1.4 Government Failure and intervention

Question 1

what are some ways that the goverment adress market failure?

Answer 1

• taxes ( internalises negtaive externalities)
• subsidies (internalises positive externalities)
• tradable pollution permits
• minimum and maximum prices
• regulation
• information provision

Question 2

what is goverment failure?

Answer 2

when the goverment intervenes to correct a market failure but makes the allocation of resources even worse than before

Question 3

what are the 4 causes of goverment failure?

Answer 3

1. distortion of the price mechnaism
2. unintended consequences
3. excessive administrative costs
4. information gaps

Question 4

what is distrtion of the price mechanism?

maximum prices on housing example

Answer 4

setting maximum prices (price below equilibrium)
* putting the market in disequilibrium
* reducing incentive, reducing the quantity supplied
* excess demand
* landlords do not maintain houses and make housing quality worse

goverment failure

Question 5

what is the distortion of the price mechanism?

minimum prices Common Agriculture policy example

Answer 5

• minimum price set above the market equilibrium, excess supply, market in disequilibirum
• this was set to incentivise farmers to overproduce
• farmers had to dispose their excess supply damaging rivers
• overproduction also had a long term impact on the soil
• future farming made difficult

gvm wanted to secure food supply but consumers were deprived cos of high

Question 6

what is the law of unintended consequnces?

examples

Answer 6

any form of goverment intervention will havse some negative uninteded consequences (which backfire)
eg:
* cobra india
* not driving today
* speed bumps and ambulences
* balck market

Question 7

what can information gaps lead to ?

examples

Answer 7

not fuly aware of cost and benefits, meaning they don’t make the right decision
eg:
* overestimating carbon tax
* NHS online :underestimating costs, leading to incompleet projects and waste of money

Question 8

what are administration costs?

Answer 8

can exceed to benefits of goverment intervention
miscellaneous costs of goverment intervension:
* regulators
* monitors
* paperwork
* management staff
* legal fees

Question 9

defiine information gaps (government)

Answer 9

when the goverment lacks the information needed to intervene most efficently

Question 10

what are public goods?

Answer 10

• non-excludable
• non- rival

Question 11

what does it mean for a good to be exludable/ non excludable?

Answer 11

• excludable: to can stop others from using a good
• non- excludable: yo cannot stop others from using a good

Question 12

what does it mean for a good to be rival/ non rival?

Answer 12

• rival: your consumption stops others from enjoying
• non- rival: your consumption of a good cannot stop anyone else from using it (no cost)

Question 13

what is the free rider problem?

Answer 13

1.public goods non excludable so others can use your public good for free- without paying
2. consumers wait for others to buy and free ride
2. no one demands the public good
3. producers won’t supply the public good because they cannot make profit

resources underproduced/ underprovided in the market

Question 14

what is the state provision of good?

Answer 14

when the goverment provide (public) goods

not always public: education/ healthcare

Question 15

what types of goods are the following:
1. healthcare
2. flood defences
3. education
4.police force
5. fire brigade

Answer 15

1. private
2. public
3. private
4. public
5. public

although could become rival/ non rival, exludable/ non excludable (Ev)

Question 16

How can you argue tha tthese goods are not pure public goods:
1. parks
2. police
3. roads

Answer 16

1. parks can become excludable
2. police can become rival goods if a large incidence stops police attending others
3. roads can become exludble(road tarrifs )

Question 17

whart are the two types of information gaps?

Answer 17

• incomplete information
• asymmetric information

Question 18

what is incomplete information?

Answer 18

• leads to underconsumption / overcosumptions
• as conusmers are not fully aware of benefit / cost of their decisions
• leading to maket failure (missallocation of resorces)

Question 19

what do the goveremnt do to prevent market failure caused bu incomplete information

Answer 19

• regulation
• information
• advertising
• subsidies
• specfic taxes

Question 20

what is asymmetric information gap?

Answer 20

one party knows more than another party in a transaction

leads to exploitataion

Question 21

what are information gaps?

Answer 21

when consumers/ producers lack the information needed to make an informed decision

Question 22

define asymetric information

Answer 22

when one party has more infprmation than another leading to market failure

Question 23

define the free rider problem

Answer 23

People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot
make a profit

Question 24

define information gap

Answer 24

When an economic agent lacks the information needed to make a
rational, informed decision

Question 25

Define non exludibility

Answer 25

one cannot be prevented from using the good

Question 26

define non riavlry

Answer 26

one person’s use of the good does
not prevent someone else from using it

Question 27

define private goods

Answer 27

rivalrous and excludable

Question 28

define goverment failure

Answer 28

goverment intervention worsens the allocataion of scarce resources

Question 29

define unintended consequences

Answer 29

outcomes that were not foreseen and intended by the goverment action