8.10 Goverment Failure Flashcards
What is government failure?
Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome
What is the aim of government intervention?
Reduce or eliminate market failure
What are three examples of government intervention in a market?
-raising taxes
-controls
-regulations
Why would the government intervene to provide free education
It would otherwise be an under-consumed merit good
What are the three reasons for government failure?
-the pursuit of conflicting policy objectives
-administrative costs
-“law of unintended consequences”
How is the pursuit of conflicting policy objectives a reason for government failure?
E.g when the government wishes to expand the economy they may approve long term projects
(Short term is often give the go-ahead over long term)
How is administrative costs a reason for government failure?
Government intervention to correct market failure may create unnecessary layers of bureaucracy which create costs that are paid for by tax payers. Therefore it is a government failure
How is the “law of unintended consequences” a reason for government failure
When government intervened and causes unforeseen consequences that had not been foreseen or intended
-triggers harmful consequences greater than the government intervention is supposed to promote
What does a price celling create in a market
Excess demand
Why are price ceilings put in place?
To protect consumers from high prices
Why is a price celling a possible bad thing?
Rising price may reflect changing demand or supply in the market
-high price needed to incentivise consumers to economise and for firms to divert more resources into producing the good
What do free marker economists argue about black markets?
They do the job the primary market should be doing (equate demand with supply)
What are black markets
an economic activity that takes place outside government-sanctioned channels.
Government controlled prices create…
Black markets
Why does a black market come into existence?
When price controls distort the primary market
