Which scenario is a classic example of government failure reducing welfare?

• A. Subsidies causing overproduction
• B. Market deregulation improves welfare
• C. Private provision of public goods is efficient
• D. Trade protection strengthens domestic industry

Answer: (A)

Government intervention reduces welfare when it distorts incentives and wastes resources rather than improves outcomes. Subsidies to producers are a classic example: they lower the cost of production and push output above the socially optimal level. As a result, resources are used to produce more than people value at that cost, while taxpayers pay for the subsidy. The overall effect is a deadweight loss to society—the economy ends up with less welfare than would occur without the subsidy.

Other options describe situations where interventions or market behavior could improve welfare or reflect trade-offs that aren’t clear examples of government failure in the same way. Deregulation can raise welfare by removing unnecessary barriers; private provision of public goods can be efficient in some cases despite free-rider problems; and trade protection can boost some domestic producers at the expense of consumers, but isn’t the classic, clear-cut case of government failure reducing welfare.