4.1.8.10 government failure Flashcards
1
Q
when can governments fail?
what can this result in?
A
- governments can fail when they intervene in markets
-> they could worsen the market failure already present or a new failure might occur
-> this results in a net welfare loss to society
-> the loss could be from having ineffective intervention or when harm is caused
2
Q
what are the four causes of government failure?
A
1) distortion of price signals
2) unintended consequences
3) excessive administrative costs
4) information gaps
3
Q
how does the distortion of price signals cause government failure?
A
- government subsidies could distort price signals by distorting the free market mechanism
- a free market economist would argue that this could lead to gov failure
- there could be an inefficient allocation of resources because the market mechanism isn’t able to act freely
- eg) the gov might end up subsidising an industry which is failing or has new prospects
4
Q
how do unintended consequences cause government failure?
A
- this is when the actions of producers and consumers have unexpected, or unintended, consequences
- with government policies, consumers react in unexpected ways
- a policy could be undermined
-> which could make government policies expensive to implement
-> since it’s harder to achieve their original goals
5
Q
how do excessive administrative costs cause government failure?
A
- the social benefits of a policy might not be worth the financial cost of administering the policy
- it might cost more than the government anticipated
- the government has consider whether the policy is good value for money
6
Q
how do information gaps cause government failure?
A
- some policies might be decided without perfect information
- this might require a full cost-benefit analysis, and it could be time-consuming and expensive
eg) government housing policies are long term and have failed several times in the past
-> however it’s impractical for governments to gain every bit of info they need, so assumptions are made
