10) government failure Flashcards
define government failure
when government intervention causes a misallocation of resources in a market
Examples of government failure
Health and safety
minimum carbon price
health and safety
energy market
How does government failure arise
a misallocation of resources due to a failed attempt of government intervention
3 examples that government failure can arise from
political self interest- government influenced by political lobbying
Political myopia- govt look for a quick fix solution that conflicts with other policies
government intervention/evasion- leads to black market eg prohibition
Disincentive effect- disincentives production and productivity
Example of political myopia
Road widening- quick fix to widen roads and ease congestion leads to higher road usage and increase CO2 production
Example of disincentive effects
Higher tax brackets de motivate workers from earning more because they are taxed more
How is government failure less and more severe than market failure??
Less-
Market failure is a known issue, government attempts to solve it is less likely to have worse downsides than the market failure
smaller welfare loss as the continued misallocation of resources is still likely to be closer to the optimum level of MSB than before
more-
government failure could lead to an even bigger misallocation of resources than before leading to a bigger welfare loss, depends on extent of correctiveness
-Spill over effects- government failure could lead to spillover effects into other markets/ industries
How might the government intervene in the housing market and what effect could it have?
- setting maximum rent controls to stop prices being determined by supply and demand factors, could lead to a shortage of properties as more is demanded than supplied
- less houses means less workers too, may increase geographic immobility
