27) Government Failure And Cost Benefit Analysis

Question 0

Explain government failure in Mexico city and emissions from cars

Answer 0

⚫️aim to reduce CO2 emissions
➡️cars withe even/odd number plates
➡️allowed into the city at alternative days
➡️which should reduce number of cars entering city by half

➡️but car owners sold their nice cars
➡brought two older and more polluting cars
➡️one with even number plate, one with odd number plate

➡️increased CO2 emissions and government failure

Question 1

What does government failure mean

Answer 1

⚫️occurs when government intervention in markets
➡️leads to an inefficient allocation if resources
➡️causing a net of welfare loss to society

Question 2

Explain government failure in the common agricultural policy

Answer 2

⚫️aim of CAP to stabilise agricultural prices
➡️to provide a satisfactory level of income for farmers in EU

➡️but outcome is inefficient
➡️ farmers produce too much
➡️ Excess supply is brought by the EU and stored
➡️EU has to pay subsidies to farmers
➡️and pay for warehouses and storages

➡️causes inefficient use of government money
➡️and government failure

Question 3

Explain government failure for national minimum wage

Answer 3

⚫️aim to protect workers who receive low pay
➡️by making it illegal for employers to pay a wage below NMW

➡️but workers who manage to retain their job, end up with higher pay
➡️but some workers loose their jobs
➡️firms reluctant to pay the higher wages

➡️cause inefficient market outcome
➡️government failure

Question 4

What is public choice theory

Answer 4

⚫️free market economists view
➡️believe market economy is well functioning
➡️price mechanism allocates resources efficiently

➡️and intervention in the market to correct market failure
➡️will lead to further misallocation of resources

Question 5

What is public interest theory

Answer 5

⚫️keynesians view
➡️support government intervention

➡️at micro level
➡️to correct market failure
➡️e.g. Environmental pollution

➡️at macro level
➡️to promote maintaining the macroeconomic objectives
➡️e.g maintain full employment

Question 6

How do the government prevent misallocation of resources

Answer 6

⚫️cos-benefit analysis
➡️compares the full weighs between costs and benefits
➡️of a major projects or policy
➡️before implemented

Question 7

What does cost benefit analysis mean

Answer 7

⚫️form of investment appraisal
➡️method of assessing 
➡️the full social costs and benefits
➡️including the external costs and benefits (externalities)
➡️of an investment project

Question 8

What would happen to the project, if social costs exceed social benefits

Answer 8

Project should not go ahead

Question 9

What would happen to the project if the social benefits exceed the social costs

Answer 9

Project might go ahead

Question 10

Give the costs of extending the congestion charging zone to west london

Answer 10

⚫️increased congestion on tube and bus network

⚫️loss of income to businesses in zone
➡️fewer shoppers

⚫️increased traffic outside zone

⚫️less cars purchased

Question 11

What are the benefits to extending the congestion charging zone to west london

Answer 11

⚫️shorter journey times

⚫️air quality

⚫️more cyclist
➡️people become fitted

⚫️safer roads in zone

⚫️increased revenue for tfl
➡️to be re-invested in transport infrastructre

Question 12

Whats the problems with cost-benefit analysis

Answer 12

⚫️external costs and benefits are difficult to measure
➡️how do u put monetary value
➡️life
➡️shorter journey times to work
➡️pollution

⚫️there are administrative costs and delays
➡️Heathrow terminal 5 public inquiry took 4 years and costs £80m

⚫️future costs and benefits are difficult to measure
➡️CBA has to allow for inflation
➡️£100 is worth more in present than it did 10 years time