1.4 Government Failure and intervention Flashcards
what are some ways that the goverment adress market failure?
- taxes ( internalises negtaive externalities)
- subsidies (internalises positive externalities)
- tradable pollution permits
- minimum and maximum prices
- regulation
- information provision
what is goverment failure?
when the goverment intervenes to correct a market failure but makes the allocation of resources even worse than before
what are the 4 causes of goverment failure?
- distortion of the price mechnaism
- unintended consequences
- excessive administrative costs
- information gaps
what is distrtion of the price mechanism?
maximum prices on housing example
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
what is the distortion of the price mechanism?
minimum prices Common Agriculture policy example
- 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
what is the law of unintended consequnces?
examples
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
what can information gaps lead to ?
examples
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
what are administration costs?
can exceed to benefits of goverment intervention
miscellaneous costs of goverment intervension:
* regulators
* monitors
* paperwork
* management staff
* legal fees
defiine information gaps (government)
when the goverment lacks the information needed to intervene most efficently
what are public goods?
- non-excludable
- non- rival
what does it mean for a good to be exludable/ non excludable?
- excludable: to can stop others from using a good
- non- excludable: yo cannot stop others from using a good
what does it mean for a good to be rival/ non rival?
- rival: your consumption stops others from enjoying
- non- rival: your consumption of a good cannot stop anyone else from using it (no cost)
what is the free rider problem?
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
what is the state provision of good?
when the goverment provide (public) goods
not always public: education/ healthcare
what types of goods are the following:
1. healthcare
2. flood defences
3. education
4.police force
5. fire brigade
- private
- public
- private
- public
- public
although could become rival/ non rival, exludable/ non excludable (Ev)
How can you argue tha tthese goods are not pure public goods:
1. parks
2. police
3. roads
- parks can become excludable
- police can become rival goods if a large incidence stops police attending others
- roads can become exludble(road tarrifs )
whart are the two types of information gaps?
- incomplete information
- asymmetric information
what is incomplete information?
- leads to underconsumption / overcosumptions
- as conusmers are not fully aware of benefit / cost of their decisions
- leading to maket failure (missallocation of resorces)
what do the goveremnt do to prevent market failure caused bu incomplete information
- regulation
- information
- advertising
- subsidies
- specfic taxes
what is asymmetric information gap?
one party knows more than another party in a transaction
leads to exploitataion
what are information gaps?
when consumers/ producers lack the information needed to make an informed decision
define asymetric information
when one party has more infprmation than another leading to market failure
define the free rider problem
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
define information gap
When an economic agent lacks the information needed to make a
rational, informed decision
Define non exludibility
one cannot be prevented from using the good
define non riavlry
one person’s use of the good does
not prevent someone else from using it
define private goods
rivalrous and excludable
define goverment failure
goverment intervention worsens the allocataion of scarce resources
define unintended consequences
outcomes that were not foreseen and intended by the goverment action
