3.8.10 - Government Failure Flashcards
What is government failure?
When government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome.
Why can government intervention lead to government failure?
There is imperfect information in the market, so intervention will not necessarily fix the problem itself.
Why do some people think state provision is an example of government failure?
There is an over-provision of education as some people consume it because it is free. Tony Blair tried to combat this by introducing university tuition fees.
The quality of state education is worse than private education.
What are the reasons for government failure?
- Conflicting policy objectives
- Administrative costs
- The ‘Law of Unintended Consequences’
Why is conflicting policy objectives an example of market failure?
When governments try to expand the economy, they give the go-ahead for long-term investment projects, they may then cancel these projects because of the perceived need to contract the economy.
Government decisions can often be criticised for favouring short-termism over long-termism.
Why are administrative costs an example of government failure?
Unnecessary layers of bureaucracy and ‘red tape’ may be created, and taxpayers will have to pay for that.
As an example, the decision to build a third runway at Heathrow, or expand Gatwick or Stansted or build a new airport.
Why is the law of unintended consquences an example of government failure?
Government intervention is often justified on the grounds that the social benefits of intervention exceed the social costs and therefore lead to a net gain in economic welfare.
However, if harmful consequences are triggered that exceed the social benefits, then government failure results.
What is an example of a government failure?
Black markets due to price controls.
How are black markets due to price controls an example of government failure?
Rising prices in a market might be needed to tell consumers to economise and for firms to divert scarce resources into producing the good.
The controlled price may send out the wrong incentives, contributing to resource misallocation.
This may incentivise criminal activity to break the price controls.
Free-market economists often justify black markets on the ground that they do what the primary market should do i.e. equate demand with supply.
Arguably, the black market contributes to better resource allocation, although their input would not be necessary if there were no price controls.
