25-Government Failure Flashcards
Define Government Failure
It occurs when Govt Intervenes to Correct a Market Failure but it Results in a more Inefficient Allocation of Resources, Leading to a Net Welfare Loss
State The Types of Government Failure
5 Types of Government Failure
- Information Gap
- * Unintended Consequences *
- Excessive Administration Costs
- Moral Hazard
- Lack of Incentive
Elaborate The Type of Government Failure
- Information Gap
Govt often Intervenes Markets with Imperfect Information and lead to wrong Policy response to a problem
Eg- Govt may not know the Appropriate amount of Tax or Subsidy needed to reach the Social Optimum Output Since its Difficult to Quantify External Costs & Benefits
Elaborate The Type of Government Failure
- * Unintended Consequences *
Govt also lacks Clear Information about the effects of their Policies which sometimes Cause Unintended Consequences
Eg- High Indirect Taxes on Tobacco might encourage the Development of Hidden Markets - Tobacco Smuggling. Govt Failure occurs since Consumption does not Fall, they lose Tax Revenue, and have to Increase Expenditure on Policies
Elaborate The Type of Government Failure
- Excessive Administration Costs
Sometimes the Administration Costs are so Large that it Outweighs the Benefits of Correcting Market Failure
Eg- Costs of Recruiting and Paying a Staff of Inspectors to ensure Firms Comply with Specific Regulations may exceed the size of the External Costs
Elaborate The Type of Government Failure
- Moral Hazard
Sometimes Govt Intervention can lead to the problem of Moral Hazard and Result into Govt Failure
Eg- Govt may offer a Guarantee to all Bank Deposits to Protect the Financial System, but this encourages Banks to take unnecessary risks because they can be bailed out by the Govt
In Public Sector, There is no Profit Incentive / Motive as a result workers and managers lacks incentive to improve Services and Cut Costs and this leads to Inefficiency
