8.4 Gov failure in microeconomic intervention Flashcards
What does gov failure result in?
Theis results in a net welfare loss to society
What are the causes of gov failure?
Unintended consequences
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 is harder to achieve their original goals.
Excessive administrative costs
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 to consider whether the policy is good value for money.
Information gaps
Some policies might be decided without perfect information. This might require a full cost-benefit analysis, and it could be time-consuming and expensive.
For example, government housing policies are long term, and have failed several times in the past.
However, it is impractical for governments to gain every bit of information they need, so assumptions are made.
Distortions of price signals in markets:
Government subsidies could distort price signals by distorting the free market mechanism. A free market economist would argue that this could lead to government failure. There could be an inefficient allocation of resources because the market mechanism is not able to act freely.
For example, the government might end up subsidising an industry which is failing or has few prospects.
In the agriculture market, governments might intervene with a buffer stock system to reduce price volatility. However, historically, these have been unsuccessful.
Governments buy up harvests during surpluses, then sell the goods onto the market when supplies are low.
Advantages:
Farmer incomes remain stable, because fluctuations in the market are reduced. This will be particularly beneficial in rural areas, where farming is a main source of income. It also increases consumer welfare by ensuring prices are not in excess.
Disadvantages:
Governments might not have the financial resources to buy up the stock. By guaranteeing farmers a minimum price, they might overproduce. This could be expensive and damaging to the environment.
Storage is difficult and expensive, since agricultural goods do not last long, and there are administrative costs.
In the labour market, market failure is caused by immobility, skills gaps and discrimination within the market. The government might intervene by implementing a National Minimum Wage or having an Equal Pay Act. There is also a minimum school leaving age, to ensure workers have a sufficient basic education.
The NMW could lead to government failure if instead of raising living standards, people become unemployed. However, there has been no evidence of this in the UK.
