1.4.2 Government Failure ✅ Flashcards

1
Q

What is government failure?

A

Intervention that leads to more inefficient allocation thus further welfare loss.

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2
Q

What are the different causes of gov failure?

A
  • Distortion of price signals.
  • Unintended consequences.
  • Excessive admin costs.
  • Information gaps
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3
Q

What is a disortion of price signals?

A

Signalling function of price mechanism is articfically altered (price max/min or subsidies).
Eg.
- subsidies support firm that without would close.
- max/min prices cause excess demand or supply.

Due to price not reflecting true supply and demand it can lead to over or under production.
Eg rent min prices discourage landlords.

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4
Q

What are excessive admin+enforcement costs?

A

Excessive costs can reduce benefits of policy.
Eg. Controlling subsidies, regulations and price controls.
Eg. Complex healthcare regulation can potentially limit recourses available.

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5
Q

What are unintended consequences?

A
  • black markets (consumers and producers maximising their interests and look for loop holes).
  • impact on poor. (Cash benefits discourage work).
  • impact on firms (and those they employ).
    New problems created.
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6
Q

What are information gaps?

A

Gov decisions are subjective and can be effected by:
- info gaps (incorrect valuation of externalities).
- bias (political pressures).
Leading to policies that do not correctly address market failure.
Eg. Regulators lack accurate pollution data therfore can’t target biggest contributors.

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7
Q

What is an example of gov failure?

A
  • illegal markets (2019 illegal trade was worth 10b pounds).
  • uk energy market (regulatory fail) ofgem set a max price which was raised in 2022 and negatively effected pensioners (unable to afford + have to ride buses to keep warm).
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8
Q

Example of market failure in the agricultural market?

A

Gov can intervene in the agricultural market with price support but this can lead to over production and waste. (Inefficient resource allocation).
Example = European Union agriculture policy has been criticised for excess production leading to “butter mountains”.

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9
Q

Example of gov failure in rent controls?

A

Rent control policies are designed to make housing affordable but can lead to shortages + lower conditions + less investment.

Example = Occurred in San Francisco.

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