4.1.8.10 Government failure Flashcards
What is government failure?
When government intervention worsens resource allocation or creates new inefficiencies.
Results in net welfare loss (e.g., costly policies with minimal benefits).
List 4 causes of government failure.
- Distorted price signals (e.g., farm subsidies propping up inefficient industries).
- Unintended consequences (e.g., rent controls → housing shortages).
- High administrative costs (e.g., complex tax systems).
- Information gaps (e.g., inaccurate cost-benefit analyses).
How do subsidies distort price signals?
Artificially lower production costs → overproduction of goods (e.g., EU Common Agricultural Policy).
Result: Resources misallocated to less productive sectors.
Give an example of unintended consequences from intervention.
Minimum wage: May lead to job losses if set too high (firms automate/cut staff).
Sugar tax: Consumers switch to other unhealthy options (e.g., sugary snacks).
Why are high administrative costs problematic?
Opportunity cost: Funds could be better spent elsewhere (e.g., NHS vs. bureaucracy).
Example: UK tax credit system’s complexity → high enforcement costs.
How do information gaps lead to failure?
Governments lack perfect data → poor policy design (e.g., HS2 cost underestimates).
Example: Housing policies fail due to unpredictable market changes.
How can governments create market distortions?
Price controls: May cause shortages (e.g., Venezuela’s food price caps).
Over-regulation: Stifles innovation (e.g., excessive red tape for startups).
Is government intervention always worse than market failure?
No: Some interventions succeed (e.g., smoking bans improve health).
Yes: If costs outweigh benefits (e.g., inefficient subsidies).
Give a UK example of government failure.
Poll Tax (1990): Poorly designed → public protests + inequitable burden.
How does this link to market failure?
Justifies limited intervention: Even with market failure, government action may not improve welfare.
