25- Government failure Flashcards
What is government failure?
It occurs when an intervention leads to an even less efficient allocation of resources than with the market failure alone. So intervention causes further inefficiencies , a misallocation of resources and a loss of economic and social welfare.
Causes of government failure?
- Political self interest/lobbying
- Policy myopia - search for quick fixes
- Regulatory capture
- Information failures
- Disincentive effects
- High enforcement/compliance costs
- Conflicting policy objectives
- Damaging effects of red tape
- Information gaps
- Distortion of price signals
Effects of government failure?
- Long term consequences for the economy or society
- Policies may lead to a net social welfare loss
- It may create more losers than winners
Example of political self interest
Farm support policies, the drinks industry, transport lobby
Example of poor value for money/admin costs
Investment on IT projects in the NHS
Example of political short termism
Road widening to reduce congestion
Example of regulatory capture
Self regulation on alcohol prices, powerful energy lobby
Example of conflicting objectives
Minimum carbon price could affect UK competitiveness
Example of bureaucracy and redtape
Costs of meeting health and safety, environment laws
Example of unintended consequences
Smoking ban, increased use of outdoor patio heaters
Bank bail outs - raises problems of moral hazard
Real life examples of government failure
- Minimum wage leads to reduction in staff non-wage benefits
- Smoking ban encouraged widespread use of outdoor patio heaters
- Tariffs on steel causes damage to car makers
- Price caps on texts leads to higher prices for mobile handsets
- Targets for treating patients might lead to a lower quality of care
What is the law of unintended consequences
Action of consumers, producers and government always have effects that are unanticipated or unintended
Well intentioned legislation often acts against the interests of those it has to serve
