9) Government Failure - MB Flashcards
define government failure
a misallocation of resources arising form government intervention that causes a less efficient allocation of resources and imposes a welfare loss on society
what are examples of government failure?
- sugar tax (soft drinks industry levy) -> anticipated revenue £530m, actual revenue £33m
- subsidy: eat it to help out
- government expenditure: HS2/ opportunity cost
- price controls: minimum wage/increasing unemployment
- legislation and regulation: workplace indoor smoking ban/ patio heaters, climate change, conflicting government objectives
- information provision: ballerinas should retrain in IT/ opportunity cost
for a mixed economy to function…
some government intervention is essential
what may happen if government intervened beyond the socially optimum level? (5 things)
1) incur opportunity cost
2) reduce private sector investment
3) increase unemployment
4) reduce consumer choice
5) cause unanticipated behaviours/effects
the governments intervention causes a worse allocation of resources than…
the correct level of intervention
analysis, what is government failure?
the intervention by government, to correct market failure, is too large (this may be because the correct level of intervention is not known by the government)
For to government failure, why has it prevented the market mechanism from achieving associative efficiency?
Instead of correcting the market failure, leading to the achievement of the socially optimum level of production and consumption and allocative efficiency, government policy has unintended effects. These effects have created new distortions in the market, preventing the market mechanism from achieving allocative efficiency
What are the 2 causes of government failure?
1) Low quality information
2) Regulatory Capture
What are 2 consequences of government failure?
1) Inequality
2) Society worse off than before (unlikely but possible)
How has low quality information caused market failure?
Before the intervention, the government may not have accurate information about the preferences of consumers and how they will respond, making government failure more likely
How is regulatory capture a cause of government failure?
Regulators may work so closely with industry that they become swayed by the preferences of the industry, and rely on them for information
How is inequality a consequence of government failure?
Lower income consumers are more likely to be harmed, and to a greater extent, than higher income consumers - increasing inequality
How can government failure cause society to be worse off than before?
Government failure could cause problems of greater magnitude than the problems that the intervention was designed to fix
Judgements: how large are the risks of government intervention?
Government failure is a risk of any government , although experience suggests that the chance of society being worse off in absolute terms than without government intervention seem low. Furthermore, government can revisit interventions and correct failing policy in the light of new data - so issues may be temporary as they can be corrected over time
