene to correct market failures. Given that both governments and markets can fail, cost-benefit analysis can be used to quantify the costs of market failure as well as government failure. Cost-benefit analysis might give us a better handle on what types of activities should be within the sphere of the government and which ones should be left to markets, even when markets are imperfect.
A-head: MARKET FAILURE VS. GOVERNMENT FAILURE
Concept: Cost-benefit analysis, market failure, government failure
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