6.10 Government Failure Flashcards
What is government failure?
Government failure occurs when the cost of intervention outweighs the benefit resulting in a worsening of the misallocation of resources in a market and a greater loss of social welfare.
What are the primary causes of government failure?
The primary causes of government failure are: 1) high administration and enforcement costs, 2) information problems within the government, 3) unintended consequences of government intervention, and 4) regulatory capture.
What is an example of high administration and enforcement costs?
Examples of high administration and enforcement costs include regulation, tradable pollution permits, and property rights.
What is an example of information problems within the government?
Information problems within the government involve being able to accurately quantify negative and positive externalities that exist and thus being able to effectively enact policy that is set at the right level. All policies used to correct market failure have this problem.
What are unintended consequences of government intervention?
Examples of unintended consequences of government intervention include the formation of black markets, smuggling, finding alternative supply, firms cheating excessive regulation, firms using subsidies incorrectly or being dependent on them, and excess demand problems with state provision.
What is regulatory capture?
Regulatory capture arises when regulatory authorities intervene to break up monopoly power intending to promote more competition in the industry. It occurs when managers and CEOs that continue to work in the industry influence the regulator in a way that benefits them as opposed to the interests of society.
Why should intervention be avoided if the risk of government failure is high?
If the risk of government failure is high with intervention, there is rationale for no intervention at all, even if there is a market failure, a misallocation of resources, and a loss of social welfare. Government failure would make these outcomes worse and thus intervention should be avoided.
What should be done if the cost of intervention is very high?
If the cost of intervention is very high, questions must be asked regarding the extent of the market failure or even whether there is a market failure and therefore whether government intervention is justified. If the market failure and welfare loss is minimal or if there isn’t a market failure at all, government intervention, which could lead to government failure, should be avoided.
