1.4.2government failure Flashcards
What is government failure?
-Government intervention to correct market failure leads to a greater net social welfare loss
-costs of intervention exceed the benefits
-gov policy fails to change behaviour outcomes as much as intended
CAUSES: political self-interest and regulatory capture
-Pursuit of self interest amongst politicians - they look for quick fixes rather than a considered analysis of long-term considerations-they want to win votes
-Regulatory capture-when government agencies operate in favour of the producers
-Rent seeking behaviour- the use of political power to manipulate the distribution of resources for themselves at the expense of others without creating any extra wealth for society
-Example: 2013-plan for minimum price of alcohol dropped- BBC report states the government met with representatives of the drink industry 130 times between 2010-2014
CAUSES: unintended consequences
-Consumers act in very unexpected ways
-opposite effects to those intended
-Example: implementing seatbelts resulted in more vehicle fatalities due to recklessness
CAUSES: imperfect information
-Governments may implement a policy without having full information required for a cost-benefit analysis (it may be time consuming and expensive)
-Assumptions are made - sometimes incorrectly - difficult to get total information
-Example: difficult to quantify external costs of pollutants - need to target the most prominent pollution contributors
CAUSE: distorts price mechanism
- Taxation can encourage people to avoid taxes or evade them
-subsidies may encourage wasteful misuse or overuse of scarce resources - protect inefficient firms from open competition and create barriers to entry for new firms - prices are kept artificially low
-maximum prices create shortages
-minimum prices create surpluses that need to be stored
Example: cotton farmers- subsidies create excess supply that needs to be stored then bought by gov- scarce resources are wasted
-May still be cheaper to import from abroad
-Opportunity cost-better spent elsewhere
CAUSES: Costs of administration and enforcement
-Social benefits might not be more than the financial costs of implementing the policy
-Could lead to the principal-agent problem as the government and all the managers goals are not aligned and there is a conflict of interest - need to ensure its objectives are pursued by managers of public sectors like the NHS
Gov failure in agriculture
-Price supports (gov buys surplus goods) can lead to overproduction and waste - moral hazard problem
-Inefficient allocation
-Support of excess production can lead to ‘butter mountains’
-Leads to increased food prices for households if gov guarantees minimum price for farmers - cost for households may be greater than benefit for farmers
Gov failure in rent controls
-House shortages
-Deteriorating building conditions
-Black market may develop - deal in cash - consumer protection at greater risk - gov does not receive any revenues
-Housing shortages may mean a shortage of workers too in certain areas
Legal red tape
-Rules and regulations become too complex and costly to follow
-Firms become more inefficient
-Costs may increase - passed onto consumers - less output being produced - net welfare loss
