1.4.2 Government Failure Flashcards
What is government failure?
When government intervention in the market leads to net welfare loss and a misallocation of resources.
The total social costs arising from the intervention are greater than the social benefit.
What are the 4 types of government failure?
- Distortion of Price Signals
- Admin Costs
- Unintended Consequences
- Infomation gaps
What is “distortion of price signals”
When govt Int changes price signals and distorts the FM mechanism. For instance, max / min prices lead to excess demand / supply.
The price mechanism aims to allocate resources to their best use and where consumers want and value them most highly. By intervening, the government distorts the mechanism and so resources may be allocated inefficiently.
What are “unintended consequences”
Some intervention cause effects which the government did not intend to happen. Consumers and producers may react to new policies in unexpected ways and so the policy doesn’t have the effect it should.
For instance, A study found that rent-controlled apartments (those with a maximum price) were 8% more likely to have maintenance issues as landlords were less incentivised to
renovate or maintain.
What are excessive admin costs?
In many caess, a lot of money that is allocated by the government is used up on basic admin costs.
The social costs may be higher than social benefits once admin costs are taken into account.
UK gov’s investment arm spent £7mn on business class flights in 2024
What are infomation gaps (govt failure)
Government decisions are based on the data availble to them, this is not always perfect. Cost and benefit forecasts are often wrong and so the government invests in a system where the costs are higher than benefits, so there is welfare loss.
